Is a financially strong franchise or a corporate-backed restaurant the best choice for a new retail center?
As all retail real estate professionals know, restaurants are red-hot right now. The total number of restaurants in the U.S. is expected to reach 1 million this year, 100,000 more locations than in 2005. This year, sales will top $783 billion, according to National Restaurant Association estimates.
While the demand for restaurants of almost all categories is undeniable, picking the right one for your project remains a tricky business. For developers and the brokers who advise them, the choice of food and beverage tenants is as essential to the tenant mix as the selection of in-line stores. and oftentimes determines the success of a property. Restaurants usually pay higher rental rates per square foot and generate excellent foot traffic.
Setting Goals
Though multiple factors determine which restaurant-related tenants are the best fit for a property, the choice ultimately depends on the developer’s goals. We believe that a developer that intends to sell the property for immediate proceeds should target corporate-backed tenants in most cases. The reason is that retail properties that offer a lineup packed with credit tenants tend to sell more quickly and command higher prices than comparable centers lacking those attributes.
For these properties, the goal of the owner and the agent should be to fill the center with high-rent tenants. The developer is generally willing to pay a higher tenant improvement allowance in order to amplify the cap rate.
Take the quick-service category, for example. Several popular Mexican-style concepts—Chipotle Mexican Grill, Moe’s Southwest Grill, and Willy’s Mexicana Grill, for instance—invite customers to create entrees from a variety of ingredients to suit their individual tastes. However, selecting the best option isn’t quite so simple. Sometimes it will be a corporate restaurant, and at other times it may be a franchisee with multiple locations.
For instance, if a developer intends to flip a property quickly, the preferred choice may be a corporate-backed restaurant like Chipotle. However, for a developer planning a long-term hold, a financially strong franchise like Moe’s is the better bet. The challenge for the broker and developer is to determine on a deal-by-deal basis which restaurant tenant is able to pay the highest rent and provide the strongest credit.
The same analytical approach holds true for another increasingly popular market segment, the fast-casual category. These restaurants typically require space ranging from 1,500 to 2,500 square feet, with multiple concepts vying for available space, particularly in new developments. It’s up to the broker and the developer to determine the best fit based on credit, the number of similar tenants in the market, and the experience of the owner or operator that would oversee the concept.
In general, most retail developers today are trying to sell their projects as quickly as possible to take advantage of low interest rates and the relatively small inventory of product on the market. For that handful of project sponsors planning a long-term hold, which offers the flexibility to incorporate more franchisees and unique local tenants.
Wise Owl
In Kennesaw, Ga., part of the metropolitan Atlanta market, we are working with a local developer on a new 17,000-square-foot center called Owl Creek Commons (the name is a tip of the hat to the mascot of nearby Kennesaw State University). Together with the developer, we created a plan to bring restaurant concepts to four of the seven available spaces in the center.
With that in mind, we identified concepts that would be willing to pay premium rents but could also provide strong guarantees in the event the developer decides to bring the property market earlier than anticipated. After working on several other nearby retail projects in prime locations, we were able to advise our client on which popular brands were seeking to expand or enter the market. The upshot was that Chipotle Mexican Grill, Capriotti’s Sandwich Shop, Taziki’s Mediterranean Café and Tropical Smoothie Café all signed leases at Owl Creek Commons, and only one 1,850-square-foot space remains.
We’d like to leave you with a final thought. When a retail project first starts coming to fruition, it’s imperative that the developer takes the time to find a broker who understands their goals. Brokers who know which retail tenants are in the hunt for space, where they want to go and what they need give their developer clients a leg up on competition and eliminate some of the risk associated with new developments. By working together to create the best possible tenant mix from the start, the sponsor and adviser greatly raise the odds of developing a successful project that meets the developer’s goals.
Justin Berryman and Reid Mason are Atlanta-based directors with Franklin Street, a diversified real estate services company. They specialize in retail landlord representation and leasing throughout Georgia, Eastern Alabama, and Southern Tennessee. In the last two years, Berryman and Mason have advised clients on 10 developments in Greater Atlanta ranging in size from 10,000 to 150,000 square feet.
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