Property owners have historically viewed restaurants as risky tenants, given the high rate of failure in the food service industry. However, with Americans dining out more than ever, restaurants are now emerging as the hottest corner of retail real estate.
In recent years, food services have accounted for over 19% of all retail leases, the highest proportion for any category since CoStar Group began tracking this data in 2007. This uptick reflects a shift in consumer behavior, with Americans increasingly spending more time and money at restaurants, from fine-dining spots to fast-casual chains. Analysts attribute this trend to low unemployment, rising wages, the rise of “foodie culture,” and millennials delaying marriage and starting families later than previous generations, resulting in more single households less likely to grocery shop.
This resurgence marks a significant recovery from the depths of the pandemic, when tens of thousands of restaurants permanently closed. Now, robust restaurant leasing is driving the retail real estate sector to its strongest position in years.
The average household spent nearly 53% of its food budget on food away from home last year, the highest proportion on record and a 10 percentage point increase from 2003, according to the U.S. Agriculture Department’s Economic Research Service. Total restaurant sales have also hit record highs, projected to top $1.1 trillion this year, a 5.4% increase from 2023’s record level, according to the National Restaurant Association.
The trend of increasing restaurant spending has been building for years. In 2018, households spent more on dining out than on groceries for the first time since the USDA began tracking these statistics in 1997. Although restaurant spending tanked in 2020, it quickly rebounded as establishments reopened and infection fears faded. Restaurant rents and occupancy levels have been rising across the U.S., with retail real-estate firm Pine Tree signing new restaurant tenants at rents as much as 10% higher than pre-pandemic levels.
Chipotle Mexican Grill, one of the fastest-growing restaurant chains, exemplifies this trend. The company opened 271 new restaurants last year—the highest annual total in its history—and plans to add about 300 more this year. Many of these new locations include drive-through lanes for customers who order ahead on the app, a feature that became popular during the pandemic. Chris Brandt, Chipotle’s chief brand officer, noted that in-store visits have come “roaring back,” with customers enjoying the customization and assembly process of their meals.
For years, property owners were wary of food tenants due to the high costs of building out restaurant spaces and the risk of early failures. However, the rise of creditworthy chains and data showing that food establishments boost foot traffic to nearby businesses have made landlords more eager to sign restaurant leases. Matt Lougee, president of capital markets for Pine Tree, highlighted the sector’s growth, noting that average sales volumes among its fast-casual restaurant tenants have increased 6% annually since 2019, about double the historic rate.
While inflation and higher menu prices have driven restaurant sales in recent years, customer demand has also increased, fueled by the flexibility of hybrid work schedules allowing suburban residents to run errands and grab lunch during the workday.
Overall, the restaurant sector has emerged as a driving force in the retail real estate market, reflecting changing consumer habits and a robust recovery post-pandemic. As Americans continue to dine out more frequently, the demand for restaurant spaces is likely to remain strong, providing opportunities for both property owners and restaurateurs.
The Wall Street Journal, Kate King
