Suburban Restaurants are Outperforming for Some Very Familiar Reasons

When Covid struck, restaurants were among its first and hardest-hit victims. First closed altogether, then allowed to reopen with fewer tables, then fully restored to normal occupancy, restaurateurs might have thought the worst was over.

If so, they failed to take into account the effect of hybrid work, especially in downtown areas dependent on hungry office workers for sales. As of March 2023, average office utilization is hovering near 50% in the 10 largest U.S. office markets, according to figures from Kastle Systems quoted in a CBRE report. Much of the remaining 50% of office utilization is taking place in suburban homes.

More companies now require employees to come into the office a few days a week. However, traditional workspaces are often sparsely populated on Mondays and especially Fridays, making it difficult for restaurants in downtown areas or with a high concentration of offices to figure out how to deal with uneven demand. The suburbs, however, are overperforming, CBRE noted.

“Office investors, especially those with Class B and C space, are grappling with higher vacancies, declining rents and a challenging capital markets environment for refinancing or selling a building,” the CBRE report noted. “Restaurants located in office buildings need to closely scrutinize their landlord’s financials, especially new establishments relying on tenant improvement allowances and other incentives to open their doors.”

Furthermore, with restaurants facing a labor shortage and rising food costs, those serving office workers may choose to close on days and times when office attendance is low, CBRE noted.

While available retail space in downtowns is rising, it is becoming harder to find in suburbs. More restaurants opened in the inner suburbs from 2019 to 2021 than in downtowns, “largely because those working from home dined out or prepared food where they live,” according to a JPMorgan Chase study cited by CBRE.

This presents challenges for restaurant owners trying to decide where to locate as they seek a clear indication of future foot traffic. Some companies are moving their office locations to cut down on commute times. Offices in some cases are following the crowds emigrating to suburban areas and the Sun Belt, creating new opportunities for restaurants in these areas. However, the shift to the suburbs also means it is hard for restaurants to find suitable locations there, while others are being priced out as rents rise steeply, which could revive interest in downtowns, CBRE stated.

And if conversion of offices to residential space becomes a trend, it could help create live-work-shop neighborhoods less exposed to fluctuating numbers of daytime weekly commuters, CBRE noted.

Restaurants in cities where this is already the case like New York, Philadelphia and Chicago are likely to do better than those in cities like Washington, DC, where according to CBRE, federal workers who make up one-third of office workers continue to work from home.

And it warns that forecasts are hazardous. “Restaurant operators are planning locations today that may not open until 2024 or 2025 in an environment where predicting future office occupancy trends is very challenging,” CBRE said.