By Joseph Latina, SIOR and Christopher Moore, CCIM, LMT Commercial Realty/CORFAC Int’l.
The restaurant industry is experiencing a significant shift in their traditional model driven by changing market conditions and economic pressures.
Tighter Margins and Increased Costs
Profitability has become a growing concern for restaurant owners as traditional benchmarks are becoming nearly impossible to maintain. Higher labor costs, increased food costs, inflated occupancy costs, delivery service fees, and rising credit card processing fees are making it increasingly difficult to maintain healthy margins.
As lawmakers continue to raise the minimum wage, small business is feeling the pinch. Although this increase in wages is certainly justified and necessary, the restaurant industry is struggling to absorb this rapid correction. Traditional benchmarks of 20%-25% labor costs have increased by 10% or more in some cases.
Consumers have been experiencing rising costs at their local grocery stores since the pandemic, so it is no surprise that the restaurant industry has been dealing with the same issues. Restaurant operators must pay very strict attention to their product purchases, and in many cases are shrinking their menus to better manage costs.
Retail vacancies remain low, while tenant demand remains high for existing commercial properties. This demand combined with the increased cost to build new retail properties, rising insurance costs, and higher expenses for property management are keeping retail leasing rates high. These factors all lead to very high occupy costs for restaurants. Traditional benchmarks of 6%-10% occupancy costs are very difficult to maintain.
The Rise of Food Delivery Services
Third-party food delivery platforms have fundamentally changed how consumers interact with restaurants. While these services provide convenience and expand customer reach, they come at a significant cost to the operator, often eating into already razor-thin profit margins. As a result, many restaurant owners are struggling to balance in-house dining with the costs associated with delivery and takeout services.
Shifting Consumer Preferences
Another major trend impacting the restaurant industry is the growing preference for dining at home. Consumers today are more budget-conscious, often opting to cook at home rather than spending money on restaurant meals. While dining out remains a staple of social life; inflation and economic uncertainty have pushed many households to cut back on discretionary spending.
Opportunities
Many current restaurant owners, particularly those from the older generation, are looking to transition out of their current businesses as they approach retirement. However, unlike in the past, often these establishments are not being passed down to the next generation, as many of their children choose careers outside the demanding food service industry.
At the same time, restaurant sales often include commercial property, adding another layer of complexity to transactions. Next generation, or new buyers today must not only assess the business’s potential but also navigate real estate market conditions and rising interest rates.
Despite these challenges, the restaurant industry remains an attractive investment for the right buyer who can adapt to changing consumer habits through innovative marketing, menu optimization, personal effort, and efficient cost management to find success in today’s evolving landscape.
There is currently a historical number of opportunities and options available to today’s restaurant entrepreneur including many long-established restaurants, asset purchases at deeply discounted costs, and 2nd generation leasing opportunities. Creativity is the key to a successful acquisition of a turn-key restaurant or restaurant space. Conventional commercial financing is of little help in acquiring non-real estate assets and the SBA funding process is cumbersome and time consuming so often we will look to the owner to assist in financing these types of acquisitions. Although some sellers are reluctant, the rewards can be gratifying in the form of interest return and the possibility of deferred capital gains.
Understanding these shifting dynamics is essential to making informed decisions. Whether it’s leveraging real estate assets, restructuring operations, or adjusting business models to accommodate new consumer behaviors, navigating the current market requires strategic planning and adaptability.
Joseph Latina, SIOR, and Christopher Moore, CCIM are managing principals at LMT Commercial Realty/CORFAC International.