Michael Maxwell – Partner, Blue Orbit Restaurant Consulting
Restaurants are saving retail developments. We hear this all the time, but what does it really mean?
Let’s look at it like this. Consider some common retail tenants – maybe a mattress store, or a clothing store. People buy a new mattress every 10 years or so and they buy new clothes with the change of the season – so a few times per year. But when it comes to food, people eat three or more times each day. Plus, buying and eating food can be equal part social activity. This type of interactive experience is proving to be more important to today’s consumers than just acquiring the “stuff” that major retailers sell. So, if your property development is struggling to retain its retail tenants, consider bringing in more restaurants. Successful food tenants drive foot traffic to your development.
Food and beverage tenants are critical attractions for any commercial or retail real estate. They serve as a draw to activate properties as they open and seek to attract more consumers and tenants. Food keeps a space energized with activity, and provides a reason for people to keep coming back. Areas allotted to food and beverage are also helping to create that coveted “third space” – the space between home and work – as a place for relaxation and conversation. Real estate developers are building mixed-use and residential centers that are increasingly food-centric because they see well curated food-driven developments keeping properties bustling, office spaces filled, and apartment leases renewed.
However, developing properties around food and restaurants can come with its headaches, too. Real estate developers generally do not fully understand what makes a restaurant or market successful. The high failure rate of food service businesses and the constant turnover of restaurant spaces can be frightening to some property managers and developers. And now, consumers crave the authenticity and uniqueness brought by local restauranteurs while rejecting stamped out chains. But local restaurant owners often don’t have the decades of operating experience under their belts that the chains have, and they do not have the skills or resources to adapt their concepts to smaller spaces and limited kitchens. This often translates to more risk for property developers. Thankfully, there’s a solution that limits the risk to both local restaurant owners and property managers alike… restaurant and hospitality consultants like us!
In the last few years, we have continued to recognize the need for a “middle guy” between real estate developers and restaurateurs. In working on projects to initially help the two parties to speak the same language, we have discovered these three basic needs to ensure the success of food-driven real estate developments:
- Tenant Curation. Curation is typically defined as selecting, organizing and maintaining a selection of artworks. For real estate developers, the food and beverage tenant options should be properly curated, just like an art museum. It is necessary to select restaurants that work well together and cover all the needs of the community served. They must visually tell a story that resonates with the community while providing food and beverage options in the categories and price ranges that the targeted consumer demands. The operators should be vetted for soundness in operating practices, name recognition, quality of food and service, and their “excitement” factor. The curation process also sorts out true innovators from trend followers. This provides for greater longevity of the concepts.
- Modifications for Success. Rule number one for any restaurant is do the research and build a projected profit model. In this process, we can help restaurant owners adapt their concept to deliver desired profits on the anticipated sales. These adaptations may come in the form of menu engineering, operating efficiencies or other methods. Thinking of all the restaurants in the development as one big restaurant also helps with profitability. For example, getting all restaurants to agree to use as many of the same vendors as possible gives them all greater cost of goods bargaining power. When the landlord can facilitate better economics for their tenants, there is less turnover, better maintained facilities, healthier owner profit and higher lease value. The profit modeling process also helps to solidify the concept and how it will operate. We look at drawings to evaluate work flow and efficient use of the space. We set standards for production and service timing, and we teach proper budgeting and sales building techniques. We look for “landmines,” and we disarm and eliminate them. When we are finished with the profit model, it becomes an operating budget and a roadmap for success.
- Means for Inspection and Direction.Too often the only conversation that happens between real estate developers (or property managers and landlords) and their tenants is “I’m struggling, I need a rent reduction.” Usually by this time it is too late to salvage the restaurant business. We always advocate for continual engagement between property manager and restaurant owner. We can develop a simple-but-regimented inspection process for each concept that allows the property manager to easily assess the health of that restaurant, allowing them to spot problems and recommend solutions early. This open and consistent dialog leads to solutions that are mutually beneficial to the landlord and the tenant. Things like consolidated marketing efforts and employee parking solutions come from this dialog and create constant win-wins. Tenants will pay a premium for space that is hard to break into and whose landlord is on their side. Far from an amenity, this service commands higher rent.
The above three basic needs are solid ways for developers to move forward with food driving the success of any real estate development.
We also believe that the future will see real estate developers driving the process even more by hiring one team to create, design and open all the food service segments within a property. This one team would curate assortment, be responsible for building profitable businesses and then direct those businesses through opening “pains”. Once the restaurants are operating solidly, they could be sold to investors who are much more willing to buy successful operations than to invest in “ideas and dreams.”
While the investment is larger upfront for the developer, it would free them from tenant improvement credits or build out contributions every time a new restaurant moves in. It would allow for better rents on an already profitable business and decrease turnover. While far different than the way food tenants are traditionally engaged, the process of putting landlords in the drivers’ seat is the future and will become more commonplace as landlords learn to partner with groups that can eliminate the food and beverage learning curve.