Although consumer spending is up, many investors hesitate to enter the retail market due to the asset type’s unpredictable swings.
However, not all retail properties are experiencing turbulence. Some service-based businesses, for example, are actually experiencing a revival as more investors look towards e-commerce resistant retail to diversify their retail holdings.
Restaurants No Longer Considered Specialty Real Estate
Restaurants are at the top of investors lists when it comes to retail. Not only do they offer an experience that can’t be had online, but in some cases, there is more demand than supply.
Due to the great variety of restaurants, investors can pick and choose the restaurant they’d like to invest in based on location, price, and brand.
1031 exchange investors, in particular, are turning to restaurants as replacement properties; these asset types are easy to understand, and buyers relish the familiarity with the brand and the ability to choose exactly the name brand they want. In addition, restaurants that are clearly growing are particularly attractive, especially since the typical price point (between $2-$3 million) is perfect for individual investors.
While normally top locations for restaurants are difficult to find, the spate of closings has opened up space for restaurants in freestanding or end-caps with great visibility. In addition, investment grade tenants like McDonald’s and Burger King are still available for purchase. These may command top dollar but are well worth it terms of NOI.
Furthermore, in contrast to other types of net leases which offer flat leases with lease increases after ten years, restaurant leases usually include rent increases after five years or a 2% rent increase yearly.
What To Look For In A Restaurant Investment
Restaurants not only have very specific location requirement but doing your due diligence means you’ll need to consider certain factors found only within the restaurant industry.
Below are some common things to ask before you invest in a particular property:
1.Is there a grease trap? To the uninitiated, a grease trap is there to prevent grease from solidifying in the pipe system, which can cause blockages. A grease trap catches the grease before it enters the septic system.
2. Is there a hood system? Hood systems contain exhaust fans and are located over stovetops; they are designed to pull smoke, smell, heat, and fumes out of the room.
3.Are there numerous sinks? A lot of water gets used in a restaurant, whether it’s for washing food, dishes, or cooking. Plumbing is expensive, so if these are already located on the property than you as the investor will save yourself a large sum of money on installation fees.
4. Is there a walk-in cooler? Walk-in coolers, while not essential for a restaurant, are important. And though a restaurant can manage by buying an upright freezer, if the property you’re considering already contains one, space will be more attractive to tenants.
5. Is the site easy to get in and out of? Consumers won’t want to weave through several lanes of traffic or drive in circles in order to enter the restaurant. Sites will do better if they are easy to get in and out of.
4.What condition is the HVAC system in? Restaurants generate a lot of heat due to cooking, which means the HVAC system must be strong enough to remove hot air from the building and cool down space, even when the restaurant is full of diners.
5.Is there sufficient parking? Restaurants have specific times when they make money. Lunch and dinner, in particular, are times when there are a large number of diners, which means parking must enough to accommodate sudden influxes of customers.
Challenges To The Industry
- Most Americans claim they plan on eating healthier and eating out less than they did this year.
- New outlets are likely to create excess supply.
- Restaurants who don’t know how to innovate will suffer.
- New rules under the Trump administration are likely to help a more favorable environment for restaurants and commercial properties in general.
- Labor pressures due to a weakened job force are being offset by mobile ordering, self-service kiosks, and mobile ordering.
- With their no-tip requirement and casual style, fast casual restaurant chains continue to be the place to go to for higher quality.
Regardless of the challenges, investors still view restaurants as a highly attractive alternative to other retail types.Tags: 1031, 1031 exchange, 1031 exchange investments, Burger King, commercial real estate, commercial real estate investing, commercial real estate properties, franchisees, McDonalds, nnn lease property, NOI, restaurants, retail commercial properties