As restaurants close across the country, executives of big chains are sensing opportunity for expansion, expecting a more favorable environment for real estate that will give them good locations, better terms or both.
Some are not even waiting. Chipotle Mexican Grill, for instance, has contacted the operators of desirable locations that haven’t closed yet and offered to buy out their remaining lease.
“We’re fortunate to be in the position of opening new locations at this time and recognize that others may be looking for relief,” the company said in an email. “To the extent the existing location fits within our real-estate strategy, we are open to lease takeovers and continue looking at new units and developments as well to support our accelerated growth.”
Real estate experts say the strategy is unusual, but also indicative of the times. As independents and small chains close, larger chains with the financial backing can potentially get new sites or lower lease costs. And they are already taking steps to take advantage of the market.
“I don’t think any of these operators would have wanted this,” said Barry Wolfe, senior managing director of investments with the real estate investment firm Marcus & Millichap. “But when you get recessionary periods, those that are strong financially, not overloaded with debt, have cash and are growing, they seize the opportunity.”
Indeed, numerous executives in interviews and on earnings calls, including Chipotle, have suggested that they expect a more favorable environment for real estate, and said they are positioning themselves to take advantage.
The environment could ease lease costs, but it could also make sites available that were not available just a few months ago, enabling companies to get into new markets or desirable neighborhoods.
“When you look at the increase in the business that we’re seeing today, and I think as you look at some of the real estate opportunities that may present themselves that weren’t available in the past, I think we’ve got a strong opportunity to continue to accelerate that U.S. store growth,” Domino’s CEO Ritch Allison told investors this week.
It’s not just expansion opportunities. Navin Nagrani, the executive vice president and operating partner with Hilco Real Estate, said that restaurant chains with operating portfolios could potentially negotiate rent concessions when leases come due.
“They’re going to have some real room to negotiate rent concessions,” Nagrani said. “Landlords don’t want to be in position to have a vacant restaurant.”
Operators shouldn’t expect lease rates to go down immediately, however, and some types of locations are expected to get even more competitive. That is especially true for any restaurant with a drive-thru.
The value of drive-thru sites could increase in the post-pandemic era. Drive-thrus were becoming more popular before the pandemic, even as some cities like Minneapolis took steps to limit their number.
The pandemic has changed that equation. Drive-thrus have become remarkably popular during the quarantine, so much so that many fast-food restaurants have seen their sales grow this year. Lines at restaurants like Chick-fil-A, Raising Cane’s, Popeyes and others have been consistently long even in mid-afternoon.
“Anybody who has an existing location, the value of that will grow going forward, I think,” Jim Creel, CEO for the Mexican fast-food chain Taco John’s, said in an upcoming edition of the Restaurant Business podcast “A Deeper Dive.”
More chains than ever are looking at sites that have available drive-thrus. Chipotle, for instance, plans to develop aggressively its mobile-order Chipotlanes. Starbucks, meanwhile, wants to build more drive-thru locations itself.
Dunkin’, too, is building more drive-thrus.
Any site that has a drive-thru can expect strong demand, as will any site that could be converted into a drive-thru restaurant—such as an old bank site with a drive-thru teller. “Think about it as gold,” Nagrani said. “It’s a commodity. There is going to be a big surge in demand for existing drive-thru locations that can be converted.”
On the other hand, casual dining sites could see their prices fall as locations close. That could open up opportunities for those companies that can expand.
“I do believe the economics are going to be more favorable than they were pre-COVID,” Gene Lee, CEO of the casual dining operator Darden Restaurants, told investors last month. He also noted that construction costs should come down, too, like they did after the previous recession. “The best restaurant deals we did were after the recession in 09 and 10,” Lee said.
The broader market should help fuel chain expansion, potentially leading to the conversion of hundreds or thousands of independents into chain locations. The aftermath of the Great Recession fueled considerable expansion for chains that had the finances to build new locations.
The pandemic has had a far more serious impact on the industry, with as many as 20% of independent restaurants expected to close. Many chains, meanwhile, are cash rich, and their sales have largely recovered.
“The brands that are doing well now because they have the financial fortitude and have the cash on hand to seize opportunities, those operators will seize the chance,” Wolfe said. “Those guys aggressively looking for opportunities will find them.”
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