Let's Make a Deal
The real estate landscape has shifted in the last decade to favor emerging restaurant brands, regional groups, and national groups—assuming they can navigate the high rents and take the right risks.
Gaurav “G” Patel and his broker, Sam DiFranco Jr. of Trinity Partners, have a little joke. Patel first approached DiFranco to be his broker nearly eight years ago, when he was 23 years old and just starting out in the restaurant business. He explained to DiFranco his vision to create a regional group in the Raleigh-Durham area of North Carolina, building high-volume restaurant concepts that complemented the up-and-coming culinary scene in that part of the state.
“Any broker who has credibility in this market is going to vet the client out,” Patel says. “He’s not just going to represent you. At the time, DiFranco was like, ‘Hey, buddy, you should just carry on your way.’”
Fast-forward to current day and Patel is president of a six-concept group called Eschelon Experiences that has at least seven more restaurants on the way over the next five years. He has strategically located the restaurants in high-dollar, high-volume regions in Raleigh and Durham, to the point that after he acquired his third concept in 2011, developers began picking up the phone to find him.
Also dialing his number was DiFranco. “We laugh about it now,” Patel says of their start. “Now we’re really good friends and he does all my deals.”
While emerging restaurant groups and brands often face a struggle to be taken seriously by brokers and developers, the real estate landscape in America is shifting in their favor. Retailers are looking to downsize their footprints and even vacate anchor spaces as cyber commerce matures, and restaurants are gaining favor in the new ecosystem, as consumers prove willing to leave their homes to pay for genuine dining experiences.
Whether they’re located in malls, shopping centers, or stand-alone units, the smart up-and-coming restaurant groups and brands are navigating the new opportunities with an eye on the industry’s increased competition and mounting rents, using empirical data and calculated risk-taking to become decidedly real estate–driven.
Tim McEnery, CEO and founder of 19-unit Cooper’s Hawk Restaurant & Winery, could write the book on growth. His canon to successful and meaningful expansion is two-fold, and it begins with a cluster strategy. The cornerstones of this tenet are brand awareness, management talent, and supply chain. Together, these three components create the pipeline for a successful cluster, whether it’s in a single city, state, or region. McEnery oversaw a successful cluster in the Midwest, spreading his locations within Illinois and then Indiana, Missouri, Ohio, and Wisconsin for eight years, before opening the restaurant’s 12th unit in Tampa, Florida, in 2013.
McEnery’s second guiding principle is to limit new-market risk in any given year. “If we’re going to open four restaurants in a year, three would be in existing markets where we feel we can be successful,” he explains. “And we might push that a little. For example, we opened in Tampa, Florida, and we considered a location in Orlando as ‘in the same market.’ So, if we open four restaurants, maybe one would be in Florida, two in the Midwest, and then one would be in Richmond, Virginia—that would be our 25 percent new-market exposure in any given year.”
This strategy proved successful last year for Cooper’s Hawk, which did indeed open in Richmond—the first location outside the Midwest or Florida—in December.
Like McEnery, Sam Fox, founder and CEO of the 15-concept, national restaurant group Fox Restaurant Concepts, believes hometown breeding works best. He opens each of his concepts inside his home base of Arizona before spreading them to the likes of Texas, Georgia, and Kansas. Over the next three to five years, Fox says 80–90 percent of the restaurants he opens will be outside Arizona.
McEnery’s and Fox’s resolve to nurture concepts in their home markets is one of two key strategies employed by emerging restaurant companies. The other tactic is to begin with locations nationwide, but limit those openings to smaller markets, which allows the brand to hone its foundational systems and scalability before it heads into new states and higher-octane cities.
Latitude 360 used the smaller-market strategy for its first three units. The multi-level entertainment concept, whose offerings include bowling, live performances, a sports theater, a movie theater, and full-service restaurant, opened its first units in Jacksonville, Florida, Pittsburgh, and Indianapolis, respectively.
“At first, we targeted ‘B’ NFL markets, and [the real estate that] was available at the time—this was back in late 2008, 2009—were standalone retail boxes at a very good cost,” CEO Brent Brown explains. “So we started focusing on those markets. I felt this was the best way to prove the concept.”
In the initial years, Brown played with the scale of Latitude 360. The Jacksonville unit is 50,000 square feet, while Pittsburgh’s is 65,000 and Indianapolis’ is 75,000. After the Indianapolis unit opened in January 2013, Brown began planning a mix of A and B markets for expansion, assured his platform could adjust to fit any zone. Latitude 360 has developments underway in the Boston area, Chicago, and Minneapolis, and four planned for the New York City market, including Wall Street and Times Square.
“What we’re doing is putting together a three-year pipeline for our growth,” Brown says. “There are a lot of these really good retailers, the Macy’s, Sears, Bloomingdale’s, but they’re saving their costs, and they don’t need as much physical space anymore—which leads to a call to us, because there are not a lot of options for developers. We can either help them reinvent themselves as a true destination or help create traffic for the other tenants that are in there.”
How to Become a Smart, Real Estate-Driven Company
When considering a new state for expansion, restaurants combine market research, demographic and psychographic studies, consumer feedback, focus groups, daytime and office employment studies, and a competitive analysis of nearby restaurants.
New markets are not as difficult as new developments, says James Walker, chief development officer for the 230-unit Johnny Rockets. “A new market for Johnny Rockets in a mall that’s been around quite a while isn’t particularly difficult, because we can get intelligence on it,” he says. “But if we looked at a new massive project near New York City, for example, that has no track record, we can’t pull dollars per square foot or competitive volumes. Even if we do as much research as we possibly can, it’s still a bit of a gamble.”
To understand how to grow outside of a hometown site for the first time, McEnery of Cooper’s Hawk advises a boots-on-the-ground tactic. “There’s nothing like walking the market and getting that grassroots understanding,” he says. He also highly encourages restaurateurs to chat with bartenders in town. “You wouldn’t believe—they will tell you everything: All the good, all the bad, and all the realities of their restaurant, the local restaurant scene, and the local market.”
Brokers are a great aid to restaurant brands when they survey new markets and properties, and every company profiled herein employs brokers, along with an internal real estate team, to locate top sites.
When exploring new markets, Fox says he’ll let his national and local brokers set up day-long tours, but then he’ll go back on his own and check out the city without brokers. He makes a point to visit on slow days. “I try to get a feel,” he says. “There’s a lot of art that goes into that. I like to see what business looks like on a Monday and a Tuesday, not necessarily on a Friday or a Saturday.”
Patel of Eschelon Experiences says he cycled through multiple brokers before landing with DiFranco Jr. “The broker has to understand the market, and he also has to be a mentor and adviser to you on what’s a good deal, what’s not a good deal,” he says. “One wrong deal can put a restaurant out. Honestly, your broker should be like your brother; he’s got to have your back, no matter what.”
But the bond between a broker and restaurateur is one to be careful of, says real estate expert Lewis Gelmon. “When I see restaurant brands letting the brokerage community drive the site selection process, those restaurants are solving the landlord’s problems; they’re not solving theirs.”
He says smart companies let the empirical data drive the site selection in markets they enter and take less direction from the brokerage community and more from the customers. Once a market is chosen based on empirical data, Gelmon says brokers can be an asset in identifying sites, and he adds brokers should not be the ones who negotiate leases.
Many restaurant group owners note competition for properties is at its highest point since 2008. “Restaurants are the new anchor tenants,” Fox says. “You’re seeing that a lot, but a lot of the same people are competing for the same real estate.”
Thus, despite the real estate opportunities developers are increasingly offering restaurants, experts warn brands to be cautious of the risks such as high rents and locations that look too good to be true.
“The trends that I see are troubling: I see a lot of what happened in the mid-2000s occurring again,” Gelmon explains. “Restaurants think that a location is going to be successful just because it’s in a high-rent district or because it has high-traffic visibility. A lot of the rents that I see emerging brands entering into are very expensive, with 5 percent per annum increases, and for every one that might work, there are going to be half a dozen that don’t.”
Fox identifies a similar pattern. “You see rents have crept way back up, especially over the last 12 months. A lot of people have made deals I would never make,” he adds. “I’m predicting over the next 24 months, there’s going to be a lot of second-generation space coming back onto the market that’s going to be available.”
Gelmon suggests looking at secondary markets extensively for several reasons. He says the rise in affluent residents in secondary markets and their suburbs, coupled with available real estate that’s reasonably priced and landlords who are willing to do deals, make these markets extremely attractive.
“The smart chains are picking the less sexy locations and the less sexy communities,” he adds, “but these sites are giving them really good bang for their buck.”
As retail stores have vacated or downsized their footprints in malls, lifestyle centers, and developments, the big leasing companies such as Simon Property Group and General Growth Properties have reworked their strategies to ensure they provide every advantage to restaurants.
“We as a company have gotten much better at learning what restaurants need to succeed,” says Tish Glenn, vice president of restaurant leasing at Simon Property Group. “Fifteen years ago, it was a lot harder. Now, we take a look at our plan and say, Where should restaurants go, how will they work, and how can we give them every advantage to succeed with parking and signage?”
Glenn says the five-person restaurant leasing team at Simon works with a network of leasing experts who are on the ground across the country, identifying emerging restaurant brands and groups—which Glenn calls critical to success—and bringing them to Simon’s attention. She adds that Simon pays special attention to what type of dining the locals prefer, whether it’s chains or independent concepts, to insert the right fit into each development.
“We see the value in restaurants and what they bring,” Glenn says. “They’re an amenity to the shoppers. They keep people at the malls longer. They identify the malls. They’re a big part of our business now.
“Twenty years ago, restaurants were more of an afterthought,” she adds. “Now, they are an absolute priority and part of our strategy from day one.”
What advice would you give to an emerging restaurant brand or group in terms of crafting a strong real estate strategy?
Take your time, do your homework, and stay small. I can’t tell you how many people have one or two restaurants in the Chicago restaurant scene, and the third or fourth restaurant they want to open is in Florida or Texas or California. And it’s almost impossible to manage that successfully when you have such a small level of infrastructure. In all practicality what’s best for your business is to grow locally, build the infrastructure, and then ultimately take small- to medium-sized calculated risks.
It’s important to understand what the landlord’s or developer’s overall vision for the development is, because at the end of the day, you’re becoming a partner with them, not just someone paying the rent. The amount of effort they put into their development is going to directly impact you, foot traffic, revenue, and what kind of longevity that you get, so it’s important to really know you are going with the right developers. Having the foresight of where the market is trending also makes us a strong regional player.
By creating something unique for the landlord, it increases the value of their property. So I would say, get as much help as you possibly can. I get calls everyday from vendors trying to sell me services, and the few calls I take are folks that tell me they can help me from a real estate standpoint. It’s such an important decision. It’s also a decision that’s almost impossible to step away from once you sign a lease. Go out and find experts in the field to help you. Don’t go it alone.
When you go into a marketplace, make sure you go into a cluster where there is already traffic and make sure you complement the other tenants with your brand and its focus. If we go into a mall or shopping center and it already has a movie theater, we don’t need to do our CineGrill. As long as someone is bringing the traffic to the area, that’s fine, and we can complement it. We look at several different factors—obviously, the investment in the area that’s being made presently but also who the landlord is and the building itself.
Go slow, be careful, and really do your homework and make sure you’re in a spot that you can do the business that you’re projecting to do. Mostly on the West Coast, for example, parking is such a big issue for us that really we want to make sure we have the right opportunity. If our goal is to do $7 million or $8 million in revenue, we need to have the parking and the infrastructure to support that. We’re open to almost anything; it just depends on our ability to do business there.
The famous quote that I’ve been using is, “You’ve got to solve your problems, not the landlord’s.” No matter how good the brand, you’re always going to have locations that do not perform well for whatever reason. You can’t assume that you can enter into a 20-year lease as an emerging brand in every market and that things are always going to be successful. If you can’t get some way to mitigate your risk or add an escape clause to your lease, I would probably pass on that location.