4 Biggest Real Estate Challenges for Fast Casual Restaurants

Is site selection slowing you down? In today's competitive real estate market, there are some ways to win the game.

For every action there is an equal and opposite reaction. As in physics, the growth of the fast casual segment has created its own challenges: the ever-growing demand and shrinking supply of quality real estate sites.

The 4 Biggest Real Estate Challenges

1. Exclusive Use Restrictions

The majority of fast casual concepts have similar real estate requirements. Most concepts prefer to locate in high traffic shopping centers with good visibility. In most cases, these shopping centers have a mix of tenants, and many have language in their lease restricting the sale of similar products or food.

If you are a better burger concept, and if there is another burger concept in the shopping center, the landlord will often be prevented from entering a lease with you. In a crowded space, it’s not unusual to have an existing competitor on all four corners of a strong intersection.

2. Parking

Parking has always been an important consideration for restaurants. In many cities and neighborhoods, building codes related to parking is more of an issue than customer experience. Many municipalities require a much higher number of parking spaces for restaurant use. 

Where a retail store may only require four spaces per 1,000 square feet, a fast casual restaurant may require 10 spaces per 1,000 square feet or one space for every three seats. 

In a city such as Los Angeles, where land is expensive and developers try to maximize the amount of square footage for lease, many properties do not have enough parking to permit restaurant use.

3. Competition

Fast casual is not the only segment expanding. There is more and more competition every day competing for sites. Multiple offers are commonplace for quality locations.

4. Rising Occupancy Costs

As developers pay higher prices for land, the rent required to pencil out these projects continues to rise. But the problem is not limited to new development. Landlords often price their properties above or near the highest price paid to lease a neighboring property. 

It makes perfect sense why rents are higher in Manhattan than in suburban Kansas.

But is there really enough traffic to justify a 100% increase in rents for a shopping center with little or no growth in population or incomes? 

Many landlords don't consider the economics of running your restaurant. There is often no relationship between sales per square foot and rent.

4 Ways to Win the Fast Casual Real Estate Game

1. Exclusive Use Restrictions

Investigate thoroughly. Just because there is a competitor in a shopping center does not mean they have an exclusive. For example, I recently secured a good location for a better burger client less than 100 feet from a McDonald's. This landlord does not grant exclusives to any tenants.

Be very specific. When you speak with a leasing agent about use restrictions, be specific. I was recently told burger use was not allowed until I pushed further. Fast food burgers were prohibited, but a fast casual or sit-down burger concept was permitted.

Larger shopping centers often have multiple owners. The center may look the same, but in reality certain parcels were sold off and controlled by different owners. These centers often provide an opportunity when you dig deeper.

2. Parking

Step No. 1 is to understand the parking requirements for each trade area you are considering. Once you understand the code, look into loopholes. For example, some neighborhoods sell parking credits. In California, certain areas have been designated "Enterprise Zones" and are exempt from the more stringent parking codes. 

Get creative. Does the code require additional parking for patio seating? If not, consider moving the storefront back to create a smaller store to meet the parking code, without sacrificing the total number of seats.

3. Competition

Aggressiveness and first-mover advantage go a long way to secure the best sites. Open stores in up-and-coming areas. Your due diligence will be harder, but the rewards will be worth it if you sign a long-term lease before the area becomes hot.

Think outside the "vanilla" box. Can you make exceptions to your prototype store to secure sites in tight markets? Consider buying the assets and lease of an existing tenant. 

Be the next "hottest concept.” There is no denying the benefit of having a brand like Starbucks or Chipotle when you are competing for sites. 

Consider larger spaces, such as former restaurant pads that may be harder to lease. These sites offer a great opportunity to demise into 2-3 units. Many landlords don't want to demise the space, but may allow you to control the entire space and sublease as you wish.

4. Rising Occupancy Costs

This may be the hardest challenge to overcome. Can you generate the higher sales to justify the higher costs? Is the brand awareness and visibility enough to potentially lose money on this store? Can you take a "B" location and drive more traffic with more advertising? 

Often in high demand, high rent areas, the best approach is to buy the assets and lease of an existing tenant with a below-market lease.

Finding great sites can be difficult, but achievable with hard work and creativity. In addition to the methods above, give yourself extra time and respond quickly when opportunities arise.

What challenges have you faced growing your brand? How are you securing good sites?