The Real Estate Office Crash & Its Massive Impact on the Food/Restaurant Industry

I recently had the chance to visit downtown Cleveland with my wife Pam, while she was on tour for a one woman show in tribute to the great Ohio icon Erma Bombeck. Besides enjoying her amazing performance (eight shows a week for four weeks), one thing I couldn’t help but notice were the empty office buildings everywhere.??

?

You’ve probably seen them - the vacant high rises in downtowns across the country. It’s a trend that started with the pandemic, but one everyone thought would reverse and go ‘back to normal’ once the vaccines came out.? What people don’t talk about is that beyond the stated vacancy rates (30%-50% depending on the city) are the offices where tenants are still paying rent but people don’t go to the office.? Who knows that the true vacancy rate is…..60%-75%?!?!

?

Little did we know what’s happened with our economy since then has done nothing but send commercial real estate (CRE) into a free fall. And given how interconnected CRE is with the food sector, it’s important to understand the layers to this unfolding crisis, how it has fundamentally reshaped the food industry, and five things operators can do to ensure their economic survival.

?

How We Got Here

?

In case you missed it the commercial real estate market is crashing due to what can only be described as the ‘perfect storm’.?

?

For starters the global shift from in-person to remote work, accelerated by the pandemic, fundamentally altered the demand for office spaces at levels we couldn’t have possibly imagined.?

?

As of this year, employees spend an average of only 3.7 days in the office and 60% of office workers now expect employers to provide flexible working arrangements. While companies have done everything to coax people back from dangling the carrot of free food, parking, and fun to outright threatening to fire people should they refuse to return, the country’s ongoing labor shortage have led these return-to-office mandates to fall on deaf ears.?

?

Firms have had no choice but to reevaluate their real estate needs, reduce their physical footprints, and move out to suburban areas, causing office occupancy rates in the top 10 U.S. cities to remain at just 47.3% of pre-pandemic levels. ?

?

Simultaneously, interest rates in the country have soared to levels we haven’t seen in 22 years , which has led to not only a higher cost of borrowing for commercial properties but also sent values tumbling.

?

With demand at all-time lows and costs at all-time highs, the signs of a CRE crash have already emerged.?

?

In Q2 of this year, the U.S. lost 12.5 million square feet of office occupancy in Q2 in addition to the 20 million square feet lost in Q1.

?

In major metropolitan areas, office vacancy rates are hitting record numbers: 22.2% in New York City , 23.7% in Chicago , and 22.5% in Los Angeles . All historic highs.?

?

Two of the largest commercial real estate banks, Signature Bank and First Republic , failed.??

?

Office values have fallen 31% from their peak in March 2022.?

?

Office-loan delinquency has reached a 20-month high , and experts say it will only get worse considering $626 billion of at-risk debt is set to mature at the end of 2025.?

?

To sum it up, banks fear this crash will make 2008 look like a kid’s game, and looking at the numbers, they’re probably right.?

?

How the Crash is Affecting Food?

?

The food industry should care about what’s happening with commercial real estate because of its dependence on consumer traffic.?

?

Collapse of the CBD Food Ecosystem?

?

Once upon a time being in the Central Business District meant restaurants, convenience stores, and even small-format grocery stores could enjoy consistent, profitable foot traffic thanks to all the surrounding offices.? Furthermore, in this bygone era, consumers valued speed, which meant as fast as people were coming in, they were getting out, which helped the bottom line.??

?

With the crash of commercial real estate, however, and the emptying out of major cities, these once thriving food ecosystems have collapsed.

?

In Midtown Manhattan, the business district of one of the most populated cities in the world, counter restaurants and delis are shutting their doors in record numbers, and even high end restaurants like Ruth’s Chris are giving up on CBD .?

?

Changing Consumer Expectations

?

Remote work has not only changed traffic for food providers, but also changed consumer preferences when it comes to food.?

?

Against the backdrop of working from home, food inflation, COVID-19, and a tipping culture consumers perceive has gotten out of hand, more people are choosing to make their own meals at home.

?

In January of this year, more than half of U.S. adults, 55% specifically, have made changes to the way they eat and drink because of inflation, and 83% of them are eating out less often at restaurants. (https://pro.morningconsult.com/analysis/inflation-food-restaurant-drink-takeout )?

?

With less people dining out and less people casually walking into restaurants for lunch during the week, we’re seeing failures and risks at a greater rate than ever in our 35 years of business.?

?

As these are only the beginning stages of the commercial real estate crash, a massive retooling of the food business will be needed.?

?

5 Ways Food Concepts Can Survive?

?

The problem is many food concepts that were created out of the pandemic, such as ghost kitchens and delivery-only sites, have not made up for the failure of their predecessors.?

?

(My guess – people weren’t fans of paying for outrageously priced food from a brand they’ve never heard of, that was only available after paying outrageous delivery fees.)?

?

Fortunately, there are 5 ways the remaining food service providers can evolve to ensure they stick around.?

?

1. Move to the Suburbs?

?

The most ideal thing concepts can do is to follow their consumers and move to the suburbs. In the words of Dig, a fast-food chain that once targeted office lunchgoers in Manhattan, Boston, and Philly, you need to ‘go where the mouths are’ . Which is now in smaller cities and in the suburbs of major metropolitan areas.

?

2. Shift from Weekdays to Weekends?

?

For restaurants that do decide to stay downtown, focus on weekend service. People may be in the suburbs during the week, but they’re still venturing out, as I did, on weekends to the big city for shows, museums, exhibits, you name it. In fact, in some areas, foot traffic has been found to be as high as 5 - 7% of pre-pandemic levels on weekends. Operators should aim on catering to this crowd that prioritizes experience, service, and dare I say luxury by reinventing their menus, investing in excellent customer service, and curating experiences around meals.

?

3. Create a Loyalty Program?

?

Regardless of where a concept is located, every restaurant and food service operator that hopes to make it through the crash will need to create a valuable loyalty program.?

?

Inflation has scared people away from going out, even for takeout and delivery orders. The best way to get them back is by offering a loyalty program that encourages repeat visits. And good ones at that, not the eat 20 meals that average $30 with us and get a $5 side. They need to provide consumers with real value.??

?

4. Double Down on Great Service?

?

We’ve reached an inflection point in restaurant history, where simply providing people good customer service is enough to differentiate your brand and create hard-core loyalists. Case in point would be Chick-Fil-A. Despite their drive-thru lines being described as ‘painfully slow ’, for nearly 2 years in a row they’ve been named consumers’ favorite brand, especially for Gen Z.?

?

Why? Because, say what you will, nobody beats them in the department of friendliness and willingness to go above and beyond for customers. At the end of the day consumers frankly miss being treated well while eating out, and if you’re able to stand out in this area, your brand will make it through any difficulties.?

?

5. Act Fast?

?

Above all else, operators will need to make their next move fast. The carnage of the commercial real estate crash on the food industry will be massive. It will be one of those once-in-a-lifetime events that changes the course of history forever. To be adequately prepared you’ll need to give yourself time to experiment, to play around with these new ideas, to see what will work and what won’t.

?

Creating a new business model is never easy, especially in the food sector. Which is why the time to start doing it…is now.?

?