Michael Osanloo, the CEO of Portillo’s, is excited about the restaurants the brand is building.
Well, except for one thing.
Just about all the company’s new restaurants this year will open in the third and fourth quarters. “I don’t like it that way,” he told investors at the ICR Conference recently. “I don’t like to open restaurants in the fourth quarter. I’d rather open no restaurants in the fourth quarter.”
The reason, he said, was permits. Delays in getting local government approval delayed new unit openings in 2022 by six to eight weeks. As such, the hot dog and Italian beef chain is pushing back projections for new restaurants this year to be better prepared and avoid disappointing Wall Street.
“I could not have predicted how slow the permitting processes are right now,” he said in an interview. “It’s like nothing I’ve ever seen.”
He can at least take comfort in this fact: Portillo’s is far from alone.
Restaurants’ aggressive growth plans coming out of the pandemic have been slowed by red tape. Delays in approvals for site plans—sometimes lasting months or, in the worst cases, years—have dogged operators eager to get building again.
“It’s really bad,” said Barry Wolfe, senior managing director with the commercial real estate firm Marcus & Millichap, who works with a number of restaurants.
Wolfe worked with one restaurant client who was trying to get a location built in the Northeast for three years before the plan was eventually approved. While that’s an extreme example, he said, it’s indicative of the problem. It’s not uncommon for approvals to take nine to 12 months.
The issue is regionally agnostic. It can happen in big cities or small towns and in any part of the country, Wolfe said. Communities with a bigger focus on economic development will be more likely to speed through approvals. But generally, they can happen almost anywhere.
Wolfe started a conversation about the challenge on LinkedIn and received numerous complaints from real estate professionals and developers about the same problem. “It’s horrible,” he said. “It’s terrible across the market. It makes it really difficult to get deals done.”
The problem with permits is adding to the obstacles of development. Construction costs have taken off since the pandemic, as has the cost of equipment—which remains more difficult to get because of supply chain concerns.
Real estate itself is also getting expensive. Add it up and the cost of a new restaurant is far higher than it was before the pandemic. “Look at Twin Peaks,” Andy Wiederhorn, CEO of Fat Brands, the casual dining chain’s owner, said at the recent ICR Conference. “It was $5.5 million to buy the land, build the building, get the whole thing out of the ground and up and running.
“Today, that would be $7 million.”
It’s unlikely to get better anytime soon. Rising interest rates are increasing the cost of debt, which will further increase the cost of development.
The factors fueling permitting delays appear to be a combination of increasingly complicated restaurant projects coupled with labor shortages and work-from-home policies that have remained in place after the pandemic.
Demand for new restaurant development is clearly there. Commercial construction increased 40% in the U.S. between October 2020 and October 2022, according to Census data.
Restaurant companies of all kinds are aggressively working to put new units in the ground. Companies like Jack in the Box, McDonald’s and KFC are opening new units for the first time in years. Franchises have been signing up new operators at a breakneck pace.
Many of the projects they’re pushing are more complicated, too. Double and even quadruple drive-thrus have proliferated.
Meanwhile, concerns about the impact many of these drive-thrus are having on traffic have led planners to push back more aggressively on such proposals. Chick-fil-A’s drive-thrus are so busy that the company has had to fend off an effort for one location to be declared a public nuisance. The company is tearing down one location in Charlotte and replacing it with a drive-thru-only location in part because of traffic headaches.
Such challenges have led to growing scrutiny of such projects and, thus, permitting delays. “That impacts how long it takes to get approvals,” Wolfe said. “There’s more traffic, more staffing, more traffic backing up. That makes it more difficult and more challenging. Chick-fil-A, Raising Cane’s and those brands have a tougher time getting approved.”
All this is happening as local planning staffs are stretched thin—something to which restaurants can relate. Local governments are 160,000 jobs short of where they were before the pandemic, excluding education, according to the U.S. Bureau of Labor Statistics.
But there are other problems. Specifically, a lot of people continue to work from home. More than a quarter of U.S. employees worked from home at least part of the time in 2022, according to Zippia. But that is higher for white collar workers and includes many government employees who oversee development reviews.
Some operators argue that it makes it more difficult to get plans approved. “It used to be that you’d bring it into the office,” Osanloo said, noting that many workers are now remote.
Many of those workers are off Fridays, too. And they leave early on Thursday. “You can’t find anyone after Thursday afternoon,” he said.
The result has caused enormous headaches for restaurants eager for growth. “Permitting delays in North America are making it difficult to identify exactly when a location may open in the future,” Papa John’s CEO Rob Lynch said in November. He added that it “isn’t a matter of if a location can open. It’s simply a matter of when.”
Competitor Domino’s Pizza expressed similar concerns. “Frankly, until we see these permitting and construction delays completely abate, it is going to be a headwind,” CFO Sandeep Reddy told investors in October.
Both executives had good reason for their complaints: New unit development had slowed. Domino’s opened 205 new locations in 2021. It opened fewer than 90 through the first three quarters of 2022, putting the company on pace to open just 111 new locations.
Similarly, Papa John’s opened 50 new locations in 2021. The brand was on pace for 25 new locations in 2022. While both brands could see a higher-than-expected level of development in the fourth quarter—and they likely opened more units than normal in 2021—that is still a substantial slowdown.
Neither of those brands operate either giant restaurants like Portillo’s or Twin Peaks or multi-drive-thru behemoths such as Chick-fil-A.
Dutch Bros, on the other hand, opened more new locations in 2022 (133) than it did in 2021 (98). “Our box is pretty simple,” CEO Joth Ricci said at the ICR Conference. “It’s a 900-square-foot rectangle. It can fit in a lot of places.”
Shake Shack, which like Dutch Bros is aggressively expanding with new units, said that it opened 36 new locations in 2022. That was the same number it opened in 2021 but was on the low end of its expectations for 35 to 40 per year. Executives suggested that permitting and construction delays—as well as the availability of equipment—caused development problems.
“Unfortunately, we and many other retail and restaurant companies are seeing this trend,” CEO Randy Garutti said in November, according to a transcript on the financial services site Sentieo. “But it’s one we’ve been preparing for.”
It’s not just limited-service chains, either. Dine Brands Global, parent company of the family dining chain IHOP, cut its expectations for new unit openings to between 35 and 45, from 50 to 65 earlier in the year, due to delays. “A lot of our pipeline was backloaded this year, and we started getting into some permitting issues that seem to be persisting post-COVID,” IHOP President Jay Johns told investors in November, according to Sentieo.
As for Portillo’s, the company expected to open at least seven new restaurants in 2022 to meet the company’s annual development goal of 10% new units annually. It opened five.
This year’s openings are expected to take place toward the end of the year, and the company is reconfiguring its development process to account for the permitting delays.
“We’ve given ourselves a significant cushion,” Osanloo said. “We’ve learned our lesson.”