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Will the retail apocalypse help restaurants?

The Bottom Line: Yes, it can, and there's evidence it's already starting.

The Bottom Line

The retail apocalypse could be a good thing for restaurant chains looking to expand.

Lease costs, which have been skyrocketing in recent years, could come down in the coming years as landlords nervous about closing locations seek out traffic-generating businesses and give them better rates.

That, at least, is according to experts after Starbucks founder Howard Schultz declared an “inflection point” in a memo obtained by Yahoo Finance. He said that Starbucks is ready to take advantage of the situation.

Others agreed with the idea, and some are saying it’s already happening.

“Retail is just so tumultuous right now,” said Stephen Cohen, an attorney out of Minneapolis who helps restaurants and retailers with their leases. “It’s just such a scary time for retailers, and landlords are feeling it.”

More than 20 retailers filed for bankruptcy last year, closing numerous locations in shopping malls and other retail centers.

Retailers closed thousands of stores last year.

While some retailers, notably Best Buy, have appeared to recover more recently, the simple fact is that the growing number of online shoppers is devastating the retail landscape.

That’s having an impact on restaurants. Starbucks, for instance, said that its mall locations underperformed its non-mall locations in the last three months of 2017.

It also impacted Starbucks by getting one mall owner nervous over the company’s closure of its Teavana brand. Simon Property Group sued Starbucks over the closures, and while the two sides settled the lawsuit, it still demonstrates the concern some landlords have over closed locations.

That lawsuit was unlikely just a couple of years ago. “They’re a little less confident in real estate,” Cohen said of Simon. “They’re less inclined to take back real estate. They’re more flexible in rent. And they’re a little more aggressive in trying to keep” stores open.

This is a potentially major shift in the landlord-renter relationship. In recent years, as fast-casual chains emerged and aggressively competed for real estate, landlords were able to charge higher prices.

The competition drove up rent costs, one of the more underrated challenges for restaurants in recent years.

But as retail locations have shuttered, some restaurant chains are able to get good deals from landlords. Restaurants can bring in traffic, and so many malls have been replacing retailers with restaurants in recent years.

It’s an especially good environment for stronger chains that are perceived as bigger traffic drivers. Chains like Shake Shack, for instance, can get better deals on real estate from landlords. Indeed, Shake Shack’s occupancy costs were 8.1% of revenues in 2017, down from 8.4% the year before.

To be sure, we spoke with franchisees recently who said that the environment for leased real estate is still competitive and difficult, especially in markets loaded with fast-casual chains, such as Washington D.C. Cohen himself said that the renter-friendly market is “coming on slowly.”

And the strongest malls and retail developments will always be more competitive. For the most part, the deals landlords are giving are more likely to come in “B” and “C” malls that are weaker, rather than the strongest “A” malls.

But, Cohen said, the number of A-rated malls is likely to decrease in the coming years as there are fewer shoppers.

“What constitutes an A mall might start to change at some point,” Cohen said.

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