CREJ - Retail Properties Quarterly - May 2015
The continuation of a strong market since the Great Recession has given the workforce flexibility with their money and, in general, they have been able to earn and save more. Now people are looking for investment opportunities in order to make a return on their money. Fastcasual restaurants are providing the opportunity and many have jumped on board. “People are more comfortable moneywise than they have been in several years,” said Matthew DeBartolomeis, vice president of brokerage and retail services with CBRE. “I have seen the franchise business grow tremendously as people look to it as an investment opportunity.” Fast-casual is a type of restaurant that does not offer full table service, but promises higher-quality food with fewer frozen or processed ingredients than a fast-food restaurant. Colorado, and especially the Denver metro area, is becoming a hotbed for these restaurants. “Red Robin, Smashburger, Noodles & Co., Chipotle and Einstein Bagels are all Colorado-based companies,” said Matthew Henrichs, vice president of investment properties with CBRE. “Colorado has been a proving ground for fast-casual growth concepts. Their success continues to drive demand from other concepts in the sector.” Another reason franchising has been so successful is because it favors all parties involved – the franchisor, the franchisee and the shopping center. For example, rather than opening up a burger shop, someone may put his money into opening up a Smashburger. “That way, he has franchise rights to a geographic location area, and is able to use their formula and programming,” said DeBartolomeis. “The landlord is also excited about welcoming in franchise tenants because of brandname recognition and financial stability.” The fast-casual franchise model is helping drive the retail business right now. Shopping center owners and their brokers easily are leasing small-shop space to fast-casual tenants, which lifts up occupancy. The name-brand tenants also are willing to pay more in rent, giving the landlord options to better reposition the shopping center and upgrade tenancy. Of course, this scenario could come at a price, as name-brand fastcasual restaurants may start driving out local unchained tenants who do not generate high profits and, therefore, are unable to pay the higher rents. DeBartolomeis said he has not seen much of this happening currently, but it might be something to watch out for going forward. According to statistics from CBRE, over half of those who are actively looking for retail space in the market are franchise driven. Jersey Mike’s Subs is a fast-casual franchise that is having its biggest year in Colorado, with 13 stores that are open or will be opening this year. Jason Brown is Jersey Mike’s Subs’ area director for Colorado and said that there are a variety of factors that have led to expansion and the success of fast-casuals in Colorado. “The economy is strong, there is a diversity of demographics in this area and it is an attractive place to live,” said Brown. “We have found Colorado to be one of the states that is quickest to recover from the recession, which has sparked an increase in franchising.” The increase in franchises as well as company-owned fast-casuals has created some concern, mostly in regard to the shortage of quality locations. “Everyone wants an end cap unit with quality signage on a main thoroughfare, but the truth is there is a lack of high-quality available space,” said Henrichs. The competitive Colorado market is an issue that every fast-casual restaurant, including Jersey Mike’s Subs, has to deal with going forward. “Because of the limited inventory of space, we have done a lot of new construction,” said Brown. “The timelines are a little bit longer, but having a brand-new store is something people can get excited about, and then we can get positioned in the right location.” However, Jersey Mike’s doesn’t just rely on new developments for its stores. “We have one broker in town who works exclusively with Jersey Mike’s,” said Brown. “Location, demographics and traffic count all play a role in which sites are chosen. There definitely is a synergy that develops between the broker and our management.” Taking location one step further, even when several fast-casuals show interest in a specific shopping center, the center cannot have several different restaurants within one category. For example, pizza places – Pizzeria Locale, Mod Pizza, Blaze Pizza and Live Basil – all compete for locations within the same shopping center. Often, noncompete clauses are built into leases in an effort to allow only one category of restaurant within a center. Economics play a considerable role in an owner of a shopping center choosing a particular concept. But concept selection is more than looking at which tenant can pay the most rent. Landlords must sort through a variety of critical factors to determine the best tenant for a center – brand awareness and credibility, creditworthiness of the franchisee, average sales per unit and how well a brand complements other tenants in the center. Many experts predict that a large majority of activity will continue to come from fast-casual restaurants through franchises. “The Denver metro area is a growing region with a high number of millennials moving in,” said Henrichs. “Everything points to an upward trend in food spending.” Jersey Mike’s Subs said that it also plans to keep pace in 2016 with its record year this year. “We have a proven model that has been around for a long time,” said Brown. “More people are showing interest in having control of their destiny and being the boss, which is what the franchise opportunity provides.”