Rubio's Coastal Grill abruptly closed nearly 50 locations in retail centers across California, including this one in Whittier near Los Angeles

Costar

June 12, 2024 | 12:48 P.M.

The abrupt closing of 48 Rubio’s Coastal Grill locations in California underscores a climate some real estate professionals describe as prompting dining chains to reconsider expanding after the state raised labor costs for quick-service restaurants.

Citing high costs of doing business, Rubio’s in late May shut down 48 of its California fast-casual restaurants serving Mexican-style food, ahead of the Carlsbad, California-based company’s second Chapter 11 bankruptcy filing in four years. A West Coast mainstay for more than 40 years, Rubio’s once had as many as 200 locations but is now down to 86.

While Rubio’s executives did not name the change specifically and did not provide details to CoStar News, a California law that took effect April 1 requires fast-food and fast-casual restaurant chains with 60 or more U.S. locations to pay their workers at least $20 per hour, higher than the state’s general hourly minimum wage of $16.

Industry professionals said higher-than-average costs in the Golden State for labor, real estate and other expenses were already dragging on business development before the latest fast-food wage hike.

“This could make a lot of the restaurant operators reconsider how they approach development in California,” Steve Avoyer, president of brokerage Flocke & Avoyer Commercial Real Estate in San Diego, told CoStar News. “A lot of them were already thinking, ‘I know that I can open three locations in Iowa for what it would cost me to operate one location in California.’ ”

Darren Tristano, CEO of restaurant consulting firm Foodservice Results in Chicago, said a consumer pullback in non-essential spending, in the face of lingering inflation and high interest rates, has now converged with the reality of high costs of doing business in states like California.

With labor costs now hiked further by the new California law, Rubio’s and other chains are having to make tough decisions about operation and development priorities to survive tough times.

“As the industry still has oversaturation in the limited-service space, each closing will result in better operational profitability for the remaining restaurants,” Tristano said. “Rubio’s is just one of the many closures we see, but expectations are that many additional underperforming chain locations will shutter restaurants and the strong will survive.”

Development Hoops

Retail broker Mike Moser, who represents landlords and tenants throughout California, said the newly enacted wage law has become top of mind for many restaurant companies that were already facing challenges making development projects pencil out in the Golden State.

“We have encountered multiple chains who are expanding in other states across the country but are electing not to come to California for these reasons,” said Moser, principal at Retail Insite in Solana Beach, California. “We also hear from many who are tired of all the hoops they need to jump through to operate here.”

Those hoops have long included high costs for labor, fuel, utilities and construction, in addition to lengthy and costly permitting timelines for new restaurants. California remains a desirable target for its population densities and household demographics in several regions, but Moser said only those chains able to drive heavy sales volumes have been expanding significantly amid these latest challenges.

Avoyer, whose company handles leasing at more than 100 Southern California retail centers, said much will depend on the disposition of leases in Rubio’s bankruptcy case and whether the chain can find a white-knight buyer to acquire its remaining 86 locations in California, Arizona and Nevada.

Retail tenants of all types have been pressured by a climate of rising costs as consumers reduce their spending, which could in turn lower incentives to expand in California, according to Avoyer.

Rising rents, for instance, contributed to the closing of at least eight Red Lobster locations in California, among nearly 100 closed nationally ahead of the seafood chain’s own bankruptcy filing. Analysts have also cited rents and related real estate costs in the shutdown of all stores of Los Angeles-based discount retailer 99 Cents Only, many of which were subsequently acquired by rival Dollar Tree.?

At least one restaurant chain has signaled that its future growth won’t be focused in California. Blaze Pizza, with more than 300 fast-casual restaurants in 39 states, announced last week it will move its corporate headquarters from Pasadena, California, to Atlanta in September. It did not cite a specific reason but joins other companies that previously relocated their headquarters out of the Golden State due to high business costs.

“Moving our corporate headquarters to Atlanta will help us drive our next wave of growth,” Blaze Pizza CEO Beto Guajardo said in a statement. Of approximately 60?corporate employees, the majority will remain remote, with the small percentage of Southern California-based employees being offered relocation opportunities at Blaze Pizza’s?new Atlanta?office, officials said.

The company did not provide further details to CoStar News.

At Least 50 Sites Vacated

Rubio’s officials did not comment beyond previous public statements, but the company website shows it has closed at least 50 California locations so far in 2024. They are about evenly divided among San Diego County at 13, Orange County at 13, the Los Angeles area at 12 and Northern California at 12, mostly in the Sacramento area.

Joshua Ohl, senior director of market analytics for CoStar Group in San Diego, said local closings will likely have a minimal effect on the region’s historically tight retail market, where new retail construction has been limited for the past two decades. Spaces below 3,000 square feet accounted for more than 50% of the region’s retail leasing volume in the past year.

“The availability rates in neighborhood centers and strip centers are trending near historically low positions, and these spaces will provide an opportunity for another retailer to quickly backfill these spaces as they have been among the most in-demand spaces in the region,” Ohl said of the Rubio’s vacancies.

Avoyer echoed this, noting there will likely be no shortage of operators looking to fill the mostly high-traffic California strip center spaces vacated by Rubio’s, each spanning 2,000 to 2,500 square feet. Other local and regional restaurant and coffee shop operators could take advantage of the chance to expand their footprints, especially in highly coveted coastal areas of Southern California, Avoyer added.

Most of Rubio’s vacated locations in Orange County should land replacement tenants within a year, particularly those in centers anchored by grocers and big-box retailers like Target, said Jesse Gundersheim, CoStar’s senior director of market analytics for that region. Vacancies could attract several chains that have expanded in the area in recent years, such as Wingstop, Acai Republic and Shake Shack.

“However, I would expect additional fast-food chains in California to close in the coming years, unable to pass higher food and labor costs on to low- and middle-income consumers, many of whom are struggling with inflation pressures,” Gundersheim said.

Ryan Patap, CoStar’s senior director of market analytics in Los Angeles, said Rubio’s locations in the Greater Los Angeles region are generally found in some of its better-performing retail areas. But parts of the region have recently shown more softness than many other large metropolitan areas due to population losses and weaker economic conditions.

“Finding restaurant tenants to backfill spaces will happen, but may not be immediate, given the headwind of California raising the minimum wage for fast-food workers,” Patap said.