Ask growing restaurant chains such as Freshii, Checkers and Straw Hat Pizza where they are expanding, and their collective answers offer a picture of some of the hottest retail markets in the country: Washington, D.C., San Francisco, New York, San Jose, Calif., Baltimore and Philadelphia.
These cities are among the top 10 markets where the climate is healthiest for retailers in 2011, according to the recently released U.S. National Retail Report, a publication by Chain Links Retail Advisors, a real estate services and brokerage organization, in partnership with commercial retail brokerage firm Terranomics.
As the economy improves, an increasing number of restaurant chains are ramping up expansion in 2011 after several years of stagnant growth. But given the slow pace of recovery, a focus on “location, location, location” couldn’t be more necessary, according to observers.
The report evaluated shopping center markets in more than 40 metropolitan areas, looking at characteristics considered important to success by both retail chains, such as Walmart and 7-Eleven, and restaurant chains. Among the factors were macroeconomic trends, such as unemployment rates, housing starts and income growth, and overall retailer demand and vacancy rates.
Capitals of commerce
Leading the top 10 markets is Washington, D.C., a city with relatively low unemployment of 6 percent. Personal income levels within the district climbed by 2.3 percent in 2010 and are expected to jump another 3.9 percent this year, according to the report.
In addition, Washington’s retailer demand rate has skyrocketed over the past 24 months, and shopping center vacancy rates are low.
“D.C. is off the charts,” said Garrick Brown, Terranomics’ director of retail research, “and it’s spilling over to the whole Eastern Seaboard. Baltimore is doing great, and in Pittsburgh there’s a ton of retailer demand.”
The somewhat upbeat report paints a picture of recovery following several tough years in the commercial real estate world.
In 2009 leasing activity in some markets was off by as much as 70 percent from the peaks seen in 2006 and 2007, according to the report, but “deal paralysis” came to an end in 2010 as opportunistic retailers looked to cash in on reduced rents.
“Right now we’re seeing rents are about 30 percent to 40 percent off peak,” said Brown.
In markets like Los Angeles, San Diego and San Francisco, there has been so much interest in first-tier shopping centers that rents have begun to rebound – although they remain about 20 percent off peak for “A” locations in those cities.
In strong markets, rental rate growth has spilled over to second-tier shopping centers, but third-tier locations – such as unanchored strip centers – remain the most challenged, according to the report.
Looking at restaurant chain expansion predictions for this year, the report said the most growth would be among quick-service and fast-casual concepts, such as Five Guys Burgers and Fries and Smashburger, two chains that remain “white-hot.”
Buffalo Wild Wings and Wingstop are also growing chains. More generally, fast-casual Asian concepts and frozen yogurt players are expected to take off in the coming year, the report said, as well as franchise operators that are lowering the barriers for entry, including Papa John’s, Quiznos and Subway.
For the Checkers Drive In brand, Washington, New York, Baltimore and Philadelphia are the top growth markets as the chain increasingly looks for nontraditional locations that forgo the double drive-thru option and instead seek high-volume, in-line locations near public transportation outlets.
For example, Checkers is looking to add more franchise locations to the 17 units that are currently open in Washington. Rather than building from the ground up, franchisees are looking to convert existing spaces.
“When you’re looking at conversion of a shell, or empty space, building out an interior is a lot less costly, and it gets our franchisees in quicker,” said Lynette McKee, Checkers senior vice president and chief development officer.
The story is similar in New York, Baltimore and Philadelphia, where the chain is looking for locations with population density offering both foot and car traffic, as well as certain levels of income – but not too high, since Checkers is a value-focused brand.
Rating unemployment
For many restaurant chains, unemployment levels in specific markets are a key factor as they look to grow, said Brown.
“Everybody is saying that in markets where there’s 10 percent unemployment or less, we’re going in strong,” he said.
Still, some markets with relatively high unemployment levels made the top 10 in the retail report, including California’s coastal cities of San Francisco, San Diego and San Jose. In those cities, relatively inexpensive rental rates are attracting growing chains.
Jonathan Fornaci, president and chief executive of the San Ramon, Calif.-based Straw Hat Restaurants Inc., said unemployment in California has remained high – 12 percent in March compared with 8.8 percent nationally.
However, the San Jose market, where the 82nd Straw Hat location was opened by franchisee Paula Agarwal in March, has weathered the economic downturn relatively well because of the high-tech industry there, Fornaci said.
The chain has five locations in the South Bay Area of Santa Clara County, also known as Silicon Valley, with another four planned to open. Systemwide, the chain plans to reach 150 units within two years.
The downside of San Jose’s stability is that rents haven’t dropped significantly, said Fornaci, who estimated that rent levels are about 20 percent to 25 percent off peak.
In nearby San Francisco, designated by the report as the second-hottest retail market, rents are even higher, averaging $30.20 per square foot in the fourth quarter of 2010 compared with $27.05 per square foot in San Jose. Within the top 10, the two California cities ranked highest in terms of rent.
However, San Francisco’s vacancy rate of 4.8 percent in the fourth quarter was much lower than San Jose’s rate of 7.3 percent.
Jeffrey Schlosser was a franchisee of the Freshii brand in San Francisco before he was named the Toronto-based company’s chief operating officer in February. The Freshii chain comprises about 40 units worldwide, including about 20 in the United States.
Schlosser sold his units and territory rights to the company, and now the chain is looking to expand throughout the San Francisco Bay Area, including the markets of San Jose, Palo Alto and Walnut.
Four to six new corporate locations are planned in the San Francisco area before the end of the year, said Schlosser.
For Freshii, a fast-casual salad, wrap and rice bowl chain with a good-for-the-planet focus on sustainability, a key draw is the demographic tendency of San Franciscans to seek out good food and “green-minded” brands.
“San Francisco has a reputation of being a foodie culture,” said Schlosser. “People here understand good food and value. And San Franciscans are very environmentally conscious.”
Though rents can be high, he said, San Francisco also offers close access to local produce vendors, which can bring down food costs.
Freshii, however, is also looking to grow in the Northeast, including New York and Baltimore, as well as Chicago, which was the first U.S. market for the brand.
“We’re looking to grow in cities where we can find great partners,” he said.
Contact Lisa Jennings at lisa.jennings@penton.com.
