The Impact of Rising Interest Rates on CRE Values

The Impact of Rising Interest Rates on CRE Values

We all often hear how increasing interest rates are affecting values. Many are saying “How does this affect me?” Such a broad statement without specifics and substance can easily be dismissed. We thought we would drill down deeper and provide you with some examples of exactly what it means for commercial retail investment property owners like yourself.

The market, generally speaking, was on a “Bull Run” for six years – from 2011 to the end of 2016. We are and have been in a post-peak market since December 2016 and values have certainly been negatively affected. During that six-year period, our clients loved meeting with us and allowing us to perform a strategic analysis for their property on an annual basis. We consistently delivered positive news which stated, when their property generally didn’t change, that their property gained value year-over-year.

In the fourth quarter of 2016, we emphasized there was a large indication and degree that the market was at its apex. Their investment property, at that time, had peaked in value and if they were to consider a disposition, this time would most likely yield them the highest price. Many expressed that they believe that values will continue to climb and they will hold to reap that benefit.

Since that time, we have reflected on the past two years and determined that at that moment in time, it indeed was the peak of the market. Our team also heard similar investor sentiments in 2007 and early 2008. Many investors echoed the same stance in stating that they still believed that they could yield another 5-10 percent from that point in time and will exit in a year or two. Upon revisiting with many of those clients, the majority have expressed to us that that turned out to be one of the biggest mistakes of their lives. While, let us be clear, in no way are we predicting a collapse of that magnitude; we don’t have a crystal ball. Instead, we use the cycles in history combined with the current market and economic conditions to guide our future projections.

What we do know is this: Market cycles, over time, typically last between 9 to 12 years. If the fourth quarter of 2016, based on values reaching a plateau was this cycle’s peak, then we have another 7-10 years of downward pressure to withstand.

You are probably asking how this affects you? We have decided to provide a few specific examples of recent properties that we provided valuations on over the past
three years. We also coupled this with a simple table that illustrates what the debt service will be in the upcoming years and how this translates to cap rates and values.

Our objective here is to continue to inform our clients about how interest rates are affecting values for retail commercial properties.

The below examples are properties that have maintained the same occupancy percentage, tenancy and lease lengths.

Example 1:

  • Charlotte County,  Florida
  • Neighborhood Shopping Center
  • 32,000 sq. ft. / 12 tenants / Class B+
  • Change in Value:
    • December 2016: $3,925,000 / 6.75% cap rate
      • November 2017: $3,760,000 / 7.05% cap rate
        • September 2018: $3,600,000 / 7.36% cap rate

An overall decrease in value of 61 basis points (.61%) which equals $325,000 in less than 2 years

Example 2:

  • Lee County, Florida
  • Grocery Anchored Shopping Center
  • 91,000 sq. ft. / 16 tenants / Class C+
  • Change in Value:
    • August 2016: $12,375,000 / 7.03% cap rate
      • September 2017: $11,966,472 / 7.27% cap rate
        • November 2018: $11,298,221 / 7.70% cap rate

An overall decrease in value of 67 basis points (.67%) which equals $1,076,779 in just over 2 years.

The below table also illustrates the picture very clearly for a two-year forecast. It relates to rising interest rates and increasing cap rates and how they directly translate to the decreasing price and price per square foot for a $2,500,000 retail asset:

Change in Value - Shopping Center.PNG

Most active investors acquire a mortgage for a commercial retail property purchase. Interest rates have risen 120 basis points (1.2%) in the past 24 months and will increase a forecasted 75 to 90 basis points (.75 to .9%) in the next 12 months. If said investor requires a 250 basis point (2.5%) spread between their mortgage interest rate and cap rate or to maintain a specific cash on cash return, as many investors do, that means that the strike price decreases as time moves throughout the upward cycle.

This is exactly what we have been seeing.

Let’s also be clear on a few additional factors. First, there is not a one-for-one point equality between interest rates and cap rates – which is a positive. Second, the increase in cap rates do not immediately follow the interest rate increases as there is often a 6-12 month lag time or delay that follow interest rate hikes. That lag time can also be dependent on the cash supply in the marketplace and demand for properties on the market.

The simple principle to understand, however, is that prices are derived from cap rates of verifiable arm’s length transactions of similar kind properties within a very brief period of time. If the cap rates of these sale comparables increase, then the value of your property is negatively impacted and also loses value, even though your property itself has not changed. It is a factor of the economic conditions and market changes due to the rising cost of debt.

We are recommending for you to frequently assess your property and understand the cycle and it’s many effects on value. We are communicating to our clients that if they plan on holding their asset at this time, then we suggest holding long term, at least seven years, to land on the other side of this cycle where values will likely be again stabilized. However, if an investor is considering a disposition and exit from their current income producing commercial retail property within the next few years, it is advantageous to exit sooner rather than later to maximize value.

Many of our clients who stated that they would never sell are now considering a disposition. Others who were on the fence are now bringing their property to market to capitalize on their equity. We are also transitioning many of our multi-tenant property clients through a strategic 1031 exchange into other asset types. Some investors are targeting stable net-leased passive assets in which the lease term expires well beyond the end of this cycle to mitigate the risk of their cash flow stream and pairing these long-term stable assets with deals that have more upside in order to obtain a better average yield. The whole purpose, however, is to mitigate risk of the current equity/cash flow stream, while getting them over the impending market shift and allowing them to take advantage of the more-favorable market and lending conditions that will exist at that time.

We not only specialize in maximizing the value and commanding the absolute highest price for the properties that we sell for our clients, but also in transitioning them into a safe landing spot with an equal or greater return. We exclusively represent these same clients as buyers through their exchange period and are extremely successful in yielding them the property that meets their criteria and return requirements. We look forward to hearing from you and working with you to assess your property and provide all of the options available to you. We then pair this with our recommendations which are also influenced by the client’s goals and existing market conditions.

Below are some historical facts as food-for-thought to conclude this article:

Historical Realities

  • Interest rates have been steadily rising since 2015.
  • The Federal Reserve just completed its eighth (8th) rate increase over the last three years bringing the Federal Funds rate to a targeted level of 2.25%. Moderate increases are expected to continue in 2019.
  • Strong economic growth fueled by lower taxes, increased spending, reduced regulations, low unemployment and higher consumer confidence has helped drive the 10-year treasury to 3.19% as of 11/06/18.

Federal Funds Rate.PNG

Economic Growth

  • Strong economic conditions and overall NOI growth should at least partially offset the impact of rising rates.
  • NOI growth was very strong in 2017 at approximately 5.3%. Forecasts for 2018 and 2019 are 3.70% and 3.90% respectively.
  • This compares to an average of 3.20% per year over the last 20 years.
  • It should be noted that a 4-5% increase in NOI is needed to offset a 25bps increase in cap rates.
  • Furthermore, an NOI increase of 8-9% is needed to offset a 50bps increase in cap rates.
  • As we get later and later into the current RE cycle, the risk that NOI growth will not be able to keep pace with rising cap rates becomes more pronounced.

 

We welcome the opportunity to pair our expert insight with more specifics about your situation and properties. We understand that even though now is a good time to sell for some, it is not the right time to sell for many. With that in mind, we pride ourselves in building long-term relationships and our intention to help you execute on your long-term investment strategy by providing our insight today; even if that means we will be providing insight for many years to come before we facilitate a transaction. That is why most of our clients become repeat clients in the future.

Let us know how we can help and we look forward to helping you in any capacity that makes the most sense for you and your goals.

My Biggest Competition

My Biggest Competition

I have been getting up earlier and earlier lately. Everyone is different and different things work for different people, but I’m actively discovering what works best for me in order to maximize my efficiency, productivity, and impact I have on the world around me. I’ve found that when I get up really early, I am extremely productive; more productive than I am late at night. So, I’ve decided to get up earlier and get more done.

One morning, I woke up in the pitch black darkness of the morning, collected my things, and headed to the gym. The roads were a ghost town.

Barreling down the barren highway, I felt like I was Will Smith in I Am Legend. I was only reminded of reality when a random pair of headlights would break the horizon. Then, in an instant, I would be alone on the road again. I got to the gym, organized my things, and hopped on the treadmill. I began my run and about 10 minutes in, I took a look around the gym that is part of my office building.

There was no one around.

The lights were only half on and I couldn’t figure out how to get them working, so I ran in dim light. Even the janitors had not yet arrived as far as I could tell. As I continued running, I looked at the treadmill to my left. There was no one running on it. The treadmill to my right? That one was empty too. I realized I’m not racing anyone on this perpetual hamster wheel except for myself.

In that moment I came to a realization:

  • I am my own worst enemy
  • I am my only competition
  • I am my limits

Replace “I” with “You” and you have a statement very relevant to your own situation. There’s no progress in comparing yourself to others. Everyone has their own limits and you don’t know any of your competition any more than you know yourself. If you take the time, you can get to know the ins and outs of yourself, but there comes a limit to how much you can know about your competition.

One important point is:

you don’t know what their limits are.

When you measure yourself to others, all you do is limit your progress. Who is to say their limit is your limit? When you compare yourself to your competition you accept their limit as your own. What about when you compete only with yourself? When you compete only with yourself, your limits disappear. I had been waking up before the sun even realized today was here. No one was on the road with me. No one was running next to me on the treadmill. I had no one to push me; no one to compare myself to.

I had to push myself. I was my only competition.

That’s when I realized something else:

That is how you stay miles ahead of your competition.

I’ve done more before my competition opened their eyes than they may do all morning. Now, I am sure there are plenty of people surpassing my own limits out there, but the point is, what would happen if I did gauge my limits by others? What if I did gauge my limits by someone who has yet to show up?

What if I waited to work out until they arrived?

Maybe they aren’t even pushing their limits. Or perhaps they think they’re already at their limits. You can’t know your limits until you push yourself. And that should be your biggest take away from this post:

YOU have to push your limits.

YOU have to drive you.

No one else will push you where you need to be. Stop letting everyone else’s limits limit yourself. Find your own limits…then push them…then break them…you’ll soon find that your potential is limitless, but only if you look past all the limits everyone else has built for you.

  • Define your own limits, then set out to prove them wrong. Let everyone else sleep on their dreams.
  • You go out there and make them happen.

How is Digital Tech Affecting Restaurants as an Investment

How is Digital Tech Affecting Restaurants as an Investment

Last month I talked about what we expect to see as the restaurant sector pushes forward this year. One of the anticipated shifts that we have already seen taking shape is the integration of digital tech into the consumer experience. Consumer preferences used to be convenience focused. As consumer preferences changed, business models shifted to offer guests a more custom and individualized experience, but the scale of offering such options cut into the convenience factor. Now concepts are learning new ways to offer consumers both convenience and individualization. How? Many of the solutions are being created through new technologies.

You used to have to browse direct mail magazines and call orders in to department stores if you wanted products shipped to you. Then, you could plan to receive them weeks later. Amazon has changed the game making orders a simple mobile click away with plans to standardize a 2-hour delivery window. As businesses started replicating the speed and efficiency of ordering through tech, you can now get groceries delivered through services like Shipt. Online ordering isn’t anything new to the restaurant sector, but concepts weren’t always been so eager to make those services available or to optimize their systems. Today, however, consumers want more, they want it faster, and they want it at a competitive price, so concepts big and small are brainstorming ways to deliver on those consumer demands.

Starbucks has done a great job making their mobile app an extension of their brand. Not only does it make it simple to pay (you just open up your app and allow the cashier to scan your barcode, which is tied to your Starbucks account and credit card), but it also offers new opportunities for guests to engage; partnering with music streaming services like Spotify to allow guests to customize their musical preferences; collecting stars for rewards programs that offer enticing discounts and promotions; a mobile store to purchase Starbucks merchandise directly from the app.

It is proving quite lucrative for Starbucks.

As a real estate investment, Starbucks is one of the highest paying QSR tenants on average paying over $60 per square foot, while the general average rent paid by QSRs floats around the $30 PSF mark. Part of what empowers Starbucks to be so aggressive on rent is their ability to turn a volume of transactions. This used to be a main function of their drive through stack; Starbucks locations with a drive through typically generate 20% more in sales revenue than a location without a drive through. Today, they are likely maintaining and increasing that guest volume through the technological efficiencies they are implementing. These technologies are not only making transactions easier for guests and catering to their changing preferences, but it is also making the entire transactional process faster allowing more foot traffic to get through the cash registers to check out. According to an article by Nation’s Restaurant News, 2017 saw 1.6 percent or 960 million restaurant visits being paid via mobile app. That was an increase of 50 percent over a year ago. Brands like Taco Bell have implemented similar apps, but aside from the convenience factor and efficiency factor, it is also allowing orders to be taken off site, which means less time guests have to stand around waiting for their food to be made, less congestion inside of restaurants themselves, and parking spaces being made available quicker allowing for additional guest volume to push through the stores. Guests can preorder their food and by the time they arrive, their food is ready. All guests have to do is sit down to eat or grab it and go.

In 2017, McDonald’s discussed their new “Experience of the Future” (EOTF) business model shift, which may take several years, but plans to utilize self-serve kiosks and more outdoor eating spaces aimed at cutting labor costs, increasing efficiencies, and improving the overall guest experience. McDonald’s is a master at guest volume. They are one of the lowest paying quick service restaurant concepts in terms of per square foot rent and in addition they have one of the lowest average ticket prices for guests across the board. The amazing thing about the concept, however, is that even with those items considered, they tout some of the highest average sales per unit across most quick service restaurant concepts and demand some really high investment sale prices when selling your real estate with them as a tenant. Why is that? Their strong credit guarantee and generally core real estate sites certainly help, but it is also because they churn such a volume of guests that their low average ticket price still yields them very aggressive unit sales figures, which translates to a low rent to sales ratio and a less risky investment for investors that will pay a premium for all of the above. Contact us about our restaurant report for more detailed information regarding average cap rates, unit sales, and year over year growth per specific concept.

These technologies are changing the game, but with these added benefits for these concepts comes added costs. Also according to the above referenced Nation’s Restaurant News article, 16 percent of cash paying non-tech users were concerned about identify theft or credit card fraud. Although it may be rare to find a completely cashless restaurant as it sits today, anyone implementing these technologies is going to have to bulk up their IT costs to ensure the apps run smoothly, safely, and prevent any sort of outside hacking.

The good news is that it is not only the smaller footprint Quick Service Restaurant concepts jumping on board. The casual dining sector has been shocked into some big changes as many larger footprint concepts have seen consistently declining sales as these consumer preferences continue to shift. These shifts have especially hurt the casual dining concepts offering cheaper meals as their average tickets do not generally have the profit margin fat to spare, which some of the more fine dining concepts can absorb due to higher tickets and heavy alcohol sales. It will be important to a casual dining concept’s success to get more people through their doors and turn over tables faster. Concepts like Chili’s have begun using tablets at tables, which allow guests to place their orders, order refills, and make their payments when they see fit in addition to adding other experiences such as games, news, and promotional upsells. Many think that the human connection a physical server brings is an experience people dine out for and cannot be replaced by technology, which may very well be true, but it seems the path to success is not a black and white, this or that philosophy. Instead, restaurants can leverage these technologies and use them in conjunction with physical servers to improve efficiencies, reduce human error, and give the guests totally new and unique dining experiences, while simultaneously allowing for more guest traffic by reducing the time it takes to turnover tables.

On the real estate investment side, many of the struggling casual dining concepts have seen cap rates go up due to some of the risk perception of their concepts increasing in the marketplace. There are many casual dining concepts still aggressively expanding, maintaining strong sales, and doing a great job of capitalizing on these technologies to cater to changing consumer preferences, but many are wondering how long it will take struggling concepts to figure things out and re-stabilize. The overall buyer pool for casual dining concepts has shrunk a bit as investors have begun moving more towards quick service restaurant investments. Because QSR concepts have smaller footprints, location centric sites with dense high traffic corridors, less of a need for an “experience” since guests are looking for speed and convenience, and the generally low ticket price that can remain in demand during a down market, these investments are perceived as a less risky alternative. With that said, some investors are viewing this as an opportunity to capitalize on how low their current QSR investment cap rates are and move into emerging or strong operating casual dining concepts where there may currently be more risk, but also more upside in the future. Some are simply following the old adage of selling what everyone is buying and buying what everyone is selling; the idea that you could sell your Starbucks for a 4.5% cap rate, but exchange into a well-located Applebee’s at a 7% cap rate with a strategy to hold on for the ride until the casual dining sector settles in, evolves, and starts demanding lower cap rates again. With core real estate principles at top of mind, those investors are weighing worst case scenario situations of re-tenanting the space, signing a new long-term lease with a new tenant down the road, and then looking to exit at that point once value has been created again.

There are a million ways to slice the salami and an investors appetite for risk can vary dramatically. A good deal to one investor can be a nightmare for another. One thing we can be sure of is that there is no lack of opportunity out there. We are helping clients strategize and exchange in and out of these types of opportunities on a daily basis. We welcome the opportunity to learn more about your situation and what we can do to compliment your existing investment efforts. We promise that if you work with us on a long-term basis, you will not only keep a pulse on ever changing market trends to avoid potential risks in the marketplace, but you will also undoubtedly find new opportunities to increase your cash flow, grow your portfolio, and maximize your equity along the way.

10 Things Successful Entrepreneurs Say

10 Things Successful Entrepreneurs Say
10 Things Successful Entrepreneurs Say
To be a successful entrepreneur, we must think like the successful entrepreneur. There are specific characteristics that the successful entrepreneur tends to have and many entrepreneurs struggle to build their business in their early stages because they fail to hone in on these characteristics. Some entrepreneurs fail and never try again; others understand where they failed, and begin changing their behavior to make things work the second time around. Whether your business is thriving or barely making it from client to client, you may want to consider reciting some of these phrases in the mirror. Or you may already be the perfect candidate for a successful entrepreneur and not even realize it!
Here are 10 things that Successful Entrepreneurs say:
1. “My Bad.”
The Successful Entrepreneur knows how to swallow her pride and take accountability (Even when it may not be exclusively because of her).  When a business fails, or an initiative bombs, or a sale doesn’t close, there are always so many variables involved that it is easy to put the blame on any number of other factors. If you’re not comfortable with failure, it may feel uncomfortable to admit you were wrong. To avoid feeling bad, you may search for reasons why something went wrong, but the fact is that pointing fingers only slows you down!
When it comes down to it, if you had a goal in mind and that goal was not reached or has become farther out of reach than when you began, then you have failed at attaining that goal. Whether it was because of unforeseen circumstances or someone else’s shortfall doesn’t matter in the long run of making it happen. When you make yourself accountable as the entrepreneur, and take on all the responsibility of success and failure, two things happen:
  • You become even more motivated to succeed
  • You learn from your past mistakes and use them to foresee future mistakes
It’s okay to fail and mistakes are going to be made, but without accountability, we may repeat the same mistakes over and over again. It’s easy to make excuses. It takes a real leader to ignore excuses and let everyone point their fingers at them.
2. “Let’s Make It Happen.”
The successful Entrepreneur has made a life decision to pursue something important to himself and pursue it blindly. Failure can be a very strong motivator to stop what you’re doing and never try to do it again, but the most successful entrepreneurs are the ones that fail to see failure as failure. The most successful entrepreneurs have failed so many times that success was simply inevitable. We can find successful people in all walks of life, but no matter how different their industries, one of the characteristics that binds these souls are their ability to persevere through their failures. You can search Google and find endless lists of successful entrepreneurs that failed at first. Here’s one of those lists right here.
Some of the names on this list include Henry Ford, Bill Gates, Walt Disney, Isaac Newton, Thomas Edison, Abraham Lincoln, Oprah Winfrey, Marilyn Monroe, Harrison Ford;
I could go on for days.
Fail to see failure as failure. Strive to see the big picture and your desired end result. When someone says you have failed, correct them and say, “Actually, it’s just another speed bump on my road to success.” It may sound too cliché for them to accept. They’ll probably just laugh you off. Be okay with being the cliché that happened and you’ll be laughing all the way to the bank.
3. “I Love My Job.”
The life of an entrepreneur is an unconventional one. Often times instead of a 9-5 work day, you might work until 3 am only to get up for a 6 am meeting. You may encounter rough patches where you are pulling out your hair just to make things work. Some days, you might even wish you had some stability and a boss that knows exactly what the next move is, but most successful entrepreneurs push through all of these things because they enjoy the ride.
Passion is a very strong motivator and if you’ve found a way to make a living doing something you’re passionate about, you will work through the night, you will sacrifice what you have to in order to make it work, and you will love every minute of it. If you don’t have a passion, begin to define it. It won’t find you. Decide where you want to put your focus and then FOCUS!
4. “How Can We Move Forward?”
As an entrepreneur, you are selling a product or service to your clients. Unless you have a unique product (hard to establish) with no competition (virtually never going to happen) and can make a decent profit margin off of a cheap retail price, your products will not sell themselves. Not all salespeople are entrepreneurs, but all entrepreneurs have to know how to be salespeople.
You have to ask for the sale! You can spend your life savings on marketing, advertising, and promotions, but all of these initiatives will be pointless if you do not ask people to buy your product or service. You cannot assume that everyone who needs your product is going to realize it and come running for your business. Find the people who need your product, make them understand why, and then ask for the business. It sounds simple, but simple is not always as easy as it is straightforward.
5. “I Thought this Might Happen.”
Successful entrepreneurs have done enough market research, planning, and analysis to understand the risk involved. Most successful entrepreneurs have already foreseen possible shortfalls and have planned appropriately. Have you ever heard of having a back-up plan to your back-up plan to back up your back-up plan? That’s what I’m talking about.
It doesn’t hurt to know what can go wrong and how you will react in such a situation. A good plan beats blind luck any day of the week.
6. “Let’s go at this Together.”
Successful entrepreneurs understand the value of building a strong team. Some of the most successful entrepreneurs were not experts in anything, but instead are average in many realms, but have found a way to recruit a strong team of experts that know how to communicate and collaborate. As a business owner, you may feel like you have to do it all because when you accept accountability like mentioned above, you feel that you are responsible for getting the job done. Life will be much easier if you can recruit a team you trust to have your back and get the job done in the same manner you would. Successful entrepreneurs build a culture around their team based on individual strengths, but allowing those strengths to work together as one cohesive unit. I just thought of another cliché!
Two heads are better than one!
The catch is finding two, three, or five heads that work as one; think as one. That’s when a strong team and support system fosters business success. Henry Ford said it best, “Coming together is a beginning. Keeping together is progress. Working together is success”.
7. “We Have What They Don’t.”
If your business isn’t different than Joe Blow next door, why buy from you? I’m Sorry Joe Blow, but the truth is, you’re not cutting it. Successful entrepreneurs know how to differentiate themselves from the competition. Without a unique selling proposition, a business can easily become lost in the sea of other businesses out there. This is probably one of the biggest reasons why 50% of small businesses fail.  This goes back to planning and analysis. Do a competitive analysis. Know your competition. Look at what your competition is doing and then be different. Get creative. Find a way to be different. Change your business model. Don’t just sell a product. Find a way to give your customers an experience. Successful entrepreneurs have learned that people will buy an experience that comes with a free product more often than they will just buy the product. Successful Entrepreneurs don’t live inside the box given to them. There are no rules. If you want to be a successful entrepreneur, start breaking and bending some rules and create your own box.
8. “Let’s Put it Back into the Business”
Successful Entrepreneurs keep a strong eye towards the big picture. They want their business to succeed more than they want the luxuries of a status driven life. They bootstrap their way through the first couple years of business growth giving up some of life’s little luxuries and finding ways to save pennies here and there. The big picture is not passing up a penny on the ground because it’s only 1/100 of a dollar. The big picture is picking up that penny on the ground because 999 more of them and that’s ten dollars that only cost you 1,000 squats to pick it up! Get paid while you work out! Of course we want to make money and be paid for our hard work, but just like how they say to pay yourself first when saving for retirement, successful entrepreneurs consider their business before they consider themselves. Pay your business first. Reinvest in the business and it is bound to succeed. You can take a hefty salary later on down the road when cash flow is growing on the trees in your spacious back yard.
9. “Oh! I Know a Guy!”
Successful entrepreneurs are essentially successful networkers. In hard economic times, your network will keep your business alive. Successful Entrepreneurs make friends easily, go to networking events and exchange contact information. They find ways to connect the dots and help people succeed even if it does not directly benefit themselves. Successful entrepreneurs maintain contact with a strong network of friends and business partners. They follow up with lunch; follow up with a card; follow up with an email; follow up with a phone call; follow up with another lunch. Did I mention that successful entrepreneurs follow up? Who you know is always more important than what you know and sometimes the most important things you know will come only from who you know. Don’t underestimate the power of networking!
10. “You Can Sleep When you’re Dead”
Here’s another cliché that deserves a second look. Dreams are certainly a fantastic mystery, but successful entrepreneurs would rather be making their dreams happen than to have to wake up from them only to realize they haven’t happened. It’s not that successful entrepreneurs don’t like sleep, but instead they have found something they want so badly that they are energized more by what they are working towards than by the sleep they can get at night. It is said that 8-9 hours of sleep is a good nightly goal, but that’s like an entire workday! A business article in the Times interviewed some of the top CEOs around the country and found that one thing they all had in common was that they didn’t get more than 4 ½ to 5 hours of sleep every night. Most of them were going to bed at 11 PM and waking up at 4 AM. If you really want to beat your competition, you will wake up earlier than they do and go to sleep after they’re already dreaming. I am by no means advocating the sacrifice of your health for your business, but successful entrepreneurs find a happy medium between the sleep they need and putting in the work to make a business successful. See power naps.
Maybe you’ve already failed a few times as an entrepreneur. Maybe you haven’t yet started your entrepreneurial adventure. Or perhaps you just want to rock the boat within the company you’re already working for. In any case, thinking like an entrepreneur can only do you good. Successful entrepreneurs create opportunities, meet new and interesting people, are happy about the life they are pursuing, and know what it takes to make it work. By shifting your perspective and adopting these phrases into your daily conversations, you may just take your business to the next level.
Go out there and Make it happen! No Excuses!

Restaurant Merger & Acquisitions: Expected to Maintain Steam in 2018

Outside of real estate investment, the restaurant market for business acquisitions has been warming for quite a while now. I say “warming up” modestly because it can be argued it has, in fact, been a fire hot space attracting investors big and small to concept acquisitions big and small. The M&A (Merger & Acquisition) market for restaurants has correlated to how the single-tenant net-leased real estate asset class has responded over the past 24 months; getting hotter than ever, then slowing down, but stabilizing at values that remain higher than most cycles have ever seen. Some of the higher profile news included JAB acquiring Panera Bread, Buffalo Wild Wings being acquired by Roark Capital, and Amazon acquiring Whole Foods in a parallel, but complimentary merging of sectors. In addition to bigger news, there has been some big news in smaller concept growth as well. R&R BBQ was acquired by Four Foods Group, while Beef ‘O’ Brady’s and Brass Tap franchisor FSC Franchising sold a majority of their stake to CapitalSpring. Ponderosa went to FAT Brands. Ruby Tuesdays went to NRD Capital.

 

Why is all of this happening? Investors have been consistently looking to take advantage of the rising consumer sentiment and there is still a ton of cash out there looking to be invested. The consensus among the restaurant lending arms of the world at the 2017 Restaurant Development and Finance Conference in Las Vegas was that the flow of capital is greater than ever right now. There is a lot of risk in many retail spaces right now and a lot of those investment dollars are being funneled towards the restaurant sector as a hedge against that risk. The newfound success by many smaller more craft concepts has sparked investors to take a more serious look at smaller growing concepts with significantly more upside than their more stable, seasoned, and proven concept competitors. Strong operators or investors with economies of scale in the space are more willing to take the risk on a potentially trendy concept if they can apply some of the basic growth principles to the brand that have worked for their other brands in the past.

 

Restaurant values are some of the highest we have ever seen with M&A multiples for franchising deals climbing higher and higher. This is making it tougher for smaller operators to grow their unit size as now there are some big money players coming into the mix, willing to throw some cash around at more aggressive prices than smaller investors may be willing to bite off on, but some of these strategic buyers backed by cash heavy big hitters have the scale and size to make the numbers work. Their long-term focus on their investments is driving some prices to 20 times EBITDA or higher. For instance, RBI paid 21 times EBITDA for Popeye’s, but they have the scale, systems, and supply chain to make even the international growth of such a well established concept a successful acquisition. According to the Restaurant Finance Monitor, Wedbush Securities analyst Nick Setyan has identified various restaurant concepts that might be acquired in 2018 based on cash flow yields. He identified BJ’s Restaurants, Fiesta Restaurant Group, and Cheesecake Factory as his top three to keep your eye on in 2018. As we all know, the restaurant industry is cyclical just like everything else, but the hope is that there is still some significant runway left in this cycle for investors, operators, franchisors and franchisees to find some win-wins and continue building concepts that will sustain profits in the long run.

Planning Your Exit Strategy

Planning Your Exit Strategy

 

Most times, when we determine the best property for our clients to purchase, we emphasize the importance of not only the entry strategy, but also, just as important, is the exit strategy. Normally, when an investor purchases a NNN restaurant property, the most important focus is how to get in the deal and how much will it cost. We ask you to take a half step back, just momentarily, to look at how we position our clients for long term success.

We believe that the Exit Strategy is just as important as the entry strategy and here’s why:

At Marcus & Millichap, we do two things and we do them more effectively than any CRE firm in the nation. We build and preserve our client’s wealth. While it is imperative to thoroughly examine each property’s worth for our investors based on their acquisition criteria and coupled this with the dozen or so variables that are factors in the overall value equation, it is also crucial to be able to measure what the property will be worth in the future.

Because of our extensive restaurant brand and tenant knowledge, we are privy to certain information that most brokers don’t have access to. If we know that a certain restaurant franchisee has a pattern of dividing their portfolio into subsidiaries and smaller lease guarantees and the language in the lease is ambiguous and provides them this option, we will factor this into the future value of the property’s worth. Simply put, when a lease guarantee is reduced from a massive franchisee guarantee to a smaller regional subsidiary guarantee, the restaurant’s lease and real estate value is negatively altered. We often advise our clients away from this type of scenario. Conversely, we have also experienced the opposite trend. Our experience has shown us that certain restaurant corporations are reducing the amount of total franchisees they communicate and do business with. As a result, they offer financial incentive for the smaller Mom & Pop franchisee to sell their business operation to a larger regional franchisee. They also offer financial incentives for the larger company to purchase those businesses such as extensions of the franchisee agreements for a reduced cost. This play increases the value of a Restaurant Property as the larger restaurant guarantee increases stability and worth due to the size and history of the larger company.  These are just two examples of what we commonly experience and are able to steer and advise our clients accordingly.

As restaurant specialists, we know this category more precisely than “Catch All” brokers that not only handle other retail categories, but also other completely different product types.

Let’s talk about lease length:

There is definitely a “Best” time to purchase a restaurant asset. We know that there are lease trigger value reduction times. These are defined as increments of time in which the lease reduces from a “5” number to below. Please allow me to explain. When a lease term reduces from 20 to 19 years, 15 to 14 years, 10 to 9 years and 5 to 4 years, the value perception dramatically alters the worth. We have seen properties lose over 50 basis points literally overnight and 35 to 45 basis points is typical. This is why we target properties that have just come out of one of those value reductions for client acquisitions. If we can pursue and secure a property with 18 or 19 years remaining on an original 20 year lease, that is the best scenario. It is exactly like driving a brand new car off of the lot. You know the saying, “That car just lost 10% of its value without traveling one block.” Why do many savvy investors buy cars with one or two years on them with ultra-low mileage? It’s because they allowed the original owner to take that loss and they purchase the car, virtually new, but at a discounted price.

SMART!!!

The same theory applies with NNN Restaurant Properties.

Now that we covered entry strategy, let’s talk about exit strategy:

The same property that you purchased with 19 years on the lease, we will recommend that you hold and cash flow for 8 ½ years, until the lease term has 10 ½ years remaining. Then, as your broker, we can list and transact this property at the absolute highest price by promoting the fact that there is an impending rent increase (which is most often the case every five years), and the perception will be a secure lengthy 10+ year term. With this strategy, you are on the positive side of the “5” number and transact the property before it loses significant value.

When we secure your property acquisition, we always provide the best-case scenario as to when to sell and exit that same property you are buying to maximize its value and your equity. Most brokers do not employ a long-term approach with their clients and are simply focused on the single transaction. Many of our most successful NNN restaurant property clients execute this strategy over and over. It truly assists them in “Climbing the Ladder” one rung at a time and has proven to be extremely effective. In fact, many have shared with us that this one strategy is responsible for much of their wealth.

Because we have the largest inventory of properties and buyers in the nation, our ability to access and secure a property for you with the right “formula” is compounded and multiplied. This fact coupled with our specialization of restaurant properties allow us to guide our clients like no other broker can. We always joke that we are the brain surgeons of restaurant and it really is true!

We build long term relationships with our clients. We are not simply seeking to secure one transaction, but instead take the time to learn about our clients and their goals and long-term objectives. We enjoy investing our time in our clients to learn as much as possible, so we can most effectively guide them to successfully reach their destination.

Above outlines just a few strategies and perspectives that we wanted to share with you. It’s no mystery that the majority of our 30 almost thirty property closings last year were multiple transactions for the same client. We either executed dispositions or acquisitions for our client for multiple properties. Or, we handled the disposition of their property (known as down-leg) and also represented them in their acquisition of their next property (called up-leg) in a 1031 Exchange.

There is a definitive reason for this. Our clients know that they are in the best hands possible. We leave no stone unturned on our mission to provide the absolute best brokerage services for our clients. Our resources coupled with our unwavering commitment we make to our clients is truly second to none and we demonstrate this each and every week. We have the bundle of letters of recommendation to prove it! Ask to see them or a phone number for one of our many satisfied long-term clients who would be happy to share their experience.

 

Restaurant Industry Trends: What to Expect in 2018

Restaurant Industry Trends: What to Expect in 2018

We have seen a number of shifts in the dynamic of how business models function over the past few years.

Consider this:

Airbnb, one of the largest travel accommodation providers does not own their real estate. Uber and Lyft, two of the most powerful personal transportation companies in power today does not own their vehicles. Alibaba, a world-renowned powerhouse retailer, owns no inventory. The world’s most popular media content company, Facebook, creates none of its own content. One of the newest and most popular forms of currency, Bitcoin, arguably holds no value.

 

The new consensus is that companies who build the quickest bridges from the consumer to the goods or services bring enormous value into the equation. In essence, a third-party company avoids paying any of the costs of providing the goods or services, but has the opportunity to capture a small percentage of the profits by inserting themselves as the middle man. Businesses that are unable to adjust and provide the same bridge to their products lose that percentage from their bottom line and must learn how to adapt to shifting consumer preferences and expectations. Investors still see restaurant investments as a hedge against the risk of these disappearing business models because ultimately, people still need to eat. The need to consume food is not going anywhere, but how, where, and why it is consumed is seeing a shift. We’re entering an operational evolution and the restaurant industry is no different. As new delivery systems attempt to bridge the gap between consumer couches and the dinner table, everyone has been pushed off an edge and they are all simply learning how to fly again. With all these changes occurring, what kind of shifts in trends can we expect to see in 2018? Based on an article from Restaurant Business Online, here are a few changes we can expect to watch unfold in 2018:

 

The Evolution of the Term “Restaurant”

A restaurant is defined as a “business establishment where meals or refreshments may be purchased”, but businesses are melding, models are changing, and footprints are reshaping in a way that is demanding new definitions. By today’s definition, a restaurant could encompass the typical quick service concepts and full service dine in concepts, while also including food kiosks, food trucks, the self-serve salad bar in a Whole Foods grocery store, and carry-out meals at Wawa gas stations. Are they all restaurants? Or will the term restaurant be redefined in an industry where there seems to be 10 new terms for every five new concepts that pop up each week?

 

A Bursting of the Meal-Kit Bubble

The various meal-kit concepts popping up worked to bridge the gap between consumers shopping at the grocery store and sitting down to finally eat their meal. Because it was in line with where consumer preferences have been heading, it has captured a lot of buzz. The intrigue has sparked a number of companies finding success in the space, but the small profit those companies are capitalizing on acting as middle man may be phased out as consumers discover how to bridge that gap themselves. There may still be space for the Meal-Kit business model with niche consumers, but the consensus is that we can expect some consolidation in the space.

 

Super Food Frenzy

Consumer preferences continue to trend towards more healthy, natural, and sustainable food offerings that allow for customization. Concepts continue to work towards a customer experience that allows guests to fully customize their offering while maintaining economies of scale in preparation and operations. Offering health conscious choices to supplement preconceived base options will allow concepts to add a little more to their bottom line by charging consumers a premium for those customizable upgrades to their food offerings. Consumers, hungry for customization and the satisfaction of being health conscious, will likely continue to pay those premiums.

 

Indulgence Among Consumers

On the other side of the coin, consumers want to treat themselves for being so health conscious. In an effort to balance the scales, you can also expect to see consumers paying premiums for regular indulgence in the instant gratification found in those carb-heavy, sugar loaded, unique out of the box craft food offerings. Sometimes even the health-conscious consumer wants to let loose and devour a maple brown sugar loaded donut with greasy bacon on top.

 

Enter Italian Fast Casual

A number of pizza based fast casual concepts have had recent success, but you can expect more pasta fast casual concepts to enter the sector. As operators and innovators work to discover the best economies of scale and sustainable business models around balancing fresh pasta with food costs and quickness of service, it can be expected that one or two pasta based fast casual concepts may begin to find significant success and lead the pack.

 

Shift in Leading Consumer Action

The use of technology will spur a learning curve amongst consumers. Some generations will be reluctant to evolve, but eventually will be forced into submission by necessity, while younger generations may find the learning curve refreshing as they begin to see the integration of the new technology they know so well into new lifestyle environments that have never found a use for the technology. Either way, operators will focus on teaching consumers how to use these new automated tools to enhance the customer experience, streamline ordering and checkout, while also helping to crack down on quality control of food product output. With successful implementation of new technology, restaurant operators may be able to cut down on labor costs, lost costs, and quality control, while actually improving the customer experience and engagement.

 

Beefing up IT

With new technology implementation comes new technology support. Operators may need to find a balance between improving profits by cutting costs with implementing these new technologies and maintaining secure systems by beefing up their IT at an added cost. This shift in expenses should still prove profitable overall, however, it will take some trial and error before figuring out the perfect recipe for cost percentages in the industry. Tech support costs will not only be necessary to maintain the new technology being implemented, but also in ensuring security and safety for their guest’s personal and sensitive information in a world where hackers are digitally lurking around every cyber corner.

 

Reset and Settle

Like many things, the restaurant industry is cyclical. There are always going to be ups and downs. Generally, when things in the space begin to slow, concepts will reset their strategies, settle into their unit growth, and look to take a breath while they optimize their existing operations to mitigate risk of slow times in preparation for their next growth spurt. Although the economy appears to be the strongest in years, some concepts continue to see decreases in sales and are adjusting their overall strategies accordingly. Concepts like BJ Brewhouse are taking the opportunity to perfect their operations at existing locations scaling back on development until they are ready again to go full steam ahead. Other concepts are being acquired at a time when their existing operations may be having challenges, but investors are still bullish on acquisitions in the space. It is likely you will see those concepts take a step back after an acquisition to assess process, adjust business models, and settle into their new cultures before heading into more aggressive expansion.

 

The Experiential Revolution

Consumers everywhere, not just in the restaurant sector, are looking for richer experiences from their retail providers. Malls are evolving; large department stores are shutting their doors and being backfilled by experiential tenants looking to draw crowds. Full service dine-in cinemas are taking the outdated “Dinner and a Movie” date and allowing guests to have both at the same time. Breweries and Wineries are backfilling large spaces with their ability to attract large groups of people offering them a venue to socialize with friends and a customized craft offering for their palate. Restaurants are the perfect compliment to these venues and concepts finding themselves as outparcels to such anchors may see a spike in guest traffic. The use of technology is freeing up the on-site labor to provide more unique and personable experiences to guests as well. You can expect more and more unique experiences on the horizon for 2018.

 

The Restaurant Industry will continue to be focus for investors and concepts that put a priority on changing with the times will be the ones to stick around for the long haul. Both consumer preferences and technology are evolving at exponential rates and what works today may very well fail tomorrow. That is why it is more important than ever to stay on your toes in the space. People may always need to eat, but they won’t always need to eat here or there. Whether you are an investor in restaurant assets or an operator of restaurant assets, we welcome the opportunity to help you stay informed on what is happening in the restaurant sector on a regular basis. If you are looking for more specific information or data regarding the restaurant industry, restaurant real estate, or strategy around all of the above, do not hesitate to reach out to us directly.

The Power of Will

The Power of Will

“Where there’s a will, there’s a way.”

This phrase, although some would call it cliché, points out that there is always a way, but you often times won’t find it without first having the will to find it.

Out of all the skills you can master, all the talents you can hone, and all of the muscles you can strengthen, your will power muscle is probably the most important. Without a strong will power muscle, all of your other skills or talents become mildly useless.

In order to make sure we are all on the same page, let’s define what will power is.

Will:

1. the faculty by which a person decides on and initiates action.

2. More control deliberately exerted to do something or to restrain one’s own impulses.

Ultimately, it is the actions we take that define the life in which we lead. It’s those actions that we will, which ultimately create our environment, our reality, and the core driving forces of our destiny.

We often forget, however, the other side of things. It’s also the actions we do not take which define our lives. It’s also the actions we don’t take that will create our reality and change the course of our destiny.

What sits at the crux of all action or inaction?

Will power.

Your life is going to happen whether you craft it yourself or just let it happen for you, but in order to craft it, you must have the will to change the future path you’re headed to the future path you envision. Then, you must use that will power to change your future possibilities through action in the present.

Will power must be used for action as well as inaction, whereby inaction ultimately means restraint. When you choose to go for a run when you’d rather sit around and eat junk food, you are using your willpower for action. When you refrain from indulging in your favorite kind of cookie offered for free, you are using your willpower for inaction.

With those thoughts in mind, I think a very simple way to view will power then is the ability to hold opposites.

When you have a certain goal in mind or a vision for the future, it can be clear the things you need to do or refrain from doing in order to attain that future, but for instant gratification purposes and the present moment, you may very likely desire to do the opposite.

Will power then is the art of holding opposites. The ability to feel a craving, desire, or pang in the present moment, but at the very same time, holding your commitment to make a different choice. Will power is your ability to make and keep promises to yourself.

Will power is that conversation you have with yourself when you set out to do something and you get to the hard part where you want to quit. Part of you says to just stop. Part of you rejects the changes you’re making and wants you to stay the same or slip back to the comfortable. The other part believes in your goal you set for yourself. The other part has a clear vision for the future possibility and wants you to attain it.

The question is:

Who is going to win?

The perpetual battle of your opposites.

Which part of you are you going to follow? The easier option is rarely the option that will yield your changed future.

You have to keep in mind that you are changing your destiny. You are changing the course of your life. It is not a single action that will change things. It’s instead the accumulation of many actions over a long period of time that will manifest that destiny. It’s forcing an action until it, not only becomes a habit that you do regularly, but also becomes part of the very essence that is you.

Do you think that happens overnight? Do you think it takes a single act of will power?

Will power, like many things, is developed through practice. Practice your will power and you will find that attaining your goals is much easier. You’ll find yourself manifesting the destiny you envision for your future.

And so I urge you to become comfortable with holding your opposites. Be aware of your opposites because they are your destiny changing in front of your eyes. Follow your opposites and make the choices that will lead you to the future possibility you wish to attain.

Strengthen your will power and you will strengthen your soul.

5 Important Characteristics of a Leader

5 Important Characteristics of a Leader

Outside of our investments, we all should dedicate some time to self-improvement. This article serves to help you grow in your leadership, whether that means with your investment portfolio, your new business initiative, or among your family and friends. Whether you’ve been elected to take the lead on a new project or you’re setting out to start an initiative of your own, you need to build a loyal team that will help you attain your goals.

Where do you start?

It doesn’t have to be complicated. Here are 5 simple words to help remind you how to build a culture, organize a system, and lead effectively:

Equalize

We all want to feel like we’re on a level playing field. That’s why dictatorships don’t work. Empower your team members to contribute in whichever way they can. This will give them a sense of ownership of the project and they will be more invested in its success. They will feel like part of a team as opposed to part of the work. Being the leader doesn’t mean giving orders, it means organizing action amongst the team that will yield the most efficient and desired results. It means showing; not telling. More specifically, showing someone a solution that they may not have seen for themselves, which isn’t necessarily unique to yourself as the leader. By empowering your team, you’re empowering them to lead. Eventually, they will likely show you a solution you would not have considered for yourself. When that happens, you know you’ve equalized.

Familiarize

Get to know your team on all levels. The more you and your team understand each other, the stronger your relationship, the better your communication, and the more cohesive you will work together. Understand each person’s personality; their strengths and weaknesses. Learn how different personalities can enhance one another and build a strong team. Understand your team from a work and efficiency stand point, then also implement fun team building activities so that you can also understand each person on a more personal level. Know their likes and dislikes, hobbies, habits, wants and needs. This is how you can come to understand their underlying motivations, justification for their actions, and how to appeal to them during project management. This is also how you build the personal relationship and turn colleagues into friends. In fact, while you’re familiarizing yourself with your team, also take the time to familiarize yourself with…yourself.

Through all of this familiarizing, you will create a strong, unified, and complimentary team ready to take on any project.

 

Organize

Systems can only work efficiently with organization. Most people work best in an organized environment. In an unorganized environment, no one has a clear idea of what’s getting done or how it’s getting done. Chaos ensues and business likely suffers. Put systems in place that organize processes and paint a clear picture for how to repeat desired results. These systems and processes don’t need to be rigid, but they must exist. Allow for criticism or constructive feedback on how to improve the processes or systems, but before that can happen, you must implement. Without systems, you will never scale. Without process, you might strike gold here or there, but you will never remain consistent.

 

Energize

Energy and emotions are contagious. Your employees will adopt whatever mood their peers are in and if you are going to be their leader, that will likely mean they will adopt whatever mood you are in. You have to become the source of positive energy everyone can feed off of. If you get excited about a new product launch, project, or initiative, so will your team members. Like Gretchen Rubin says: Act the way you want to feel. Even if you’re in a sour mood, put a smile on and walk confidently with purpose! Before you know it, everyone around you will be doing the same and you may even find your sour mood has dissipated.

 

Utilize

Don’t forget about the team you’ve built. You’ve built a great team, now release them onto the project! You may be the leader, but you’re only one person. Without delegation, you will become encumbered and overworked. Delegate the necessary work to the appropriate team members and let the systems you put in place do their jobs. You should contribute where necessary and step in as the leader when issues arise, but let the project take a life of its own so that you can focus on the bigger picture and organizing the next project.

 

Keep these few simple action items in the back of your mind and you will continue to be a successful leader. You will increase member engagement. You will increase efficiency. You will increase synergy. You will increase member satisfaction and loyalty. Most importantly, you and your team will accomplish whatever goals you set out to accomplish.

Checkers and Rally’s: Leveraging Modular Development

Checkers and Rally’s: Leveraging Modular Development

Checkers is one of the largest double drive thru chains in the United States. Having served hamburgers, hotdogs, French fries and milkshakes since 1986, Checkers today is headquartered in Tampa, Florida and operates over 850 locations in 29 states. Rally’s, a similar concept out of Louisville, Kentucky, was purchased by Checkers in 1999. Since the acquisition, Rally’s has began adopting design from Checkers and the two concepts look virtually identical aside from the name on their signs.

Despite construction costs ticking up and some concepts pulling back on development, Checkers is pushing forward hard. Checkers is slated for a future 30 new locations in the D.C. area; a future 30 new locations in Houston; With over 60 locations around its headquarters in Tampa, even franchisees local to Tampa Bay are still growing.

What is enabling the company to pursue such aggressive expansion? A big factor seems to be the modular design they are using for their new construction. Modular construction involves an off-site process where buildings are constructed under a controlled environment. Although the same codes and standards employed under traditional construction are adhered to throughout the process, the construction can be completed in half the time. The buildings are built in sections, which are then put together like Legos, on site. Not only can the buildings be built in half the time, but modular buildings are typically stronger than conventional construction since each portion of the building is built with its own structural integrity to withstand the stress of travel. The process also includes a number of other benefits including safe and secure storage of construction materials, reducing site disruption from weather or pedestrian traffic, and reduced waste for a more sustainable construction process. With the new prototype designed by Checkers, building each modular location ends up being 20% cheaper in addition to being much faster. With the nimble flexibility of popping a location up faster to avoid “dead rent” periods and a cheaper upfront capital injection for new locations, it is allowing Checkers corporate and franchisees the opportunity to expand into denser, higher rent, competitive markets where barriers to entry are high. Another model includes Checkers re-using shipping containers for constructing their new prototype, which is also both cost effective and sustainable.

As a real estate investor, this can be good news if you are eyeing Checkers as an investment, which tends to have a higher cap rate when compared to other concepts in the QSR sector. It can build confidence around an investment into Checkers as a tenant, who appears to be making shifts in technology to take advantage of the evolving landscape, while also adapting in ways that are allowing them to expand the concept and capture more market share. Like anything else, investors should also be aware of the risks associated with these deals. The Checkers prototype can go as small as an 800 square foot building, while the average QSR concept operates in 2,800 square feet. This can present a potential metric of risk to watch. The average unit sales volume for Checkers was around $970,000 in 2016; about the same volume as the average KFC ($999,500), Captain D’s ($1.04MM), and Arby’s ($1.07MM), but operating with a building square footage almost 2,000 square feet smaller than the other above referenced concepts. This can equate to a higher rent per square foot paid by Checkers; a high rent per square foot in markets that are generally lower income areas where the Checkers concept thrives.

Why is this a potential pressure point?

The average rent per square foot paid by QSR concepts was $35 per square foot in 2016, while Checkers, on average, was paying $47 per square foot in rent with an average square footage in 2016 of 1,800 SF. That rent per square foot could be inflated even further with their 800-1,000 SF prototype design. I have seen investors purchase new construction Checkers locations and after a few years, Checkers had decided to vacate. While Checkers may still be paying their rent obligation in these scenarios, the realization may set in that replacing $40-$50 PSF in rent will be impossible in a market where the average rents may be as low as $10-$15 per square foot gross due to the demographics and household income capacity. Now, with the new smaller footprint and an aggressive campaign to secure urban locations by getting competitive with rent, some new Checkers leases are approaching $80-$100 per square foot in rent. These very well may be slam dunk locations and great investments, but it cannot be argued that these deals also bring exposure to risk in rent sustainability. Pair that risk with the fact that Checkers is one of the few concepts that can develop on 0.25 acres of land, which does not provide many future opportunities for redevelopment, and the risk in these deals must be weighed accordingly.

All in all, there are positive things happening for Checkers as a concept as they remain bullish on further expansion. Investors looking to take a dive into the concept should look at every deal on a case by case basis. If you have a deal you are currently looking at and determining how to underwrite the deal to hedge against risk, but also remain aggressive in securing the asset for purchase, I am happy to walk through the details of the deal with you and help you determine your best strategic move. As always, I’m available to help wherever it makes the most sense for you.