Restaurants have persevered through pandemic shutdowns, high inflation and a shortage of workers, and many operators are coming off a big year of sales. However, advance, seasonally adjusted data from the U.S. Census Bureau shows that January sales from restaurants and drinking establishments increased only 6.3% year over year, slower growth than in any month the previous year. It’s too soon, of course, to say whether that’s a blip or the start of a trend.

Despite high operating costs and the question around consumer spending, expansion is still on the table for many restaurant groups. “It is always going to depend on what market we’re talking about and where we are in the country, but really there are no signs of a slowdown,” said JLL senior vice president of food-and-beverage advisory services Emily Durham. “There are some variations in the offering, but especially in hot markets like Houston, we continue to see demand far outpacing supply for restaurant locations.”

There are ample examples of corporate and franchise groups pushing forward with new units. Expansion by coffee chains, in particular, is downright frothy. Starbucks opened 208 U.S. locations in the fourth quarter alone, according to Northmarq’s Top 100: Tenant Expansion Trends report. Dutch Bros Coffee opened 159 stores in 2023 and plans over 150 more this year. Meanwhile, Chipotle and Raising Cane’s are leading the quick-service restaurant pack. Chipotle plans more than 285 openings this year, and Raising Cane’s aims to open over 100. Even McDonald’s continues to find opportunities for growth, reportedly planning to open 900 U.S. locations by 2027, according to Northmarq.

“There’s a cautious optimism, but I don’t think it’s exuberance,” said John Few, SRS Real Estate Partners managing principal in Newport Beach, California. “We’re all dealing with the same headwinds still coming out of the COVID shutdown and how that’s affecting different aspects of restaurant operations from labor to construction costs and interest rates.” Macro headwinds related to higher costs and economic growth also are creating a bigger gap between larger, sophisticated operations and smaller, mom and pop owners. Highly capitalized, well-defined brands that have great operations and great cash flow are the ones in a good place to grow, added Few.

Growth Drivers

Expansion remains active across categories, from full-service restaurants to casual dining and QSRs. According to TouchBistro’s State of Restaurants in 2024 report, a majority of the 600 U.S. full-service restaurant owners surveyed plan some degree of expansion activity in 2024. Forty-four percent plan to add multiple locations, according to the maker of point-of-sale and restaurant-management systems.

A notable trend fueling growth is a proliferation of entertainment and competitive socializing concepts that have strong F&B programs. Though there are some signs that the economy is slowing, noted Few, people still value experience and want to go out with friends. He represents U.K.-based, high-tech shuffleboard concept Electric Shuffle, which recently opened a location in each Austin and Dallas and has one under construction in Manhattan. The company is considering cities like Chicago; Nashville, Tennessee; Charlotte, North Carolina; Boston; and Atlanta. Then there are the mini golf concepts like Puttery, Swingers and Popstroke, which boasts 18-hole outdoor putting courses designed by Tiger Woods. People can have fun at to these places without swinging a club, whether they’re dining, watching sports on TV or just socializing, said Few.

Restaurants are catering to the latest food trends, from comfort foods to global fare. “The trend towards international flavors and foods, as well as international brands coming to the U.S., is really exciting,” said Durham. JLL represents a number of overseas brands from crepes to coffee to fine dining, and she said 2024 will be “a very exciting year for new things.”

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What Could Hold Restaurants Back

Restaurants do face hurdles to expansion, including high development costs and a scarcity of real estate options. Second-generation spaces, especially in good locations with existing restaurant infrastructure, are snapped up quickly. Some operators are shrinking footprints to save on real estate costs and adapt their prototype to available space.

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Restaurant groups are proceeding cautiously and keeping a close eye on their profit margins. According to an IBISWorld report on U.S. chain restaurants, revenue grew at an annual rate of 5.3% over the past five years but that growth is forecast to slow to an annual rate of 1.3% through 2028. That will put more pressure on efficiency to maintain profit margins.

A restaurant doesn’t want to be trying to make something work when it isn’t the right fit, so they’re being practical when looking at properties, said Few. “You definitely have to be patient. You definitely have to stick to your guns on building your model and making sure that it can apply to what we’re looking for because there aren’t as many choices,” he said.

A challenge for chains that rely on sale-leasebacks to finance growth is that higher rates have slowed investment sales. Developers that build and sell restaurants to net lease investors also have tapped the brakes. “The risk of having to hold that property while you have a construction loan is just too high right now,” said Matt Lipson, a vice president in the West region for Northmarq. Some developers are stuck with properties they can’t exit for the price they want to achieve. “What ended up happening is there just became an overload of net lease properties on the market,” he added.

Landlords Aren’t Just Filling Restaurant Holes but Rather Are Picking and Choosing

Landlords can be selective when it comes to F&B tenants these days. “Landlords see their food-and-beverage and their entertainment choices as really making their projects distinctive,” said Few. Their decisions don’t focus just on which tenant can pay the most rent. It really comes down to who will be there the longest and what type of customers they will attract, he said. “Landlords are looking at concepts in terms of: ‘What will this brand bring to my project and how will it differentiate my project?’”

In some cases, tenants are knocking on landlords’ doors, and in other cases, landlords proactively are finding restaurants that complement their tenant mixes and strategies. For example, after Federal acquired The Shops at Hilton Village in Scottsdale, Arizona, about two years ago, the leasing team analyzed the restaurant base and recognized an opportunity to use its F&B spaces to attract a younger demographic and drive more evening traffic to the property.

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Federal has partnered with local restaurateur Charles Barber to open a new restaurant, Born & Bred, at the center. This will be the second restaurant in the area for Barber, who also operates Phoenix’s Aftermath Bar & Kitchen, a high-energy, full-service restaurant that has gained a following for its menu, craft beer and craft cocktails. Born & Bred is scheduled to open in late February.

“Landing a key F&B operator that we think is special and that we think is going to resonate with the local customer was a big priority,” said Federal vice president of West Coast leasing Christian Irwin. Finding the right fit and balance of restaurants at a property is by no means a one-size-fits-all strategy. In this case, the leasing team felt that partnering with a local operator was the best choice.

The right restaurant tenant can change the trajectory of a property, he added. Case in point is Telefèric Barcelona at Federal’s Old Town Los Gatos in California. The family-owned restaurant originated in Spain and is expanding in California. Since the Los Gatos location, pictured at top, opened in 2022, it has helped drive both customer traffic and leasing activity. New tenants include Blue Bottle Coffee, Salt & Straw ice cream shop, Warby Parker and Arhaus. Irwin said: “It really comes down to understanding the asset and how it lives and breathes and who is your customer, what is their lifestyle and what are their interests.”