QSR April 2023

DEPARTMENT OPERATIONS

The Real Price of Real Estate While there’s space to grow on the backend of COVID, doing so can come at a cost. BY BARNEY WOLF

A major real-estate industry slogan since the early 20th century has been “loca tion, location, location.” But these days, it easily could be recast as “inflation, infla tion, inflation.” Location certainly remains key to most types of real estate, including for quick-ser vice restaurant operators making decisions to locate new stores or retain existing ones. Ris ing prices, however, on everything from land and rents to borrowing money, are now play ing just as important a role. The soaring costs and longer lead times for construction—both in materials and labor—is having a major impact on development. Add in restaurant equipment supply chain issues, plus margin-based pressures from commodity, staffing, and utility inflation, and the dilemma only grows. The enthusiasm for development is definitely lower than a year or 18 months ago due to inflation and margin contraction, says Peter Saleh, managing director and restau rant analyst for financial services firm BTIG. “[Operators] lost a lot of margin in 2022,” he says. Saleh adds margins always return to historical levels due to factors such as pric

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ing, commodity deflation, and efficiencies, but recovery takes time. “Development tends to follow the same directional trend as margins and unit economics,” he says, so even as margins likely improve this year, there’s “not much hope … for a decisive snap back” in store growth. Despite the headwinds—and, perhaps, in some cases because of them— “there is more demand for good sites, especially in [quick service], with a drive-thru and perhaps double or triple drive-thrus,” says Barry M. Wolfe, a Fort Lauderdale, Florida-based senior man aging director of investment at national real estate firm Marcus & Millichap. Of course, he notes, demand for top-notch sites in turn pushes the cost higher. “Everyone is looking for unicorn, drive-thru locations,” says Sam Fonseca, chief operating officer at Roll-Em Up Taquitos. Rather than compete with deep-pocketed big players, his chain seeks sites that help franchisees pay less rent. For many operators in various parts of America, “land costs really need to come down,” Wolfe says. “It is a challenge for devel opers or owners to find land that works for them.” At the same time, “we’ve kind of maxed out on the rental rates,” which, he

notes, need to move downward some to work for most operators. A related issue, he adds, is an increasingly lengthy permitting pro cess for constructing new or renovating older restaurants. “It’s even worse now in some places than it was during COVID,” Wolfe says. Both Saleh and Wolfe believe the continuing impact of inflation ary pressures hit franchisees harder than big companies that are able to self-finance development, rather than worrying about con ventional loans that have elevated interest rates. “We expect 2023 to be a reset year, with franchisees of most concepts opting to slow development, reprioritizing their focus on existing units and recovering some of the margin lost last year,” Saleh wrote in a research note. In checking with franchisees in the back half of 2022, a recurring theme was “waning enthusiasm for new unit development.” That seems to match up with results of a survey of 3,000 restaurants conducted late last year by The National Restaurant Association, which found most limited-service opera tors said food, labor, and utility costs remained a serious challenge,

and nearly half postponed expansion plans. Some operators have located in food halls

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