Restaurants are an often talked about retail real estate tenant nowadays. In a commercial real estate sector where store expansion in uneven, many eatery chains are increasing their footprints across the country. In the single-tenant net-lease arena especially, quick-service and fast-casual restaurants are an extremely hot investment. Additionally, in upscale markets, celebrity chefs are opening several restaurants. But as in other areas of retail, the middle-market players are facing challenges and transition. In this case, it’s the sit-down casual-dining chains.
On the heels of the recent Restaurant Leadership Conference, GRS Group initiated a discussion on this sector between three experts on the industry: Allen Brown, national accounts manager and Arizona operations manager of GRS | Title; Barry Bain, a GRS | Centaur director in the Chicago area; and Stephen Schwanz, president and managing director of Franchise Capital Advisors, based in Scottsdale, Ariz. The three touched on the overall health of this retail real estate tenant and the key trends impacting the sector.
Based on what you saw at the conference, how is the restaurant sector holding up?
Stephen Schwanz: They had 1,500 people there, and it was very busy, and people were very upbeat. From what I understand, there were about 400 people on the waiting list to get in.
People were excited about the rate of expansions. Capital has freed up quite a bit over the last couple of years. It’s never going to be like it was prior to 2007 as far as capital, where you’re getting 100% money here and there. The market has corrected itself in a good way to go back to traditional lending that keeps more deals safe than sorry.
Barry Bain: It seems like the vibe is upbeat. The market is definitely in an expansion mode through development of new locations and stores, as well as trying to grow through acquisitions and mergers to help facilitate more growth. And I’ve seen this in particular with the Taco Bell brand. The franchisor is pushing the franchisee to continue with their development agreements, and if they’re not sticking with them, they aren’t going to have the opportunity to grow whenever there becomes a market open. I’ve seen that first hand with a couple of deals that I’ve worked on.
Allen Brown: I’m seeing many more options today than there were pre-recession as well from a traditional-lending standpoint. There seem to be several more players in the market that have established franchise-financed lending that weren’t there before.
But from a title perspective, in the single-tenant triple net-lease arena during the first quarter, I saw some weakness in our order count. There is a lot of optimism out there, but deal activity was down in the first quarter. We’re starting to get more quotes and looks at projects than we were in the first quarter, so I think this quarter bodes well. I’m hopeful for 20-to-30-percent growth over last year, which is what I projected at the beginning of the year, but the first quarter was certainly negative.
Barry Bain: The first quarter seemed a little slow, but I look back on last year, and it always seems a little slow because you finish with such a flurry in the fourth quarter. That said, it may just be the result of the activity that we saw last year, and people were just slow in getting things going. And rates have a little bit to do with that, too. They’ve been jumping up and down, to some extent. I will say I have seen a pickup in activity in the second quarter so far, even though we’re only a couple of weeks into it.
I assume you’re seeing different lending terms for different types of concepts?
Schwanz: Of course. You’re seeing some lenders that put together specific programs for certain concepts. The lenders out there have different programs, for example, GE might set up something specifically for Jack-In-The-Box. They have been successful at doing that. Wells Fargo has programs for Tier One players. They all have different models and different lending parameters for Tier One and Tier Two. Casual dining may be a little different.
Brown: From a title insurance standpoint, there are a larger variety of entities offering up than there was in the past five years. There are lot more players. At the conferences that I’ve attended, it seems like everyone’s coming out of the woodwork. They have established new guidelines on which they’re more comfortable to lend than the 100 percent lending that we saw in 2007. We’re seeing more 60 to 65 percent loan to values. They might be somewhat more aggressive right now and lending more, but there is more equity infusion being required, a little bit more due diligence being done, looking for more strengths and a lot of non-recourse loans.
What is driving the increased variety of players?
Schwanz: You’ve got local community banks, like National Bank of Arizona, who we do a lot of business with, and then you have Cadence Bank out of Atlanta, which is getting very involved. And of course you have all of the bigger lenders that are out there, such as Bank of America, and Wells Fargo, which is one of the biggest. You also have a pool of newer lending institutions out there, like Infinity Lending Group, which are looking at the second-tier opportunities.
Brown: Wells Fargo has even added a program to start doing some tier-two deals. They have a program out there that targets 50-unit, $100 million institutions. They’re now looking at trying to latch to the small franchisees that might be in a rural area, and they’re not using just real estate as the basis for their loans but other types of collateral as well, such as enterprise value and receivables.
Schwanz: There’s cash-flow lending out there everywhere. Real estate lending is out there, obviously, but a lot of lenders are looking at cash flow.
What is the hottest dining category out there right now?
Bain: The quick-service, then fast-casual then casual dining, historically, and even today, are A, B, and C in terms of how it runs and that’s how lenders look at it as well.
Schwanz: I’ve been asked this question for 30 years, and I will tell you that nine times out of 10 it comes down to the operator. For instance, there is United States Beef Corp., one of the largest Arby’s franchisees in the country, out of Tulsa, Okla. They are one of the best operators in the country. You can really tell the guys who pay attention to their business and the guys that don’t. What we look for is good operators.
But some concepts work, and some don’t. Quiznos just filed for Chapter 11. Some of them have their struggles, and some don’t. You always have to reinvent yourself in this business.
Brown: I have a question. Are the Chili’s, the Applebee’s and the TGI Fridays becoming stale brands? Have they lived their functional lives?
Schwanz/Bain: They’re not necessarily fading away. But they need to keep up with the times as far as their remodel requirements and commitments, and that’s pretty tough with some of the franchisees, particularly in the casual-dining sector because that can be a big nut to swallow, but you have new brands and new concepts enter the market every year. Some of them take off and stick. Some of them are flat. But your Fridays, Applebee’s and Chili’s, as long as they’re committed to upgrading and staying competitive, they will always be around.
There are a lot of new concepts coming out all of the time. Is there room enough for all of them, or are some categories overheating?
Schwanz: There are only so many butts you can put in so many seats. You have Subways everywhere. Also, you have Jimmy John’s Gourmet Sandwiches, Jersey Mike’s Subs and Which Wich Superior Sandwiches, which are fairly new concepts, that seem to be doing very well. Where are these people coming from? I don’t know the answer to that.
Brown: This really brought be back to what I see in my children’s generation. They are now 23, 26 and 30. That age group does virtually no cooking at home. They are always going out to eat somewhere. I’ve seen that, and is that where the butts are coming from, a generation that goes out to eat more often than my generation does?
Bain: There is a tendency to eat out more. Here in Chicago, you have many different options as far as restaurant opportunities are concerned. But in the fourth quarter of last year, our Dominick’s grocery chain, which was a founding grocer in Chicago for many generations, closed all of its stores. That’s a whole other sector outside of the restaurant space, but I think there is some correlation between grocery store and restaurant. There are more people eating out versus buying food or prepared foods.
Are the expanding concepts finding the locations that they want in an environment where there is not a lot of new development taking place?
Schwanz: We operate coast-to-coast. Operators are finding spots that have been closed and re-leasing them. That happens a lot. The Which Wich guys are going into spaces that have been used by other places here in Phoenix that are about the size of a Subway. But then you have Taco Bell, where you have to find A+ locations. That might be a little more difficult.
Bain: In working with a couple different restaurant concepts looking for sites, in major markets, they have been relatively challenged in trying to find good sites and real estate. At the same time, I see a lot of backfilling and retrofitting going on. We’re at a time where we’re seeing some restaurant chains still struggling and closing up under-performing locations. And from a real estate perspective, if you find a site that’s good real estate, one concept might be more successful than the other, be it just because of the operator or the demographics of the neighborhood.
Brown: There is a lot of repurposing of real estate going on. I see it happening every day. A prime example would be Buffalo Wild Wings. They have larger footprints, they’re expensive stores to develop, but in the Phoenix area, they took an existing store that used to be a Genghis Grill, and then something else, and they put a Buffalo Wild Wings in there, and its done fabulous compared to what the others were doing. I’ve seen a TGI Fridays close in Goodyear, Ariz., which is now occupied by a bank. I saw an On the Border restaurant close, and its now about 40 percent leased to a Five Guys Burgers and Fries, and the rest of the building is urgent care. People are finding places to put tenants without having to do any new development.