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The Downturn in the Restaurant Industry and Its Impact on CRE

May 5, 2021

a vacant restaurant with a for lease sign

Thousands of restaurants have closed their doors for good, but there may be CRE opportunity

Restrictions during the COVID-19 pandemic, especially bans on indoor dining, severely impacted the U.S. restaurant industry. Even areas with loose or no restrictions, like Florida, are experiencing slowdowns because of consumer hesitancy.

The result is hundreds of thousands of restaurants throughout the country permanently closing their doors. In addition, many eateries that have managed to stay in business are struggling through significant financial issues. While these closures signal trouble for the industry overall, there could be opportunities for savvy investors to capitalize on the widespread return of in-person dining.

Here’s a look at what’s happening in the restaurant industry and what we might expect to happen in the coming months.

What the numbers say

On the surface, the numbers associated with the restaurant industry might be described as “cataclysmic.” 

By early December, over 110,000 of the 778,807 restaurants in the United States had permanently shut down because of pandemic-related financial losses. That number has undoubtedly grown this year, too, with some estimates suggesting that nearly half of the country’s restaurants might never recover. In addition, the industry’s sales decreased by $240 billion from the expected levels of $899 billion in 2020.

Typically, any industry with over 14% of businesses failing in less than a year and a sales decrease of $240 billion would be a no-go for investors. However, COVID-19 has created an atypical scenario.

Recovery is coming

Of course, we all know that people all over the country didn’t just suddenly decide to stop eating at restaurants. COVID restrictions and virus-related consumer cautiousness are driving the slowdown in the industry.

However, there is light at the end of the tunnel thanks to national vaccination efforts. Nationwide, over 40% of the population had at least one vaccine dose by the end of April 2021, with about 30% of people already receiving two doses. 

Florida’s numbers are very similar to the national ones, with over 40% receiving at least one dose and 28% getting two doses already. COVID numbers are dropping with the increase in vaccine doses, too. Despite lifting its restrictions, Florida is seeing a steady decrease in positive tests as we move deeper into the spring. 

As more people get vaccinated, the populace will likely revert to normal as quickly as possible, with dining out at restaurants rapidly returning toward pre-pandemic levels.

How recovery could influence restaurants and CRE

Assuming we see vaccination rates continue to increase and the virus retreat to endemic levels, the restaurant industry should see a significant boom. But will that boom hit pre-pandemic levels? And if it does, will there be enough supply to keep up with demand?

The country has lost at least 14% of its restaurants. One might argue that there were too many dining options to begin with, but entrepreneurs could see line-ups outside of popular eateries, and new investors may look to get involved in the industry. Complicating a renewed surge in demand is an inability for many restaurant owners to find employees as government unemployment benefits continue.

Nevertheless, a restaurant rebound will increase demand for restaurant space, and there are plenty of CRE investment opportunities due to restaurant closures and empty properties. These buildings already have kitchens and are set up to accommodate indoor dining, of course. 

But CRE investors and possible restaurateurs must continue to weigh specific risks in the face of continued uncertainty:

  • Dining traffic is bouncing back rapidly, but will it match pre-pandemic levels? Or will some hesitance remain among former in-person patrons?
  • Could new variants of the virus outpace vaccination, causing some form of COVID to stick around permanently?
  • Restaurant owners are having trouble finding workers, which represents an operational and financial risk. These risks, of course, are passed on to landlords.

In the end, the wise path on restaurants mirrors the smart play on any CRE investment: pay attention to trends but conduct thorough due diligence on every deal. 

For those thinking of purchasing a property, evaluate the area, its foot traffic, a property’s proximity to other in-person retail and service businesses, and more. And current landlords should closely assess a potential tenant’s business case, including the length of the lease terms, the lessee’s track record in the industry, and other factors.

If a deal makes sense, it’s likely to make sense regardless of broader trends.

Preparing for the end of COVID

Of course, COVID-19 will remain a big part of our lives for the near future, and there’s a lot of work to be done before things become “normal.” It’s essential to keep an eye on the economic recovery in South Florida and throughout the country to ensure you’re making wise investments.

Morris Southeast Group works with commercial real estate investors and can assist as you look for value in the South Florida market. Whether it’s empty restaurant space or other commercial property types, we’ll provide advice and local market knowledge as you look to expand or manage a portfolio. 

Give us a call at 954.474.1776 to learn more. You can also reach Ken Morris directly by calling 954.240.4400 or via email at kenmorris@morrissegroup.com.

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