Matt Hammond comments on the battle for second-generation restaurant space among new dining concepts.

By Patrick Sisson | May 20, 2024 | As published by Commercial Observer

With the ever-changing nature of dining trends and strip mall occupants, it might be tough to notice. But there’s a battle for restaurant retail space taking place in commercial corridors across the U.S. right now — and the insurgents are gaining. 

“Obsolete, older, fast-casual concepts are struggling,” said Matt Hammond, principal at Coreland Companies, a Southern California brokerage that specializes in retail leasing. “As those spaces become available, newer, emerging concepts that have capital and technology are excited for the opportunity to get some great real estate that has been occupied for the last 10 to 20 years.” 

Shaped by rising costs of business, including higher wages and more expensive energy and food, the post-pandemic restaurant landscape has bifurcated. 

A core group of popular chains like Cava — buoyed by streamlined operations, mobile- and pickup-first layouts, and better operational and labor performance — have seen their fortunes rise with expansion and new locations. They have the capital and revenue to reinvest in efficiency, employee training and even automation — Chipotle has tested a robot that makes guacamole. So far this year, JLL (JLL) has recorded roughly 2,400 new restaurant openings announced in the quick-service and fast-casual spaces, an acceleration from recent years, according to senior retail research analyst Keisha Virtue.

Losers, who continued to rewrite their menus to compensate for a challenging inflationary environment, have hit the point where raising prices drives away customers, creating a downward spiral that leads to lower revenue, and, eventually, to shuttering locations. Revenue Management Solutions, a restaurant consultancy, found quick-service restaurant prices rose 2.6 percent annually in April. Many big brands have recently closed locations or announced closures, such as Red LobsterApplebee’s, Denny’s and Boston Market, the last of which went from 300 locations at the start of 2023 to a few dozen today.  

In many cases, the shuttered locations get picked up by the winners as part of their expansion. When Corner Bakery began closing sites over the last few years amid a bankruptcy, individual locations were getting up to four proposals from fast-casual chains looking to expand, said Hammond…

The areas where growth has taken root, not surprisingly, follows households: Southern and Southeastern cities in Texas, Florida and the Carolinas, which have seen growth in both population and household income, have been targets for operators and restaurateurs. But even states and cities typically written off due to high costs and burdensome regulations have seen increased interest and growth. 

California, for instance, has been buffeted by a recent law mandating a $20-an-hour minimum wage for workers in the fast-food industry plus some of the nation’s highest real estate costs. Yet the state still sees significant openings. Coreland Companies’ Hammond points to chains like Urbane Cafe, Kebab Shop and a pizza chain called Slice House, which is aggressively expanding from San Francisco to San Diego, pursuing second-generation sites from chains on the way out.  

Deal volume spiked in 2022, Hammond said, as California restaurateurs pursued a flight-to-quality strategy around new sites. Things have slowed recently because there aren’t many such sites left. Lots of restaurants remain ready to grow, waiting patiently for more struggling sites to close. 

“Labor and rent, to a great extent, is extremely challenging here,” said Pruitt, the L.A. consultant. “But that doesn’t mean you can’t make money.”