How to find lease deals now

Steven Josovitz shakes his head as he looks at a map of downtown Atlanta. “I have hundreds of people calling me every week, looking for locations to lease or businesses to buy in those core markets,” says Josovitz, vice president of restaurant-real-estate broker The Schumacher Group. “I have to tell them there’s almost nothing available for lease.

“There are a couple of options that are very expensive, but they’re prohibitive for most people except the high-volume player. For the small to medium-sized franchisee or independent who wants to open in a strong location with high-income demographics, it’s very tough.”

By the numbers, for restaurants looking for affordable real estate, 2012 ought to be the best of times. In the retail sector, vacancy rates are still high, by historical standards, and rents are still low:

  • At the end of June, according to real-estate-data firm CoStar Group, retail property nationwide was 6.9 percent vacant, down only slightly from a peak of 7.6 percent two years before. There were 28.8 million square feet available.
  • Average annual rental rates inched down 0.76 percent from a year earlier, to $14.51 a square foot. In 2008, by comparison, rents were over $17.

So why, for small restaurant chains looking to grow, does the current real estate market seem like the worst of times?

What the overall numbers disguise, say restaurant realtors, is that most major cities are really tales of two cities. Many suburbs are still retail wastelands. Vacancy rates for shopping centers are close to 11 percent, almost triple those for freestanding retail buildings. But just a few miles away, dining rooms are packed, availability of “A” locations is tight and rents are rising.

“The market is very fragmented,” says Jeremy Kudan, principal of The Kudan Group in Chicago. In urban corridors like River North and Bucktown, “landlords can pretty much choose their tenants, because of continued growth in the foodservice segment. However, in outlying areas, so many places have closed that the demand is much less than the supply. Tenants and buyers have good abilities to negotiate excellent rates.”

Agrees Atlanta realtor Michael Bull, “You can’t generalize in this market. It can change block to block.”

Even where prime sites are vacant, many landlords give first preference to national chains with deep pockets. “Often, the landlord is willing to forego the highest payer to get more dependability and predictability in tenants,” says Andrew Moger, CEO of Branded Concept Development in New York City. “The biggest issue is that nice, big corporate guarantee.”
But just because it’s harder for smaller operators to win in the real estate game doesn’t mean it’s impossible, say restaurant realtors. Many are just working smarter.

They’re moving into gentrifying areas, where populations are dense but rents are low. They’re converting high-traffic locations that used to house banks and drugstores. They’re finding developers who are hungry for some local flavor.
“I’m seeing more and more interest from landlords wanting to find local or regional type chains that don’t have units all across the country, that makes a project a little unique,” says broker John Evans of Dallas. “I’ve taken leases to people that were turned down because the landlord didn’t want a chain in his development.”

Above all, they’re showing how they can enhance a property’s bottom line. Says Marty Kotis, president of Kotis Properties in Greensboro, North Carolina, “The landlord wants to know what value you can add to the center, and how likely it is that you’re going to be there for the long term and pay your rent.”

Here are some secrets of six restaurant groups—independents and small chains—who are competing for great real estate with the Starbucks and Chipotles of the world.

Strategy #1
Find new demand
J.B. Dawson’s
Reading, Pennsylvania
5 units
After operating 11 truck stops, Jim Lukens was ready to start his own casual dining concept, modeled after Houston’s. His first two stores were doing $4 million apiece in sales. But an hour-and-a-half from Philadelphia, he couldn’t get the attention of major mall developers. “I struck out again and again with the national guys,” recalls Lukens. “They’d ask, ‘Who are you and how many restaurants do you have?’”

His break came after he opened a third restaurant closer to Philly. A frequent customer was broker David Orkin, who repped a number of national chains. Orkin knew a real estate investment trust, General Growth Properties, that wanted to add strong local concepts to its lifestyle centers, alongside the Cheesecake Factories and Brios.

“Your higher-income clientele has been to all the chains,” says Lukens. “These operators told me consumers had gotten chained out. They wanted something more unique.”

J.B. Dawson’s have opened at General Growth’s lifestyle centers in Lancaster, Pennsylvania, and Newark, Delaware. “It’s a win-win,” says Orkin. “You get a guy who has four or five restaurants, who you can suddenly put in a mall next to a Nordstrom. Two years ago, he was next to a Walmart.”