Eight trends to watch in real estate
Boston’s is one restaurant chain taking advantage of changes in shopping habits and mall construction, by targeting mixed-use projects and non-retail anchors.
1. More store closures ahead
Big name retailers have been dominating headlines in recent months with a fresh wave of store closings and bankruptcies. National retail chains closed an estimated 4,000 stores across the U.S. in 2016 and that number is expected to grow by another 5,000 stores this year, according to Cushman & Wakefield.
Department stores such as Macy’s, JCPenney and Sears are paring down the size of their physical footprints as they close under-performing stores and, in general, shrink their network of brick-and-mortar stores. Macy’s announced last year it would close 100 stores, while JCPenney announced in February it would close nearly 140 locations.
The loss of key mall anchors is creating a ripple effect as landlords scramble to fill space. Closures by retailers like Radio Shack and The Limited are creating additional vacancies.
2. Recycling empty spaces
For some franchisees, vacancies are creating new opportunities to enter markets or secure desirable locations. Bloomin’ Brands, Ruby Tuesday and Applebee’s are just a few of the restaurant chains that will be closing locations this year. “Several of these sites are situated in prime retail corridors that would be considered class A real estate opportunities,” says Jennifer Watson, a senior managing director in the Chicago office of Newmark Grubb Knight Frank, a real estate services firm.
Checkers is one company that typically develops its own stores. However, the rise in store closures is creating new opportunities to lease or buy existing space. Checkers is converting several stores formerly occupied by brands such as Dunkin’ Donuts, KFC and Long John Silver’s. “We are in a heavy growth cycle. So, we’re a pretty big consumer of new and now conversion spaces,” says Kevin Fitzgerald, director of real estate at Checkers.
For example, Checkers is expanding into Dallas and expects to open 100 stores in that market over the next five years. The company has already identified nearly a dozen good sites in the Dallas metro that other fast-casual concepts have vacated and could be converted to a Checkers.
3. Smart leases land in spotlight
Tenants can arm themselves with certain lease provisions to help protect against the negative impact from store closures. For example, negotiating limited guarantees, such as a shorter term with a “burn off” or a rolling guarantee, are ways to limit a franchisee’s exposure, notes Watson. Negotiating termination clauses, or co-tenancy clauses that tie a tenant’s lease to the presence of an anchor are other ways to mitigate potential risks, she adds.
Restaurants such as Boston’s also are pushing for more percentage rent structures in leases that create a more equitable split between the rent a tenant pays and income for landlords. Percentage rent layers on top of the base rent and typically goes into effect once a tenant hits a certain minimum sales threshold. “It definitely blurs the lines of success and failure and helps us to stay a tenant for the landlord and helps us to move with the ebb and flow of the economy,” says James Fracht, director of real estate, U.S. for Boston’s Restaurant & Sports Bar.
4. Hot spots for growth
Franchisors that “follow the rooftops” to identify expansion opportunities are painting a bullseye on the southern U.S. Over the next decade, an estimated 62 percent of household growth is expected to occur in the South, according to a 2017 Retail Real Estate Outlook published by Buxton.
Culver’s is one franchisor that expects the Southeast will be a big source of growth over the next five years. “We have had a lot of interest in Florida and Georgia and into the Carolinas,” says Tom Goldsmith, vice president of development at Culver’s. Culver’s also is active in southwestern states such as Arizona, Utah and Idaho. “Our franchisees really aren’t tapping the brakes yet,” he says. “We probably have more people interested in building now than maybe any time since we started franchising back in the ‘90s.”
Buxton offers some additional insights into areas that may be hot in the coming year. The top 10 markets the company evaluated in 2016 on behalf of its clients include: Dallas-Fort Worth, New York-Newark-Jersey City, Houston, Los Angeles, Atlanta, Chicago, Miami, Washington, DC, Denver and Philadelphia.
5. Tenants target mixed-use projects
“The most notable trend that I have seen is franchisors and franchisees getting away from shopping malls and big box anchored strip centers,” says Fracht. Instead, more franchise groups are targeting mixed-use projects anchored by office buildings and apartments.
The lack of new shopping construction also is driving franchisors to seek alternative locations in those mixed-use developments. Retail construction is still a fraction of the development boom that was occurring pre-recession. According to data from research firm Reis, completions of new neighborhood and community centers completed last year totaled 9.6 million square feet.
By setting up shop right in someone’s backyard—outside of a home or office—it brings the product closer to the consumer, notes Fracht. For those franchisees that might not have strong mixed-use developments, Boston’s is looking to locate near other destinations and non-retail anchors such as sporting venues, community parks, hospitals and airports. “We’re looking to be a little bit more flexible with our franchisee and open to new ideas,” he says.
6. Parking, parking, parking
It may not be a sexy topic, but finding locations with adequate parking is a big priority for restaurant tenants. Shopping centers have been filling empty retail spaces with restaurant tenants, and the growing percentage of restaurants is highlighting a growing parking shortage. Shopping centers were designed primarily with retail tenants in mind, which demand far less parking than restaurants.
Older shopping centers and malls in particular did not contemplate the number of restaurant seats that they now have today, notes David Orkin, executive vice president and restaurant practice leader at CBRE. These days, shopping centers have more restaurant tenants and those restaurant customers are gobbling up a bigger share of the parking. “It is a very real issue. If the customer can’t park, they can’t go in and eat at your restaurant,” he says.
7. Design trends: Changing spaces
Two of the popular design trends in restaurants today include more communal seating and shifting designs to accommodate advance and mobile take-away orders. Some restaurants are adding more communal seating with long, connected tables vs. the traditional two- and four-top table setup. “Millennials are buying into this table-sharing concept to combine dining and more social interaction, and these communal tables can increase seating efficiencies within a dining area,” says Watson.
Restaurants also are ramping up catering, delivery and to-go models to provide additional revenue to in-store dining. It is almost a necessity for restaurants to adopt these services to service the shifting consumer trend of prioritizing convenience and speed with regards to dining out, notes Watson. Some fast-casual restaurants have introduced a separate POS station for call-ahead orders that doesn’t interfere with the queue of customers in line for pick-up or eat-in dining.
8. Malls reinvent themselves
Malls that are in danger of losing key anchor tenants are looking for new and creative ways to reinvent themselves. Some mall owners are redeveloping empty big boxes into shopping areas that can accommodate small shop retail and restaurants, including exterior exposure to allow for outdoor seating and more pedestrian flow. Landlords also are backfilling these boxes with food and entertainment, such as movie theaters and indoor play areas, as well as adding non-traditional mall tenants such as grocery stores and fitness centers.