When does a phenomenal trade area become oversaturated with restaurants?
With an influx of over 145,000 residents from 2016 to 2017, the completion of multiple major corporate headquarters relocations (Toyota, JPMorgan Chase, State Farm, Liberty Mutual), and news swirling about Amazon’s HQ2, Dallas-Fort Worth is definitely in the running for “Most Likely to Succeed” in this year’s class awards. So, it’s no surprise there’s an astonishing number of new restaurants opening in key DFW markets as well. Restaurants love to follow growing markets with new homes and new jobs.
Perhaps the pinnacle of restaurant activity in DFW has been in and around the Legacy West development in Plano. Within the development itself, there are now 16 concepts like Del Frisco’s, Barnes & Noble Kitchen, Shake Shack, Haywire, Fogo de Chao, Legacy Hall and more. However, the restaurant growth in this market has not been limited to this project. Many surrounding developments like the Star in Frisco, Village 121, and Legacy Spring Creek Village are signing restaurant deals as well. It’s estimated that there are over 200 restaurants either open or opening soon near Legacy West. That’s a huge number of restaurant seats for one market.
What does that mean for restaurant owners and landlords?
For restaurant owners, the market is now and will continue to be incredibly competitive. That competition isn’t just within individual restaurant categories like steak houses, burger concepts, or Mexican food. It’s competition across the board with the total dining seats in the market. By way of example, there might only be a few steak house concepts in the trade area, but because there are so many other high-end concepts opening in the market, steak houses will likely still feel the impact on their sales.
Unfortunately for restaurant owners, attracting customers in a competitive market isn’t the only challenge—so is attracting good labor. Many of our restaurant clients have cited hiring good restaurant employees as the biggest challenge they face in being successful. So, in a market like Legacy, hiring good labor becomes that much harder—and more expensive. That increased cost for good labor, however, can be the difference in creating and maintaining the quality of food and service it takes to be successful.
Lastly, identifying the right location is always an important consideration when looking in a market like Legacy. Before this market became as built out with restaurants as it is now, it might be easier to justify a “B” or “B Minus” location because of the strength of the market. However, with the number of eating choices in this trade area now, taking an inferior location could have a major negative impact on your overall sales. Key location criteria becomes more important than ever—great visibility, easy access, ample parking, good co-tenancy, and great traffic generators. All of these elements are critical, but securing a site that satisfies all of those criteria will likely be incredibly expensive, just like the labor.
For restaurant landlords, there are a number of challenges to consider in a market like Legacy. While the market continues to thrive as a whole and demand from tenants continues to be high, Landlords should be mindful of the competition in the market. Sometimes leasing space to the 10th chicken concept in the market just doesn’t make a lot of sense. It’s hard for them all to be successful. More than that, landlords should really have confidence that a potential restaurant tenant is experienced, has a unique product offering, maintains a high quality of food and service and isn’t overcommitting themselves to a cost of occupancy that isn’t sustainable. Restaurants might look at a market like Legacy and project volumes that are 25-50percent higher than AUV in order to justify paying a 25-50 percent higher rent, but if those projections don’t take into account the competition in the area, they could be committing themselves to a rent that their sales can’t afford.
Despite these challenges, the Legacy trade area continues to be bright light in the DFW market, and it will be interesting to watch the restaurant landscape continue to evolve in that trade area in 2018.
Ryan Johnson is a senior vice president and co-market leader at SRS Real Estate Partners.