Shumacher Interview in Restaurant Business Magazine!

by Steven Josovitz

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How to find lease deals now

The silver lining of the economic downturn was cheap leases. The deals aren’t as easy to find anymore. But don’t hand over that firstborn just yet.

By STEVE BROOKS
Published: November 1, 2012
Restaurant Business Magazine

Steven Josovitz shakes his head as he looks at a map of downtown Atlanta. “I have hundreds of people calling me every week, looking for locations to lease or businesses to buy in those core markets,” says Josovitz, vice president of restaurant-real-estate broker The Schumacher Group. “I have to tell them there’s almost nothing available for lease.

“There are a couple of options that are very expensive, but they’re prohibitive for most people except the high-volume player. For the small to medium-sized franchisee or independent who wants to open in a strong location with high-income demographics, it’s very tough.”

By the numbers, for restaurants looking for affordable real estate, 2012 ought to be the best of times. In the retail sector, vacancy rates are still high, by historical standards, and rents are still low:

  • At the end of June, according to real-estate-data firm CoStar Group, retail property nationwide was 6.9 percent vacant, down only slightly from a peak of 7.6 percent two years before. There were 28.8 million square feet available.
  • Average annual rental rates inched down 0.76 percent from a year earlier, to $14.51 a square foot. In 2008, by comparison, rents were over $17.

So why, for small restaurant chains looking to grow, does the current real estate market seem like the worst of times?

What the overall numbers disguise, say restaurant realtors, is that most major cities are really tales of two cities. Many suburbs are still retail wastelands. Vacancy rates for shopping centers are close to 11 percent, almost triple those for freestanding retail buildings. But just a few miles away, dining rooms are packed, availability of “A” locations is tight and rents are rising.

“The market is very fragmented,” says Jeremy Kudan, principal of The Kudan Group in Chicago. In urban corridors like River North and Bucktown, “landlords can pretty much choose their tenants, because of continued growth in the foodservice segment. However, in outlying areas, so many places have closed that the demand is much less than the supply. Tenants and buyers have good abilities to negotiate excellent rates.”

Agrees Atlanta realtor Michael Bull, “You can’t generalize in this market. It can change block to block.”

Even where prime sites are vacant, many landlords give first preference to national chains with deep pockets. “Often, the landlord is willing to forego the highest payer to get more dependability and predictability in tenants,” says Andrew Moger, CEO of Branded Concept Development in New York City. “The biggest issue is that nice, big corporate guarantee.”
But just because it’s harder for smaller operators to win in the real estate game doesn’t mean it’s impossible, say restaurant realtors. Many are just working smarter.

They’re moving into gentrifying areas, where populations are dense but rents are low. They’re converting high-traffic locations that used to house banks and drugstores. They’re finding developers who are hungry for some local flavor.
“I’m seeing more and more interest from landlords wanting to find local or regional type chains that don’t have units all across the country, that makes a project a little unique,” says broker John Evans of Dallas. “I’ve taken leases to people that were turned down because the landlord didn’t want a chain in his development.”

Above all, they’re showing how they can enhance a property’s bottom line. Says Marty Kotis, president of Kotis Properties in Greensboro, North Carolina, “The landlord wants to know what value you can add to the center, and how likely it is that you’re going to be there for the long term and pay your rent.”

Here are some secrets of six restaurant groups—independents and small chains—who are competing for great real estate with the Starbucks and Chipotles of the world.

Strategy #1 
Find new demand
J.B. Dawson’s
Reading, Pennsylvania
5 units
After operating 11 truck stops, Jim Lukens was ready to start his own casual dining concept, modeled after Houston’s. His first two stores were doing $4 million apiece in sales. But an hour-and-a-half from Philadelphia, he couldn’t get the attention of major mall developers. “I struck out again and again with the national guys,” recalls Lukens. “They’d ask, ‘Who are you and how many restaurants do you have?’”

His break came after he opened a third restaurant closer to Philly. A frequent customer was broker David Orkin, who repped a number of national chains. Orkin knew a real estate investment trust, General Growth Properties, that wanted to add strong local concepts to its lifestyle centers, alongside the Cheesecake Factories and Brios.

“Your higher-income clientele has been to all the chains,” says Lukens. “These operators told me consumers had gotten chained out. They wanted something more unique.”

J.B. Dawson’s have opened at General Growth’s lifestyle centers in Lancaster, Pennsylvania, and Newark, Delaware. “It’s a win-win,” says Orkin. “You get a guy who has four or five restaurants, who you can suddenly put in a mall next to a Nordstrom. Two years ago, he was next to a Walmart.”

Strategy #2 
Find the new fringe
Rathbun’s Restaurants
Atlanta, Georgia
3 units
In the bustling Buckhead section of Atlanta, it’s as if a recession never happened. Restaurant leases go for $45 a square foot, when you can find them.

A few miles away sits Inman Park, a faded Victorian neighborhood pocked with warehouses. Where others saw decay, Cliff Bramble saw potential. For $18 a square foot, he could get an empty warehouse with 245 parking spots, a mile from downtown and from 10,000 hotel rooms. In 2004, he partnered with celebrity chef Kevin Rathbun to open the New American cuisine restaurant, Rathbun’s.

Today, the duo owns two more warehouse eateries on the same block. The district had only four other restaurants; now the count is up to 27 with 2,800 seats. They’re about to open their fourth concept, KR SteakBar, on the gentrifying edge of Buckhead.

“It’s better to be the leader than the follower,” says Bramble. “We definitely look for buildings in areas that are … up and coming. People come in and say, ‘Boy, we’ve been through some tough areas to get here.’ But that’s part of the allure. From the outside, it looks like a broken down warehouse, but when you walk in, there’s a ‘Wow’ effect.”

Strategy #3 
Convert
Tilted Kilt
Tempe, Arizona
75 units
Mark Hanby started franchising just in time for the Great Recession. If that wasn’t bad enough, he was in casual dining, the foodservice sector that suffered most. But he’s seen a real estate opportunity in others’ misfortune.

With casual chains like Bennigan’s and T.G.I Friday’s shuttering freestanding stores around the country, Hanby can acquire the leases and build out the empty stores for an average of $1.2 million, versus $2.2 million to erect one from the ground up. Of 45 openings planned by the end of 2013, 70 percent are conversions.

The trick is to be flexible in his design. “We have to identify our core brand elements,” says Hanby, vice president of development, “and how to make the process malleable enough to shoehorn our brand into all different kinds of shapes and sizes, where people can still recognize our core brand elements.”

Two key elements are a bar, populated by maids in tight kilts—think a Scottish Hooter’s—and big-screen TVs tuned to sports. In an L-shaped space in Maryland, the bar went in at a 45-degree angle across the bend in the building. In a Pennsylvania store, he knocked a hole between the first and second floors. Above the bar, he mounted extra-large screens, visible from both directions.

Strategy #4 
Be smarter about demographics
Rocket Farm Restaurants
Atlanta, Georgia
3 units
Chef Ford Fry had a great concept for his first restaurant. But with no track record, he couldn’t find a landlord to let him try it. After two years, while skiing with his main investor—his brother-in-law—he had a flash, he recalls: “Let’s find a great location and put in a restaurant the neighborhood needs.”

He remembered a former meatpacking plant that had already housed two failed restaurants. The demographics were right: it backed up to blocks of upscale boutiques, and the most recent tenant had opened to large crowds. “It just wasn’t the right concept for the area,” says Fry.

He concocted a new concept. JCT. Kitchen & Bar would deliver a modern take on Southern cooking, with locally sourced ingredients. Just as important, it would fill an economic gap, between an existing white-tablecloth restaurant and a taqueria. Fry prepared carefully for his pitch to the landlord, with visuals to evoke a hip but down-home feel.

Five years later, JCT. does a $5 million business. Fry has launched two more one-off concepts and assembled $5 million from investors to create more. Now, landlords are coming to him. “They see that we’re in the middle, between big chains versus the mom and pop who doesn’t have any ability to guarantee a lease.”

Strategy #5 
Always be shopping
Boka Restaurant Group
Chicago, Illinois
8 units
Rob Katz can’t walk away from a great real estate deal. When he and his partners decided to close their original eatery, in midscale Lincoln Park, they thought about selling the assets. Instead, they invested $1.5 million to launch an Italian concept called Balena.

“We were torn,” says Katz. “We had outgrown Lincoln Park. But the rent was really cheap.” As in, $13 per square foot. “We can amortize the money we put in,” he adds, “because we have about 15 years left on it.”

He had long been eyeing River North, where rents push $50 a square foot. In 2010, a failing operator offered to sell him a long lease for only $20 a square foot. “It was too good an opportunity,” says Katz. “We bought the business, locked the doors and walked away for three or four months.”

After consulting with chef Giuseppe Tentori, he put in a small plates seafood house, called GT Fish & Oyster. It wasn’t lost on Katz that if the restaurant failed, he could recoup most of his investment. “All the money we invest in a space is viable,” he says. “I know full well that in the West Loop and River North, unless something dramatic happens, there’s always going to be someone wanting to rent.”


Boka Restaurant Group’s Rob Katz jumps on great real estate deals even if he’s not ready to open a new restaurant immediately.
Strategy #6 
Make nontraditional deals
Marco’s Pizza
Toledo, Ohio
305 Units
The recession has boosted pizza sales, like fast food in general, says Bryon Stephens, vice president of new business development with Marco’s Pizza. It’s also been good for his real estate. “When no one else is growing, we can get good quality deals and lock in long-term savings.”

Now, the easy pickings are picked out. “You’re getting the leftovers, more B and C quality sites,” he says. To hold down costs, he’s inking multi-property deals with national developers. But his biggest deal has been to take on a franchisee who’s also a landlord.

In February, Marco’s announced a partnership with Family Video, a chain of 765 stores in 19 states. Family Video owns most of the strip centers that house its stores, and the deal calls for it to put in up to 500 franchised Marco’s.

The family-friendly demographics are nearly identical for both chains, says Stephens. “There’s a great spillover effect of the two. They know that, at some point in time, it’s possible the video business could be a thing of the past. Assessing the real estate and what would be the next best use, pizza is a natural fit.”

Every city’s got a Motor Row. On Chicago’s Near South Side, it’s block after block of boarded-up car dealerships. Now, it’s blossoming into an entertainment district, and some of the city’s top restaurateurs are eyeing its empty buildings.

But for every Motor Row, there are a dozen run-down neighborhoods that aren’t likely to redevelop any time soon. How does a restaurateur with a taste for first-wave gentrification tell the difference?

The best sign is being close to an existing commercial district, notes Steven Josovitz, vice president of Atlanta brokers The Schumacher Group. “These areas are almost touching better, more built up parts of town, but generally just don’t look as nice or have any street visibility.”

Motor Row is just west of McCormick Place, the largest convention center in America. Says co-owner Rob Katz of Boka Restaurant Group, who’s looking at the district, “There are 100 large shows a year, so there are a set amount of people coming through the doors.”

There are other ways to sniff out up-and-coming neighborhoods. One is to look for paper trails, which can indicate coming development. Building permits and liquor license applications are public records. Says Cliff Bramble, partner in Rathbun’s in Atlanta, “You can find out a lot of information by reviewing the zip codes that have the most building going on.”

Or, you can talk to people, from realtors and politicians to monitoring conversations online. “Use the Internet to learn who’s paying attention to certain areas,” advises Mario Ponce, of the New York consulting firm Partners in Hospitality.

Lastly, there’s no substitute for eyeballing the streetscape. “If the neighborhood has houses that have been rehabbed, and the yards look like they are taken care of, that is a good sign for us,” says Bramble. He also recommends talking to cops on the beat. “Ask them what they think is the next upcoming area. They have a tremendous amount of wisdom and street knowledge.”

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