Restaurant operators with cash are ready to seize the moment after COVID

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(Bloomberg) – A record number of US restaurants finally closed their doors in 2020. In 2021, industry survivors see an unprecedented opportunity.

Cashed landlords are offering more concessions than ever to make room, while the vaccine-driven promise of a return to normal life – and a new round of government incentives – is likely to spark a wave of pent-up demand for restaurants. This creates the conditions for a number of restaurant openings in the next year.

It’s a very uneven landscape. If the bulk of the estimated 91,000 restaurants and bars that closed in 2020 were small family businesses, many of those hurrying up now are chains or Covid-era perks like ghost kitchens. Not only does this signal a rapid acceleration in a decade-long trend of local restaurants giving way to corporate-backed businesses, but it again shows how the pandemic has exacerbated inequality that characterizes nearly every facet of the U.S. economy: strong, deep pocket companies thrive while the weaker fight for survival.

“It’s an economy of belongings,” said Camille Renshaw, chairman of the board of B + E Brokerage, a commercial real estate broker specializing in single-tenant properties, which are often home to grocery chains. “Those with lines of credit are using these lines and are currently using them quite opportunistically.”

Chipotle Mexican Grill Inc. plans to open 200 locations this year. C3, which operates fast-casual chains and ghost kitchens that prepare groceries only for delivery, expects to sign 300 new leases. Even upscale restaurant operators like Jason Berry, founder of Knead Hospitality + Design, see a clear opportunity.

“When the dust settles, there won’t be a better time, financially, to take the plunge,” said Berry, whose company operates restaurants in the Washington, DC area. He expects a strong recovery in 2022 and 2023.

The opportunity, of course, largely arises from widespread closures due to capacity constraints, declining sales and new operating costs. After an unprecedented shutdown last year, an estimate by Technomic, a Chicago-based research firm specializing in the food service industry, is expected to close another 26,000 restaurants in 2021 due to the ongoing aftermath of the pandemic. Growth is expected to accelerate over the next year and continue through 2025.

Slow recovery

Small chains and independent restaurants, which make up more than two-thirds of the restaurant industry, according to Technomic, have borne the brunt of the impact, with around 90% of last year’s closings coming from their ranks.

The landlords are left with an empty space that is difficult to fill. The retail vacancy rate in U.S. neighborhood and community malls, which are often home to restaurants, rose to 10.5% late last year, the highest since 2013, according to Moody’s Analytics.

Jeffrey Bank, CEO of Alicart Restaurant Group, said there was “a gold rush of opportunities for us” right now. He runs Carmine’s Italian restaurants in New York, Las Vegas, Washington, and the Bahamas, and said real estate agents are constantly calling to offer deals.

More space could become available this year as landlords get tougher on restaurant owners who have been behind with payments, said Cobi Levy, co-owner of New York’s Lola Taverna. He expects to open three new places in the city in the next five months. Hiring is also easier because of the closings, he said.

“Months later and I’m already all occupied in my new places,” he said. “That could never have happened.”

Big operators like Chipotle, whose shares have more than doubled in the past 12 months due to its pandemic popularity, are expected to get even bigger. The Burrito chain is focused on increasing the number of passageways in its 200 openings this year.

“A lot of people turn to us,” said CEO Brian Niccol in a recent interview. “Landlords would love to have Chipotle, I’m always learning more.”

The continued popularity of fast food and drive-thru options shows that some pandemic trends are likely to continue even after the dining rooms reopen. Rob Hunziker, a Marietta, Georgia restaurant broker with 25 years of experience, said drive-through locations charge a premium like never before. “Some of these chains are killing it right now and they’re fetching the highest prices I’ve seen,” he said.

One of the many restaurants that have permanently closed their doors due to the pandemic. Rental and leasing signs have become common attractions in cities as large as New York. Photographer: Nina Westervelt / Bloomberg

On the other hand, many smaller businesses sell at a huge discount. Hunziker said he had customers who sold a small Mexican chain of restaurants in Austin, Texas, whose sales fell during the pandemic, and the owners were unable to handle their debts. The sellers got about half what they could have got a year ago, he said.

Sam Nazarian, founder of C3, characterizes the current environment as “a once in a lifetime time to secure real estate”. His company, which was backed by shopping mall owner Simon Property Group Inc. and hotel operator Accor SA, signed nearly 200 leases last year. It previously had fewer than 30 locations.

Aside from ghost kitchens, the company also wins contracts to open chains like Umami Burger and its Japanese concept Krispy Rice in outdoor restaurant areas, Nazarian said.

Michael Halen, a restaurant analyst at Bloomberg Intelligence, said full-service restaurants could regain market share from quick-service chains in the second half of the year as vaccinations become more widespread, dining room restrictions ease, and pent-up demand increases. Nevertheless, the average revenue per restaurant will be well below the 2019 level.

For much of the industry, it’s about staying afloat until this recovery takes hold.

Chad Severson, a real estate agent who also runs a bar in the Chicago suburb of Schaumburg, expects an influx after the pandemic as consumers ease their cabin fever. With no income during a recent governor-ordered shutdown, he paid the company’s electricity bill with his personal credit cards. He had to throw old beer that was not consumed.

“You have to think you can survive, but it’s not easy,” he said. “It’s just such a vicious circle that has been created.”

– With the support of Natalie Wong, Kate Krader, Patrick Clark, Leslie Patton and Alex Wittenberg.

To contact the author of this story: Jonathan Roeder in Chicago at [email protected]

© 2021 Bloomberg LP

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