Credit, Real Estate Woes Shift Market Dynamics

From the mid-1990s through 2007, there were few real estate options available to restaurateurs. Although many operators would have preferred to own their real estate, purchase prices were prohibitively high.

Strong real estate prices combined with a large number of creditworthy operators made property ownership very attractive to developers and investors. Cap rates were low; property values were trending higher. Restaurateurs who wanted to own their real estate had to pay absolute top dollar. Instead, most contented themselves with negotiating the best leases they could get, and making their operations as profitable as possible.

Much has changed over the past three years. A tightening of credit since early in 2008 has forced some developers and investors to deleverage by liquidating certain properties. A number of tenants have either filed for bankruptcy or called for renegotiation of leases. For some landlords, the risks of ownership have begun to outweigh the rewards.

Market dynamics have changed enough to prompt some operators to reassess their real estate options. Desirable locations are available in good markets and prices are more affordable than they have been in years.

It was once rare to see smaller parcels available in good markets. Not only are the parcels available today, they are selling at substantial discounts to prices from three years ago. In several markets, asking prices for choice properties have fallen 30 to 50 percent.

Ownership of their real estate has always been important to some restaurateurs. Control over real estate facilitates long-term business planning and makes operations easier for a multitude of reasons. For the first time in a long time, it makes sense to run the numbers to determine whether ownership is a viable option.