A menu of options exists for redeveloping food-use retail spaces.
Most owners of retail
properties have restaurant tenants. Whether they are located on an end cap,
inline, or on a free-standing outparcel, these restaurants make up an integral
component of the retail investment landscape. Savvy property owners recognize that
restaurant tenants and transactions require special attention and consideration
— at times quite different from other, more-traditional shop spaces.
This notion is nothing
new; however, several factors, including recent economic challenges and changes
in consumer behavior and tastes, are forcing landlords to once again reinvent
and reposition their properties due to unexpected vacancies.
Determine Best Use
Depending on the
circumstances, property owners may be faced with leasing former restaurant
spaces to another restaurant, converting an existing restaurant building to
retail, or converting a retail building to a restaurant use.
In any of these scenarios,
the first move is to consult with a local broker to determine the property’s value and best use. The
value of a vacant restaurant facility is determined primarily by its location,
supply and demand, quality of the existing tenant mix, available non-competing
co-tenant menus in a shopping center, and the overall delivery condition.
If the above factors and
market data indicate that the highest and best use for the site is to re-lease
it to another restaurant tenant, then the next step is to better understand the
existing restaurant building’s physical and mechanical condition. In most cases,
these improvements are a valuable asset to a replacement restaurant tenant and
a landlord will want to maintain the facility in the most intact, visibly
turnkey condition possible.
The most valuable
mechanical improvements involve plumbing, electrical, venting, and a grease
trap. Other fixtures that are of equal value are walk-in coolers, kitchen
hoods, sinks, stainless kitchen fixtures, and bar equipment. Age of
improvements may play a role in their usability: For example, older grease
interceptors may not meet today’s code. Any large-scale building modifications will
trigger permits that will require code upgrades.
Maintenance of the
restaurant while it’s
closed requires periodically running the plumbing, such as flushing toilets and
running water through drains; cracking open all doors on any walk-in coolers or
other refrigeration equipment; detailing the facility; and removing all food. It’s also important to maintain
the power, so that dark areas are easily lit for tenant showings.
A landlord with an
extremely well-located vacant restaurant building in a high-demand area is
likely in the best position. Basic financial considerations for a landlord
trying to re-lease a former restaurant facility consist of a tenant improvement
contribution, rent relief during construction, and brokerage commissions, all
of which are standard in any new retail lease negotiation. In the best
scenarios, landlords may be able to increase rents due to delivery of a
restaurant facility with significant improvements including salvageable
furniture and equipment.
On the flip side,
restaurants built as specific prototypes have limited re-use potential. For
example, an older El Torito that was built as a very large Mexican hacienda
will not be functional for many other restaurant brands. Other restaurants that
are difficult to convert include bi-level Bucca di Beppo buildings and older
Black Angus restaurants.
When sites are located in
prime high-demand retail corridors, it may be profitable for a landlord to
redevelop the property. In most cases, capitalizing on the restaurant
entitlements will typically make the most economic sense. Options include
converting the structure to a multitenant
building or keeping it as a single-tenant restaurant by way of a new ground
lease or build-to-suit. In either case, landlords may face considerable
financial implications, including construction downtime and expectations for
delivery condition; thus, an investment analysis should be the first step
before going forward.
Pad Site Considerations
In the case of inline or
end-cap sites of former restaurants, a good rule of thumb is for a landlord to
maintain and make use of previous restaurant improvements and entitlements and
lease the site to another food use. It rarely makes financial sense to convert
a restaurant facility to a non-food retail space. The only caveat to this would
be if the vacant space was required to assemble a larger space for a retail
However, the opposite is
true for pad sites: Landlords may be able to take advantage of a pad site
currently occupied by retail and convert the site to a restaurant. Recently,
countless numbers of Blockbuster pads with great visibility in shopping centers
have been converted to either single-tenant or multitenant restaurants.
Some benefits of this
conversion may be higher rents, shorter lease-up periods, and upside from
percentage rent. There is a growing market for fast-casual restaurants that
occupy smaller footprints; they traditionally can afford a higher
per-square-foot rent, allowing for this type of reposition to pencil out.
Growing national brands in
this segment are Panera Bread, Chipotle Mexican Grill, Five Guys Burger and
Fries, and Rubio’s
Fresh Mexican Grill, as well as many regional brands. Traditionally, tenants
will require delivery of a space in a vanilla condition with plumbing, gas,
electrical, venting, and a grease interceptor installed.
In this challenging
economy, landlords should monitor tenants carefully and realize when a
restaurant tenant is struggling or on the brink of bankruptcy. A landlord with
failing tenants should start working with a broker early to grasp the current
market demand for a location. Once educated about the market, the landlord will
have a better understanding of what type of investment decisions may make the
best economic sense for the property.
Michael Spilky is
president of Location Matters, a San Diego-based commercial real estate
brokerage firm focused on retail and the restaurant industry. Contact him at [email protected].