Part 1 of an SCT series lending insight into the year ahead

Opportunistic restaurant chains are on the leading edge of deal making despite the huge hit that food-and-beverage tenants have taken during the pandemic, says CBRE restaurant practice leader Jessica Curtis. “The reason for that is just the lead time it takes for restaurant deals from start to finish,” explained Curtis, whose 18-year career has included helping tenants like Bartaco and Barcelona Wine Bar grow their portfolios. “If I issue a proposal or a letter of intent today, I don’t expect my restaurant to open for 12 to 18 months, minimum, so that puts my CBRE restaurant clients out to somewhere between Q1 and Q2 of 2022, and most of us believe the world will be back to normal by then.”

But what will that new normal look like? To be sure, plenty of second-generation restaurant space will be available to expanding operators: As another wave of COVID-19 infections was sweeping the country in December, the National Retail Federation reported that more than 110,000 food-and-beverage tenants had closed permanently or for a long stretch of time. Curtis says the boards and private equity investors at restaurants that aim to move forward this year anticipate a better environment as the pandemic draws to a close.

It won’t be a return to business as it was in 2019, however. “They’re trying to solve for operational questions like whether chasing the delivery model and implementing ghost kitchens is worth the return or the effort,” Curtis said. “If everybody can go back to restaurants, are delivery sales going to go down precipitously or just a little bit?”

The pandemic has made it abundantly clear that the 20 or 30 percent-per-transaction tolls charged by the delivery apps are unsustainable for a great many restaurants, she says. But restaurateurs are loath to pass along to their customers the higher costs typically associated with third-party delivery partnerships. “They do not feel like their customers should have to pay more, especially during a pandemic,” Curtis said. Some operators aim to negotiate better deals with these providers, she notes, while others are exploring whether to run the deliveries themselves. “That bears its own complications and expense and is uncharted territory for many of them.”

Delivery questions are particularly acute for operators in big cities like Chicago, New York and Washington, D.C. “There is very little walk-in traffic right now [in major urban areas], and so the bulk of their sales are through third-party delivery,” Curtis said. “One of my clients in New York, a burger concept, is now doing 56 percent of its sales that way.”

If the pandemic ends in 2021, restaurants that have operated much like “takeout machines” over the past nine months could see their dining areas fill up again. If they simultaneously continue to receive high numbers of delivery orders, new challenges could arise. “Many of these kitchens were not designed to support that additional business,” Curtis explains, “and for their kitchen staff, it can be very complicated to have half of your tickets be takeout and the other dine in.”

Whether these are make-or-break questions for a particular operator can depend on its location. Throughout the pandemic, restaurants have performed better in areas with sunnier climates, less regulation and/or fewer outbreaks of COVID-19, Curtis says. “I have restaurant clients in Texas that have seen their sales go back to 80 or even 90 percent of pre-COVID-19 volumes, whereas in a place like D.C., the norm is more like 50 or 60 percent.”

But it’s clear that restaurants see business opportunities. In one negotiation, a CBRE client is vying with three other restaurant operators for a space in Florida. In Dallas, as many as 12 restaurants have competed for a single space even during the pandemic, Curtis says. “The investors at most of the brands that CBRE works with want to start filling that pipeline back up.”

As they plan those expansions, another question for them is whether the current swing to the suburbs will persist. “Right now, office buildings in central business districts are 10 or 25 percent occupied,” Curtis said. “How do all of these major employers treat their workforces on a go-forward basis? Will they allow them to work from home two or three days a week, or will those employees be at home full time? Will they demand that their employees fully return to the office? Restaurants will be better able to target their capital for expansion when they start getting answers to these questions.”

Read more from SCT’s 2021 look ahead series

Plan for omnichannel; don’t wait for certainty on 2021 shopping behavior
Too soon to plan for the end of COVID, so what will a healthy center look like?
Faster and more collaborative style for retail real estate companies
Which chains will be expanding
E-commerce will face a reality check just like brick-and-mortar