It’s become increasingly popular for a restaurant to serve as the anchor tenant for mixed-use multifamily developments, but health concerns and social distancing measures have put the service industry on its heels. Data from Yelp showed that nearly 16,000 restaurants in the United States have been permanently closed due to the pandemic, and some estimates suggest 10% of all restaurants globally will be eliminated by COVID-19.
This trend presents two new challenges for the investors of mixed-use multifamily projects to fill retail space. First, navigating a sea of bankrupt restaurants that are now dubious anchor tenants for multifamily and mixed-use developments; and second, identifying which restaurants will make a safe bet in the short-term and are able to capture the surge in foot traffic that is likely to occur once the pandemic recedes.
We predict that the restaurant anchor tenants best positioned to drive demand in the “new normal” will be those that can build a robust take-out infrastructure, improve digital customer acquisition, and embrace an attitude of internal development.
The Future Is Takeout
The era of COVID-19 has made takeout and drive-through dining extremely popular, and there is a good chance that the trend will remain true long after stay-at-home orders finally expire. Looking forward, the casual dining restaurants that will perform best as anchor tenants will be those that are able to sustain their take-out business to offset any long-term changes in consumer behavior caused by social distancing.
For example, Restaurant Business Magazine said that Bloomin’ Brands, operator of Carrabba’s Italian Grill and Outback Steakhouse, took aggressive actions to ramp up off-premises sales and compete with delivery services prior to the pandemic. As a result, the company tripled its take-out business, generated $32 million in off-premises sales during the second quarter, and is positioned to be flexible regardless of how long the pandemic rages on in the United States.
Online Engagement Remains Vital
Restaurants that were once chiefly concerned with competing against their neighbors are now facing off against everything within range of a Grubhub delivery. Brands that have responded to the pandemic by investing in digital marketing and partnering with third-party delivery services have shown success in offsetting the decline in dine-in revenue.
Chipotle is a great example of a successful fast casual anchor tenant that went all-in on digital customer acquisition in 2020 and reaped positive results. The brand also invested in physical infrastructure to support its online ordering strategy.
Dedicating in-store space to digital pickup made the process more convenient and is helping to win back repeat digital customers. As a result, online ordering sales increased 15.7% during the previous quarter and the company’s stock has surged 37% year to date.
Looking Beyond Pandemic Success
In these times of pandemic uncertainty, maintaining predictable cash-flow through the retail component of mixed-use developments is a top priority. When considering the restaurant anchor tenant of tomorrow, the winning strategy will combine a short-term plan for success with a clear vision for internal development.
Wingstop is one of the few restaurant tenants, satellite or anchor, that is not battling declining sales during the pandemic. Much of this success is the result of 80% of the restaurant’s pre-pandemic sales coming from delivery orders. However, that is why it is so impressive that the brand is choosing to keep a foot on the gas pedal.
During the second quarter, the company extended a major incentive plan to in-store workers. The company also accelerated hiring at its stores, preparing the company to capture an uptick in foot traffic as state economies begin to reopen.
Looking forward, we expect owners and leasing agents to target restaurant anchors that have displayed an acute ability to adapt in an unpredictable environment.
Integrity is one of our core values at Berkadia, and one way we pursue that value is by considering every angle when we evaluate the real estate market. Continue to visit our blog for a steady source of unique insights into the biggest challenges facing the multifamily industry in 2020.