WSJ: The Unlikely New Real-Estate Darling: Restaurants

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Property owners have long seen restaurants as risky tenants with a high rate of failure. Now, with Americans dining out more than ever, the restaurant business is emerging as the hottest corner of retail real estate.

Food services accounted for more than 19% of all retail leases last year, rising in recent years to the highest proportion for any category since data firm CoStar Group began tracking the statistic in 2007.

The uptick reflects how Americans are spending more time and money at restaurants, from fine-dining hot spots to fast-casual chains. Low unemployment, rising wages, the ascent of “foodie culture” and millennials’ tendency to marry and have children later than previous generations have likely contributed to increased restaurant spending in recent years, analysts say. Single households are less likely to grocery shop than families.

It is a far cry from the depths of the pandemic, when tens of thousands of restaurants permanently closed. Four years later, robust restaurant leasing has helped power the retail-real-estate sector to its strongest position in years.

“It has definitely come as a surprise,” said Brandon Svec, national director of U.S. retail analytics for CoStar. “We wouldn’t have seen as strong of a retail recovery without it.”

The average household spent nearly 53% of its food budget on food away from home last year, a record-high proportion and up 10 percentage points from 2003, according to the U.S. Agriculture Department’s Economic Research Service.

Total restaurant sales have never been higher. They are on track to top $1.1 trillion this year, a 5.4% increase from 2023’s record-high level, according to the National Restaurant Association, an industry group.

Money spent on dining out has been rising for years. In 2018, the average household spent slightly more money dining out for the first time since the USDA started tracking the statistics in 1997. Restaurant spending tanked in 2020 but quickly rebounded as establishments reopened and infection fears faded.

Bailey Mack, a 32-year-old resident of Louisville, Ky., who works in business development, almost always ate home-cooked dinners growing up.

Restaurants were for special occasions like birthdays or when family from out of town visited.

As an adult, she still considered dining out an expensive treat. Then the pandemic hit. When restaurants reopened, Mack met with friends at her neighborhood burger-and-fries joint and went on dates with her now-husband to Indian and Asian restaurants.

“The stimulus checks came through, and there were all these restaurants around me that I’d always wanted to try,” she said. “It’s about connecting with people through food.”

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Inflation and higher menu prices have undoubtedly juiced restaurant sales in recent years. But Lougee said customer demand is also up as hybrid work gives suburban residents more flexibility to run errands and grab lunch during the workday.

It isn’t all good news in the restaurant industry. Rising payroll and ingredient costs are squeezing profit margins, especially for independent operators. Seafood chain Red Lobster plans to close hundreds of stores after declaring bankruptcy, and McDonald’s sales growth has slowed as lower-income consumers pull back on spending.

Still, these recent challenges aren’t an indication that the broader restaurant industry is headed for a significant slowdown, said Sara Senatore, senior analyst with Bank of America. McDonald’s sales volumes are still more than 30% higher than they were pre-Covid, and Americans continue to spend more money at restaurants.

“You have this long-term trend, which is ongoing, even now despite the fact that consumer tailwinds are a little less robust,” Senatore said. “The industry as a whole seems to be growing.”

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So happy to hear that Mrs Mack was able to use taxpayer funded COVID checks to eat at all the different restaurants she had been wanting to try. Meanwhile, some others of us went through the Spring and Summer of 2020 moving around finances and cutting back on extras to make up for economies coming to a grind thanks to shutdowns.

We do enjoy eating out though, and especially patronizing our favorite local establishments in the Acadiana and Houston areas. I’m glad many of the ones we love were able to hang on during the COVID lull. Texas finally allowing restaurants to sell booze to-go with food orders when no one was allowed to eat in dining rooms was certainly a big help.