New QSR Concepts Challenge Net Lease Investor Expectations

Traditionally, there has been a basic win/win dynamic in net lease agreements that exists between investors and tenants. Among the many benefits that accrue to both parties in a net-lease deal, the tenant enjoys long-term predictability in its real estate, while the investor/owner can rely on the attractiveness of a well-located property with great bones when the time comes to re-tenant the asset.

But today, those “great bones” are starting to rattle as new concepts invade the Quick Service Restaurant (QSR) space. The drivers of this change are twofold: the rise of cell phone apps and the hangover fear of human contact that arose during the pandemic. Both phenomena are changing customer expectations, and major brands such as Chick-fil-A, Taco Bell, Shake Shack and Burger King are responding to that need.

These brands are experimenting with such amenities as more drive-through and walk-up windows and more mobile pick-up stations–while cutting back on their in-store counter and seating space. But Chick-fil-A and Burger King are currently strategizing on what is likely the most radical idea–two story assets with dedicated drive-through access on the first floor and expanded kitchens above. By some estimates, the concept could reduce store size by as much as 60%.

To date, app-based service and health safety have been pandemic-driven add-ons, with no critical change to what is essentially a 100-year-old walk-in, sit-down concept. (It all started with the founding of White Castle in the early 1920s.) The same is true of the venerable drive-through window.

Today, customer convenience and safety are forging what might be a new era in QSR design. But, until it evolves into common practice for net lease tenants, it represents a major challenge for investors.

As traditional QSR footprints shape-shift, investors will be hard-pressed to find tenants with these specific needs, at least until such concepts gain widespread acceptance. What we’ll call new-age QSR designs won’t work for chains with a more traditional approach to customer service. The options are even fewer for a cost-effective adaptive reuse for other categories of retail–be it a pharmacy or auto store.

Such concepts as those that are being rolled out by the above-named brands need to reach a tipping point of acceptance and more general buy-in before a risk-averse investor can invest with confidence in such assets. No doubt, that day will come, given our ever-growing reliance on cell phones as a tool to aid convenience and speed in all our daily functions. (How long the hangover fears of contact linger with us remains to be seen.)

And when that day comes, the commercial real estate market–ever adaptable to new market realities–will rise to that challenge and embrace these new concepts with new and profitable solutions that produce win/win results.

In the meantime, for investors who enjoy a challenge and want to roll the dice on such watershed approaches, the time is clearly ripe to move. But move with caution, carefully reviewing the corporate sponsorships and credit enhancements that are being offered. These include the existence of corporate-level guaranties. In this way, you can reduce the risk of an unsuccessful concept and a location closing on you. 

For others, a wait-and-see attitude and reliance on more traditional venues will be the watchword.