Is Now the Best Time to Open a Restaurant?

More than 110,000 eateries have shut their doors across the U.S. due to pandemic-related restrictions, according to the National Restaurant Association. In the wake of such a devastating blow to the industry, however, some experts see unprecedented opportunity for new restaurants to emerge.

“If the supply of restaurants was reduced by 110,000, there's room now," said Beth Azor, founder and owner of Azor Advisory Services, a commercial real estate advisory and investment firm based in Southeast Florida. “There's an opening."

While Shake Shack founder Danny Meyer believes that even those who have never owned a restaurant should consider opening one soon, other veterans, like Native Realty founder and CEO Jaime Sturgis, say that seasoned restaurateurs are better positioned for success than newcomers are right now.

“Now is a great time to open a restaurant for those who are already in the business and have a thorough understanding of the industry," Sturgis said. “But I would be cautious to suggest that people who are not intimately familiar with the industry charge in, guns blazing, trying to reinvent the wheel."

R. J. Hottovy, an analyst with Aaron Allen & Associates, a team of global restaurant consultants, posited a similarly cautious opinion.

“In a post-COVID world, there's going to be a ton of competition, and a lot of the bigger players are only going to get stronger," he said. “It's going to be difficult for startups to gain traction."

Though competition may be fierce, experts agree on the potential financial benefits for restaurateurs seeking real estate space in the current climate.

“With all the closures we've had in the industry, I think we'll see more rational rent structures in the months ahead — particularly for leases," said Hottovy.

Pre-pandemic, lease rates for restaurants in populous cities like New York and Chicago were often linked to the density of nearby residential neighborhoods and business areas. The more people around to spend money at area restaurants, the higher the rent. Now, with restricted dining and fewer employees in office buildings, rent structures may shift to reflect the new reality.

This bear market presents an opportunistic time to invest, particularly for seasoned operators who are willing to take on some risk, Sturgis explained.

“There are a number of second-generation spaces that are available for no key money, which is a departure from where we've always been," he said. “A number of those spaces are even on high street retail and extremely desirable locations."

In the restaurant business, “key money" refers to a fee paid to buy an existing tenant out of their lease. The new tenant pays key money in order to secure a lease for a second-generation restaurant space and all its furniture, fixtures and equipment. But in a down market, restaurant owners that have closed up shop may be looking to sign over their lease as expeditiously as possible, and are therefore not asking for key money — presenting a unique financial opportunity for new tenants.

Securing second-gen space also means restaurateurs won't have to start from scratch with the build.

“Any time you get in with a second-generation space, you're not dealing with brand-new-build lease rates. You're not dealing with white box, gray box, or cold, dark, shell spaces," said Samir Daoud, franchise director at Gold Star Chili and Tom & Chee restaurants. “If it's a second-generation restaurant, it might have a hood system and a walk-in cooler, which are high-ticket items."

Of course, lease rates vary by location, and opportunities are market-specific.

“The Sun Belt is booming right now, so I don't think you're going to see rent discounts there," Azor said, listing Austin, Phoenix, Miami, and Charlotte as particularly hot cities. “But in the Midwest, California and the Northeast, you're definitely going to see some discounts."

Across all markets, restaurants have had to pivot to stay solvent throughout the pandemic. According to the 2020 State of Independent Restaurants Report, based on a Q2 survey, only 7% of restaurants described their operations as “normal" in 2020. Most restaurants (91%) reported modifying their operations in some way.

Since March 2020, many restaurants have reworked their physical models to focus on pandemic-friendly features like drive-thrus, curbside pickup and outdoor seating. In fact, over 60% of the independent restaurants surveyed launched curbside ordering or pickup programs, and nearly 40% launched or increased delivery.

Franchises have also fine-tuned their operations to continue serving customers during the pandemic, said Daoud. For example, Gold Star Chili created an online ordering platform, as well as pickup locations in-store, at their existing drive-thru window, and even curbside.

In many cases, owners haven't had to embark on any large capital renovation projects to accommodate this shift. “We fine-tuned our operations. There have not been any additional physical construction modifications as we had already been planning and were well-positioned for off-premise dining," Daoud said.

The drive-thru trend is here to stay, though, according to Hottovy. “A lot of quick-service companies are shrinking the amount of dining room space, but potentially adding a second or third drive-thru lane."

Obviously, adding a drive-thru lane is a significant investment.

“McDonald's has said it would cost $125,000-$150,000 per location to add a second drive-thru lane, Burger King has said $80,000-$120,000 (for its 'Burger King of Tomorrow' format), and Wendy's has said $75,000," said Hottovy.

But it's an investment that restaurants hope will pay off. Demand for drive-thrus is skyrocketing, confirmed Azor, adding that rents for those spaces are rising accordingly.

“If you've got real estate [for sale] where you can add a drive-thru — or you have an existing drive-thru — you're not going to have it for long. I know people who are taking strip centers and cutting them down the middle to create a drive-thru," she said. “Drive-thru is the name of the game." Big chains are blazing the trail, with Starbucks Corp., for example, stating on a recent earnings call that it will aggressively develop more drive-thru models.

Outdoor seating is another key aspect of restaurants' new normal — and it may be another lasting trend.

“Outdoor seating is very important, pre- and post-pandemic," said Sturgis. “It's a nice departure from the office environment for people to be able to get outside. Obviously, that's been accelerated with COVID, where people want to have more physical distance and fresh air."

To be successful in 2021, Daoud believes that restaurateurs must increase off-premise dining and continue to innovate.

“You need to be open-minded and intuitive to understand that when the world changes, you've got to change with it," he said.

Hottovy agreed it's essential for restaurateurs to adapt their business model, particularly in a time when there are still so many unknowns.

“It takes a lot of flexibility and agility to survive in this industry," he said. “There's a ton of uncertainty in the market right now, whether it's consumer behavior or competition. There will be some opportunities for new restaurant concepts, but it's going to be competitive. Entrepreneurs should not go in expecting this to be easy."

Still, restaurateurs who can take advantage of opportunities to snatch up valuable real estate now may be poised to meet future consumer demand.

“Those who are looking to secure locations now maintain some competitive advantage over those who are going to wait three or six months, when there will be a flood of people coming back into the space," affirmed Sturgis. “We're in an interesting, opportunistic time in the market. And timing is everything."