Investors: Look to Retooled Restaurants for Growth in That Space

It would seem we are entering a stage of fragile recovery from the depths of the COVID-19-induced recession. I say fragile because the threat of new virus strains still exists, and confidence in a general return to enclosed spaces still looms large. Even so, slowly we are emerging, even though masks, hand sanitizers and caution around handshakes are still with us and it seems will be for some time to come. 

Those ongoing protections are part of the so-called new normal, the new rules of engagement. We are seeing it take shape in other forms as well, a new melding of traditional wants and needs with this new reality. We see it in the office sector, for instance, with a rise in work-from-home and hybrid policies in place. We see it in retail, with the increase in internet shopping. And we’re seeing it in the sit-down/casual dining restaurant sector as well.

It’s often written that certain retail sectors were arguably (next to the office sector) the hardest hit area of commercial real estate. And within the retail space, restaurants show the most battle scars. Diners stayed away in obvious droves to avoid interaction and possible contamination, drilling a huge hole in restaurant profitability.

But it was also during this time that we saw the more proactive restaurants rise to the occasion, especially quick service restaurants (QSRs), with an increase in such amenities as more efficient drive-through capabilities and curbside service. According to Restaurant Dive, “off-premise traffic made up 70% of restaurant traffic industry-wide in July 2020, and this increased to 80% in July 2021.” 

And, as we reported earlier this year in this same space, QSRs remained fairly solid through the depths of the pandemic, actually moving in slightly along the risk scale, from 5.72 to 5.61 percent. Cap rates in the QSR space are even lower today.

From our perspective, investors eyeing the retail sector as a target for their capital placement are well advised to seek out these more aggressively market-driven brands, brands such as McDonalds and Chick-fil-A with their ever-growing number of double-lane drive-throughs. Or, as Restaurant Dive points out:

• Del Tacos, with third-party delivery stations;
• Dunkins’ digital-only eateries; or
• Taco Bell’s four-lane double story delivery system.

And innovation isn’t limited to QSRs. As GlobeSt.com reported a few weeks ago, ghost kitchens are another adaptive re-use of otherwise shuttered or vacant spaces of all types–such as the square footage previously dedicated to sit-down dining. 

“Ghost kitchens aren’t a new business model,” the article stated, underscoring the trend toward the acceleration of concepts that COVID was known for. “But they became a necessity during the pandemic not only for restaurants to fulfill online orders . . .  but also to generate revenue during business closers.”

The article indicates that lenders too, wary of other investment types in this stage of the recovery, are turning a more generous eye to such concepts, because they “are still worthy of a deal.”

In philosophy it’s been said that an idea is suggested, a counter idea comes up and then they blend for a solution–thesis to antithesis to synthesis. If COVID was our antithesis, disrupting all our beliefs about how restaurants should operate, then we are seeing proactive restaurateurs—backed by savvy investors, in turn backed by wise lenders—create a new synthesis, a new solution, for the marketplace.