Net Lease-Friendly Ghost Kitchens
We will continue to see more and more Ghost Kitchens pop up in key markets across the county to accommodate growing demand.
Ghost Kitchens have been a growing trend over the past several years. By utilizing social media and other marketing strategies and capitalizing on the thriving home delivery segment, chefs can create new opportunities for themselves by reimagining their workspace and business model. Compared to a restaurant operation, Ghost Kitchens are solely focused on creating food fare that is void of traditional restaurant space that can be enjoyed by diners at an off-site location of their choosing.
This option opens up a new world of possibilities for culinary experts as the location doesn’t need to be at Main & Main—it can be in an industrial park, B or C retail space, or in an office on the outskirts of town. Delivery services can have easy access to pick up the food to deliver to customers, and depending on the situation, customers could come pick up food at the site as well.
Gaining even more steam from the COVID crisis, Ghost Kitchens are poised to continue to grow their footprint in major metro areas over the coming months and years. Los Angeles, Chicago, Denver, Seattle, Dallas and New York City are examples of prime locations for this thriving net lease segment. The good news for landlords is that by making a space Ghost Kitchen-friendly, they may have an opportunity to secure stronger rents and create a more in-demand offering for what would typically be harder to lease space.
There are three main user profiles for Ghost Kitchen real estate:
- A chef wants to launch their own restaurant, however, overcoming the challenges of costs, site selection, and finding investors are too overwhelming and a huge hassle. Many chefs just want to do what they do best! They don’t like the business side of their career and just want to practice their craft and get great food out to customers.
- For up-and-coming chefs that are looking to get noticed and are trying to create a name for themselves, Ghost Kitchens may be a good fit for them. Perhaps they just got out of cooking school and need a place where they can refine their culinary creations and make money at the same time. This is an ideal entry into the industry and gives them a lower price point than owning a dine-in restaurant.
- An existing restaurant wants to expand its business with a catering arm, however, its current restaurant kitchen can’t handle the additional business, therefore a remote, Ghost Kitchen location makes logical sense.
That said, landlords looking to create a space that is Ghost Kitchen-ready need to understand that one-size-fits-all doesn’t necessarily work for all kitchens. For example, for Asian fare, a kitchen will need to have special burners for woks, or for chefs making pizza, pizza ovens will need to be in place. Also, the majority of Ghost Kitchen leases feature monthly fixed rents that include water and utilities, therefore, it is important to understand costs associated with those items prior to negotiating and executing a lease. Finally, a myriad of other items to consider are needed in order to create a winning situation for both the landlord and the tenant. However, while there are obstacles that come with space conversion, the payoff can be upwards of four times the rent as compared to using the space in a traditional manner.
When it comes to an asset sale, a property set up with Ghost Kitchen functionality is often hotly contested. I recently worked with a landlord on a property listing for a Ghost Kitchen set up. It was in an office space in a secondary market and was being used as a kitchen for bakery items. We listed it and quickly received a total of 12 offers—every single interested buyer was a restaurant or catering operator who saw a huge amount of value in buying the property in tandem with the kitchen improvements. It sold at asking price.
According to a Morgan Stanley report from April 2020, the food delivery industry is projected to grow to $467 billion in 2025 which is a significant increase from 2019 sales of $356 billion. As restaurant delivery and catering services grow their market share, I believe we will continue to see more and more Ghost Kitchens pop up in key markets across the county to accommodate growing demand.