When you think corporate real estate, the restaurant industry is probably not the first thing that comes to your mind but it is for me. This segment of the market is a specialty for me and holds a special place in my heart. It has seen significant changes the past 6 years with mass consolidation of the restaurant industry. Private Equity (PE) firms such as Roark and Jellybean have started acquiring concepts and brands, especially successful brands, so they can more tightly control their interests.
Locally in Nashville, restaurant vacancy is tight and challenging, especially as there were not many restaurant casualties due to COVID. The restaurant categories are fast casual, quick-serve (QSR), and specialty, which includes everything from steakhouses to sports bars. People eat out in neighborhoods and people will travel to go to a really cool one-off restaurant, but they won’t travel for a fast casual chain. Most major brands are well established here in Nashville. Restaurants coming in are typically new to the market, and they are finding locations in Nashville a little more challenging to come by.
Many of the established brands are going back to wanting endcaps at locations, which is hurting the smaller brands who would take less space. Some dying brands have survived by getting bought by REITs (Real Estate Investment Trusts) and PE firms, some of whom are more interested in the real estate than the business. The leases are renewed early and new long-term leases are signed so that someone can buy them out later. It becomes a real estate play, rather than an operations play. We haven’t seen the end of carnage in the restaurant game, but what categories will be next is still to be seen.
One universal problem we are seeing is staffing. This continues to be a challenge and we just can’t figure out where all the workers went and how to get them back out into the job market. Every client says staffing is horrible. This is consistent for all categories. The high-end restaurants have less of an issue with staffing because staff can make more money, but the higher-end is supposed to give better service, which takes more employees. Restaurants just can’t hire all those people anymore. Restaurants that used to have 10 to 12 employees are now doing it with 8 to 10.
The effects of the pandemic and shortages will be realized in longer-term price adjustments. Those who are working are working harder, and the staffing challenge is artificially inflating wages. Businesses are having to pay more for people to show up to work, which raises prices and cuts into the profit margin. With that said, even with shortages, the retail division will remain strong. Just different.
How will this all fare for commercial real estate in 2022 or years to come? Labor shortages, supply disruption, and inflation will all continue to be at play, although on a smaller scale. Even so, the year ahead looks positive, with retail rebounding and industrial continuing to thrive.