If you haven’t read a June 11 Wall Street Journal article entitled “The Unlikely New Real-Estate Darling: Restaurants,” we suggest you do some catching up. It’s an insightful read that points to an interesting trend emerging: restaurants are becoming highly sought-after tenants in the commercial real estate market.

The article identified the evolving dynamics of the restaurant industry and how these are reshaping retail real estate, in general. The uptick in leasing and occupancy rates is attributed to factors like increased dining out spending and a shift in consumer preferences.

As business appraisers, staying attuned to market fluctuations that can impact property values helps in accurate property assessments and strategic decision-making.

Then vs Now

Traditionally, restaurants have been viewed as risky businesses due to high failure rates. Here were some factors that contributed to the volatility and risk historically associated with restaurant ventures:

• High Cost of Operations – Building out and equipping restaurant spaces costs a lot, requiring significant upfront investment that can strain financial resources.
• Cutthroat Competition Saturated the Market – Thin profit margins usually come as a result when many establishments are simultaneously vying for customers’ attention.
• Management Challenges and Variable Operating Costs—Whether we’re talking about fluctuations in the cost of ingredients or rising labor costs, operating expenses impact profitability and present a challenge to many business owners.

Still, these recent challenges aren’t an indication that the broader restaurant industry is headed for a significant slowdown. McDonald’s sales volumes are still more than 30% higher than they were pre-Covid, and Americans continue to spend more money at restaurants.
– Sara Senatore, Senior Analyst, Bank of America

However, what this WSJ article identifies this shift that appraisers need to note if we’re to adapt our valuation strategies accordingly. Here are some of these insights from the WSJ’s report:

1. Increased Demand for Restaurant Spaces – The trend towards eating out has resulted in an increase in the need for restaurant locations. Food services accounted for over 19% of all retail leases in 2023, the highest proportion on record. The emerging trend indicates a rise in prospects for appraisers to assess the escalating worth of properties rented out to food service tenants. Keep an eye out for business opportunities!
2. Rising Restaurant Rents and Occupancy Levels – Restaurant rents have surged by as much as 10% above the levels seen before the pandemic, indicating a significant rise in demand. Appraisers need to consider these escalating rental rates while evaluating property values and projecting future income streams for properties occupied by restaurants.
3. Strong Retail Recovery Boosted by Restaurants – The renewed vigor in the restaurant industry has also propelled the retail real estate market to its most robust state in recent memory. Appraisers need to consider the significant influence of restaurant tenants on the overall performance of retail properties, which can affect valuations and investment choices.
4. Evolving Tenant Risk Profiles – Restaurant tenants once considered risky because of their high failure rates, are now seen as more stable, particularly creditworthy chains that attract customers and boost sales for neighboring establishments. Appraisers should reevaluate the risk profiles of restaurant tenants when assessing their value.
5. Impact of Foodie Culture and Lifestyle Changes – The rise of “foodie culture” and millennials’ lifestyle choices, like putting off marriage and having kids, have led to a rise in dining out spending. Appraisers should note these socio-economic shifts when assessing market demand and property usage.
6. Adaptation to Hybrid Work Models – Hybrid work models have boosted suburban restaurant traffic, as people have more flexibility to dine out. Appraisers should consider the changing dynamics of work and residential patterns in their evaluations of suburban retail and restaurant properties.
7. Digital Integration and Drive-Through Expansion—Chains like Chipotle are expanding drive-through and digital order capabilities to cater to evolving consumer preferences. Appraisers need to understand how these adaptations affect property layouts, site selection, and the potential for increased traffic and sales.
8. Inflation’s Mixed Effects on Profitability – While inflation has increased restaurant sales through higher menu prices, rising payroll and ingredient costs have squeezed profit margins, especially for independents. Appraisers must balance these factors in assessing the profitability and sustainability of restaurant tenants.

Beyond Watching Trends

The evolving dynamics of the restaurant industry are reshaping retail real estate. For business appraisers, staying attuned to these trends is essential for accurate property assessments and strategic decision-making. Whether it’s understanding the new value of restaurant spaces or adapting to changing consumer habits, appraisers have a critical role in navigating this vibrant sector.

By leveraging these insights, appraisers can provide more nuanced valuations and contribute to informed investment decisions in the rapidly evolving restaurant real estate market.

Level up with the Business Certified Appraiser (BCA) designation, a globally- recognized gold standard for small and Main Street business valuation. Hone your skill set with specialized courses like Advanced Financial Analysis, Going Concern – Real Property, and Building the Essential BV Templates in Excel. By joining ISBA, you elevate your capabilities and contribute to building stronger businesses, one valuation at a time.