As the COVID-19 pandemic moves into its third year, an old real-estate saying seems to be easily transferrable to the limited-service restaurant industry: location, location, location.
Two years ago, as operators worried about worsening economic conditions, many experts predicted a huge shakeout that would result in a sizable number of quick-service and fast-casual closings, creating thousands of available second-generation locations.
According to thinking at the time, all these newly vacant sites would result in a depressed restaurant real estate market, which in turn would provide inexpensive growth opportunities for the strongest entities as well as lower costs for startups.
So, did this projected boom in second-generation sites occur? At this point, observers are split in their views, although the majority say the boom never happened.
“Back in March, April, and May of 2020, there was a lot of talk about this flood of drive-thrus that were going to come available, and these great opportunities would be around the corner,” says Barry Wolfe, a senior managing director of national real-estate firm Marcus & Millichap.
“People thought they were going to get A-plus locations on the cheap,” the Fort Lauderdale-based retail specialist recalls. But while some of this occurred, “the wave of closures never came, much to the disappointment of chains that were flush with cash.”
The pandemic certainly caused damage to the dining industry. The National Restaurant Association estimates 90,000 eating establishments shuttered for good or long-term due to coronavirus setbacks.
“It’s been hard to track closings caused by the pandemic separate of other business reasons,” says Association spokesperson Vanessa Sink. “The industry is still being disrupted.”
Nonetheless, an annual average of 60,000 eating and drinking establishments opened and 50,000 closed for various business reasons before 2020, according to the organization’s research,
Companies like McDonald’s and Dunkin’, for instance, announced plans before COVID’s spread to close hundreds of units in Walmarts and Speedway stores, respectively. Subway was struggling and closing hundreds of restaurants. Numerous operators shuttered older sites but opened others in better locations.
With offices closed due to coronavirus mandates and precautionary measures, many urban core eateries did suffer. At the same time, consumers flocked to suburban and ex-urban limited-service units, especially those with drive-thrus.
Based on statistics calculated last year by market research firm The NPD Group, the number of full-service restaurants at the end of first quarter 2021 slid 10.7 percent versus pre-pandemic units, but quick-service spots dipped just 3.7 percent and fast-casual chain stores declined only 1.5 percent.
And while NPD found quick-service online and physical traffic was still off a percent at the end of 2021 compared with two years earlier, dozens of limited-service chains reported strong revenues and earnings last year. Fast casuals made up for declines early in the pandemic by focusing increasingly on off-premises operations, and some even added drive-thrus.
“It speaks very positively of anything with a drive-thru, using it to survive and prosper,” Wolfe says. “These owners were also entrepreneurial and able to pivot quickly.”
Of course, as he and others note, federal and state government assistance also played a significant role in helping many restaurants stay above water.
“If not for PPP [Paycheck Protection Program], there would have been a more likely repeat of the dynamics of the [2007–2009] recession,” notes Don Fox, CEO of Firehouse Subs. “[The government help] may have done its job in holding off closures for the overall industry.”
Fox was among those who thought shuttered limited-service restaurants—both standalone and in-line eateries—would flood the market for operators like Jacksonville, Florida-based Firehouse to snap up. “It didn’t play out the way people thought—or hoped—it would,” he says.
Drive-thrus became “the hottest of commodities,” he adds.
“You could have a poor performing unit that became a great performing one,” Fox says. At the same time, the adoption and expansion of delivery, online ordering, and other efforts also helped.
The decision by many fast casuals to seeks sites that would allow for drive-thru lanes—either standalone units or endcaps of shopping strips—plus ongoing growth by quick-service companies, has caused demand, land costs, and rents to soar, Fox and others say.
When Ohio’s sole Corner Bakery, a standalone eatery with a drive-thru, closed in suburban northern Columbus, another fast-casual tenant new to the market was announced the same day.
Similar restaurants that became available in top-three tier locations “were absorbed immediately,” notes Brad Giles, vice president of real estate for Savory Fund. After the first few pandemic months, “competition for good space grew,” including sites without drive-thrus.
And it has become more expensive.
“We are seeing this happen everywhere,” he says. “If you look at submarkets in Kansas, even in Utah, there are no shortage of takers for space. Not only have competition and prices for sites increased, but “groups are making decisions quicker. They’re not staying on the market long.”
Utah-based Savory, which owns brands like The Crack Shack and Mo’ Bettas, has been growing its units via all means possible—buying and building new spaces and converting other locations. “We’re leaving no stone unturned and are taking those great locations when we can,” Giles says.
Still, the view the pandemic didn’t create a strong supply of great second-generation sites isn’t unanimous. Dan Rowe, chief executive and founder of Fransmart, a franchise development company, says his prediction of a boom in these locations “absolutely” came to fruition.
“We’re seeing it across the board, all across the country,” he notes. “We are aggressively making very good deals,” pointing to cases in which restaurants that Fransmart is helping, like Brooklyn Dumpling Shop, have found top-notch locations that are offering terrific incentives for operators.
Rowe says deals are available everywhere, although he notes the best ones are in city centers. Those property owners have seen their tenants hurt by a loss of foot traffic due to COVID-closed offices, so some are offering inducements—including rent concessions and bigger improvement allowances – to keep existing businesses or attract new ones.
Only now are these real estate markets tightening, he says. “A year ago, we were able to ask for the moon. This year they will be normalized, and next year will be a landlord’s market.”