Beefing Up The Menu

People in the restaurant business are used to a feast-or-famine mentality. The industry, which is infamous for its high failure rates, must deal with demanding and fickle consumers, as well as the exorbitant costs of starting and operating a restaurant.

Despite the challenges inherent in the restaurant industry, many retail real estate developers and owners want a taste of the restaurant business. "More people are recognizing the value of having restaurants as part of their retail centers," said Marty Kotis, president of the Council of International Restaurant Real Estate Brokers and president of Kotis Properties Inc.

The restaurant industry today is being significantly impacted by two notable trends: Consumers are eating out more, but they are spending less. Indeed, the recession and subsequent weak economy have compelled consumers to move away from fine dining and to look for more value-oriented options. At the same time, consumers' increasingly busy lifestyles are taking them out of their kitchens more than ever in the past, explained Webber Hudson, president of leasing and marketing for Urban Retail Properties Co.

As a result, restaurant-industry sales are projected to reach a record $426.1 billion this year, an increase of 4.5 percent over 2002, according to the National Restaurant Association's 2003 forecast.

"I've never seen more restaurants opening," said Robert Futterman, CEO of Robert K. Futterman & Associates L.L.C.



More Than a Food Court

On any given day, the restaurant industry will record average sales of nearly $1.2 billion. With so much money at stake, it is no surprise restaurants are becoming increasingly important—and highly sought after—parts of retail centers, whether they are regional malls, lifestyle centers or community centers.

"There's been such steady growth in the restaurant industry that it's a major part of our development and merchandizing strategy," said Tom Unis, senior vice president & director of leasing for The Macerich Co.

Macerich, for example, is in the process of expanding its existing malls to provide additional entertainment and restaurant space. And the REIT also is integrating restaurants into its lifestyle centers. In Tucson, it is developing La Encantada, a lifestyle center that has a cluster of restaurants at one end. "This cluster is an anchor attraction," Unis said.

The belief that restaurants can lure as many consumers as an anchor tenant like J.C. Penney or Bloomingdale's is becoming quite widespread. "Malls that have not always considered restaurants as anchors are now taking a different focus and thinking about what a restaurant can do for the mall," said Jack Thompson, leader of the real estate advisory group for Ernst & Young L.L.P.

And Macerich is not the only retail owner making restaurants an anchor attraction in lifestyle centers. Main Street developments are also seeking that special cachet to drive foot traffic.

"If you assemble the right mix, restaurants can draw a tremendous amount of people," said Mitch Friedel, a senior vice president for The Related Cos. "In the best-case scenario, a collaboration of the best restaurants can act as an anchor." Like Macerich with La Encantada, Related Cos. is pursuing such a strategy at AOL Time Warner Center in New York City's Columbus Circle.

Related Cos. is further using the restaurants to move people throughout the center, locating restaurants on the sixth floor instead of the usual first or second floors.

Indeed, smart retail owners and developers know that the more time shoppers spend in a center, the more money they are likely to spend. "Restaurants are critical because they extend the time of the visit, which is an important component in this day and age when people are pressed for time," Hudson said.

For that reason, according to John Few, a vice president in the retail services division of The Staubach Co., developers that are focused on creating a unique sense of place will look toward restaurants and other entertainment-related concepts.

Attracting them may not be so easy, though. Although there is an expectation that restaurateurs and retailers alike benefit from having restaurants in retail centers, most full-service casual or upscale-casual restaurants—such as Chili's Grill & Bar or P.F. Chang's China Bistro—would prefer a freestanding location, which provides better parking and street visibility, explained Mike Gottlieb, a partner with Ernst & Young.

However, well-located pad sites in strong markets are increasingly difficult to find, which has compelled restaurateurs to evaluate other options as they continue to expand. For example, Chili's was having difficulty finding a freestanding location near Santa Cruz, Calif. So Macerich offered the well-known brand an inside-outside location at the entrance of its Capitola Mall. "We have the ability to count how many people are coming in and out of each entrance, and we use those numbers to convince restaurateurs," Unis said.

Fast-casual concepts like Baja Fresh Mexican Grill (owned by Fresh Enterprises Inc.) and Pei Wei Asian Diner (owned by P.F. Chang's) are particularly aggressive in their growth strategies and tend to gravitate toward centers that have significant retail anchors, such as Bed, Bath & Beyond and Best Buy.

"People want something better than fast food, but they still want it fast," said Troy Peple, president of Chainlinks Retail Advisors. "The explosion in the fast-casual segment is a logical outgrowth of people demanding both better-quality food and convenience."

To that end, Developers Diversified Realty Corp. often constructs freestanding multi-tenant buildings that can accommodate fast-casual restaurateurs. "The fast-casual segment attracts a huge volume of people to our centers," said Kenneth Stern, director of peripheral development.

Similarly, J.H. Snyder Co. is developing a retail center that will attract consumers seeking both fast-casual and casual offerings. Such establishments—Starbucks Coffee, Baja Fresh, Daphne's Greek Cafe and Ben & Jerry's—have moved into the West Hollywood Gateway in Los Angeles. "Historically, food was provided to shoppers as an amenity or a convenience," said Milt Swimmer, senior partner with J.H. Snyder. "Today, having restaurants in our centers is no longer just an amenity but a necessity."



No Plain Vanilla

For most retail owners and developers, finding the right restaurants for a center's demographic base is often challenging, quite risky and involves a lot of legwork. "Restaurants are much more complicated and expensive for developers and owners than retailers," Few said.

According to Hudson, Urban Retail creates a matrix to evaluate the best restaurants for the centers it manages. The matrix includes various price points and types of cuisine to provide a smorgasbord of restaurants that will appeal to more consumers.

"You've got to have someone with broad name appeal to attract the bulk of the consumers, and then the defining difference for your center is the local restaurant," Hudson said.

Along the same lines, two years ago Jones Lang LaSalle was charged with bringing the right mix of restaurants to the expanded Southdale Center in Minneapolis. Now the regional mall boasts a collection of the most popular restaurant concepts, including The Cheesecake Factory, Maggiano's Little Italy Restaurant, P.F. Chang's, California Pizza Kitchen and a local pub.

"We wanted to provide a lot of choices—a theater of eating—and this is a great mix of American, Italian and Chinese," said Steven Silverstein, vice president of regional leasing at Jones Lang LaSalle. "Bringing in these national brands has improved the image and the perception of the mall."

According to Yaromir Steiner, CEO of Columbus, Ohio-based Steiner & Associates Inc., developers and owners should view restaurants as an opportunity to differentiate their centers and make them less homogeneous. In fact, many of Steiner's developments have incorporated local restaurateurs into their national retailer base, as well as bringing new restaurants to an area. Its Easton Town Center, for instance, introduced nationally known steakhouse Smith & Wollensky to Columbus.

"Restaurants become the personality, because retail doesn't change very much," said Few, who represents Smith & Wollensky. He also is working on the national rollout of Fox Sports Grill, a new sports-bar concept that has locations in Arizona and Southern California.

Similarly, Jonas Woods, president of Hillwood Capital, reports his firm is pursuing several restaurants for its 72-acre, mixed-use Victory development near downtown Dallas. About 90 percent of the restaurants will be new to the city, enabling the project to stand out from other retail destinations.

"You can take the conservative route and go with the national, proven concepts, or you can take a little bit of a risk and go with the individual restaurateurs," Unis said.

But most owners and developers have different levels of comfort with larger, national brands than they do with smaller, local restaurants. "Plain and simple, restaurants are riskier to pursue no matter what," Hudson said, although he acknowledged that national brands typically have stronger credits, which reassures real estate players. In fact, many owners believe that a lease signed by one of the leading restaurant groups, such as Brinker International Inc. or Darden Restaurants Inc., is "like money in the bank."

Even so, most owners are taking a risk just by pursuing restaurants as part of their centers—a main reason the majority were reluctant to entertain the idea until now. "The owner or developer is a stakeholder in that restaurant because he is already making a significant investment by shouldering part of the cost," Gottlieb said.

Indeed, developers and owners often have to provide capital to help a new restaurant get started because it typically cannot afford occupancy costs that exceed 8 percent of its total income. (Retailers tussle with occupancy costs as high as 15 percent.)

Unlike most retailers, however, restaurants require more than a plain vanilla shell and often can cost two to six times more than a retailer buildout, thanks to special features like heavy-duty HVAC, electric, sewer and venting. And that does not even include the interior design.

The most unique and high-profile restaurants—The Cheesecake Factory is currently the creme de la creme—have the most leverage when it comes to favorable lease terms. "You get more attention from the landlord if you're a market maker versus a market taker," Few said.

Few also pointed out that high-profile restaurants often receive higher tenant improvement allowances—as much as $100 per square foot. Additionally, many landlords will offer a lower base rent if they can share part of a restaurant's profits—often between 4 percent and 6 percent once the restaurant has met its sales target threshold.

"The economics of the deal are really determined by how badly an owner or developer wants that restaurant in their center," Silverstein said. "And from a restaurateur's perspective, the economics are determined by how much they want that location and how much (revenue) they can expect to make because of it."

And in today's economy, restaurateurs are being very deliberate in their decisionmaking. "Without smart real estate decisions, a restaurant just won't be successful," Gottlieb said.

From Restaurant Rows to Restaurant Parks

Restaurant rows are becoming common sights across the country. They tend to be upscale-casual or full-service restaurants with locations along a busy thoroughfare, each with its own parking lot. And they are traditionally located near large regional shopping areas or busy intersections. This kind of site planning found success as restaurants opted to congregate around other restaurants in an effort to attract larger pools of customers who craved variety and convenience.

But according to Jim Fisher, president of Houston-based JEFCO Development Co., the restaurant-row concept has evolved and matured into a new one: restaurant parks. Fisher's firm embraced the idea when designing its Gardens at Westgreen project in western Houston. The park sits on 13 acres and features an outdoor courtyard, fountains and fireplaces. It boasts several local restaurants, including New York Pizzeria, Black Walnut Grill, Murphy's Deli, Swig and Texasdelphia.

Restaurant parks are gaining in popularity, particularly in areas that are not land constrained, with developers across the country continuing to buy large parcels of land—typically six to 10 acres—so they can construct 15,000- to 20,000-square-foot inline buildings to accommodate restaurants. Pad sites near the inline buildings also are sold for restaurant use. These parks often do not have any retail component (although some have a small amount), and the restaurants have shared parking.

"Restaurant parks are similar to restaurant rows in that they offer convenience and variety, but they take it to the next level," said Matt Keener, a vice president with Trammell Crow Co. "We'll be seeing a lot more of these in the future." In fact, Trammell Crow itself has plans to develop a restaurant park in Houston.

Additionally, restaurant parks offer local restaurateurs access to sites that are often open only to national restaurateurs. "If you look to a lot of retail developments, local restaurateurs often get beaten out," Keener said. "This way, locals get the first crack at the development. While we all love our Chili's and Applebee's, these restaurants make things a lot more interesting."