A ‘Good’ QSR Site Is Defined by How People Actually Move

QSR brands have been rethinking their real estate requirements and seeking out unique and smaller footprints as well as redefining what makes a “good site.”

Pre-pandemic, a "good site" was largely a proxy conversation: traffic counts, co-tenancy, demographics in a ring, and static inputs, evaluated once, at signing, but post-pandemic, a good site is defined by how people actually move, Rafael Weiss, co-founder of Sytes CRE, a tenant demand–driven commercial real estate marketplace, told Modern Restaurant Management (MRM) magazine. 

“Daytime population versus residential population matters enormously now because work patterns permanently changed, a site that fed a 9-to-5 office crowd may be dead, while a suburban site near where those same people now live all day is printing money. Convenience of access got weighted way up: can you get in and out, is there a drive-thru or the ability to add one, does the pickup experience work. Morning-side-of-the-street versus evening-side matters for daypart-driven concepts in a way brokers used to hand-wave.”

But the bigger evolution, and the reason Sytes exists, Weiss notes is that a good site is one where demand and supply actually match on specifics.

There are a number of reasons unit sizes are getting smaller such as economic and structural and the structural part is the permanent part, Weiss pointed out. The square footage bands have compressed and the trade-off is explicit: brands will take fewer square feet in exchange for the right attributes including drive-thru capability, visibility, stacking depth, and the end cap, Sytes data suggests. 

Every Square Foot Needs to Earn Its Keep

“Every square foot has to earn its keep. If you can do the same volume in 2,200 feet that you used to do in 3,400, that's pure profit baby. But here's the thing most people aren't talking about, when your footprint shrinks it opens you up to new real estate that could have never previously been considered. If your proto can fit on a half acre site now…you might have just put your brand on one of the best pieces of real estate in that market.”

Some parts of the country are faring well such as the Sunbelt, according to Sytes data, however it’s more nuanced, Weiss noted, with tenants actively posting site requirements right now, before a single LOI gets signed and there being a standout area just out of the top five.

“Outside of the highest population states, the California's, Texas's, etc. The state with way more QSR requirements than it should have is Ohio. Yes, Ohio. Ohio is number six behind Florida, Texas, California, New York and Illinois in terms of requirements for new locations needed.”

Three things drive the hot markets including population inflow with income attached and households that spend; municipalities that will actually let you build or convert; and underrated: markets where the housing got built first, Weiss said. 

“Retail follows rooftops with a 24-to-36-month lag, so the suburban ring roads around Charlotte, Raleigh, Tampa, Austin, San Antonio, Boise, that's where demand is stacking up fastest in our data.”

The sleeper story is secondary Midwest and Southeast markets such as Columbus, Indianapolis, Huntsville, Greenville, he added. Where the math works because rents haven't run and the labor pool is stable. 

The Pacific Northwest and New England, outside of Massachusetts, are the weakest markets, according to Sytes data. The absolute worst: high-cost urban cores that haven't recovered daytime population, parts of downtown San Francisco, Chicago's Loop, pockets of Midtown. They're still showing weak demand.

More About Formula than Geography

However, it's really anywhere the tenant math breaks, Weiss added. More so less about geography than about a formula: rent growth that outran sales growth, plus labor cost, plus construction cost.

“We've seen brands pull criteria out of a market  and we see that in real time when campaigns go quiet or radius requirements shift. Ironically, some of the hottest Sun Belt submarkets are pricing themselves out too. When a pad site ground lease in a top Dallas or Nashville suburb needs $60+ per square foot to pencil for the landlord, a lot of restaurant P&Ls can't carry it and brands start posting criteria one ring further out.”

Restaurant operators planning expansion need to educate themselves about a number of factors affecting the real estate market, Weiss advised.

“The mechanics are simple. There are less retail spaces being built every year. e-commerce fear kept capital away for a decade even as the ‘retail apocalypse’narrative proved wrong for necessity and service-anchored centers.”

Meanwhile, obsolete supply got demolished or converted, he said, so you have 15-plus years of demand growth pressing against a supply base that's flat to shrinking. 

“National shopping center occupancy is at or near record highs and when a space comes back, landlords are getting multiple offers. That scarcity is what's driving valuations, cap rates on well-located centers are being defended by the durability of the income, not by cheap debt.”

Additionally, replacement cost is so far above in-place rents that you'd need rents 30-40 percent higher to justify ground-up development in most markets, Weiss said, adding that means the scarcity is durable.

“What restaurant operators need to internalize: the leverage flipped, and it's not flipping back soon. For 20 years, tenants were the scarce resource and landlords competed for you. Now second-generation restaurant space with a hood, a grease trap and a drive-thru (in good locations) is the scarcest asset class in retail. Practical implications: your TI packages are shrinking, your rent bumps are steeper, landlords will choose credit and concept fit over the highest rent and the good vanilla-box or second-gen space is trading before it ever hits a broker flyer.”

Speed and direct visibility into supply is now a competitive weapon, Weiss said.  Pad sites are rising in popularity because they are where three trends intersect: the drive thru economy; brand visibility; and landlord economics. 

“Pad ground leases and build-to-suits are the highest-value-per-foot play in a center, so landlords are actively carving pads out of parking fields they over-built in the 1990s.”

Other trends showing up in Sytes demand data include conversion appetite, brands writing criteria flexible enough to take former banks, former pharmacies, and former sit-down restaurants. 

“The brands that can adapt a prototype to second-gen space are outrunning the ones that need ground-up,” Weiss said. 

Finding the Right Opportunities

The biggest challenge for operators in identifying prime real estate is that the best sites never reach you, Weiss said.

“In a supply-scarce market, prime space trades through relationships before a flyer exists. If you're relying on listings, you're shopping the clearance rack and being told it's the showroom. How do you beat relationships? You need to make sure landlords, brokers and developers know that you are actively looking in a market and make it as easy as possible to do deal with you.”

There is also a matching problem because site selection still mostly runs on human intermediaries pattern-matching from memory, Weiss said. A tenant rep covering a market knows some fraction of the supply and some fraction of your requirements and the precision loss in the middle is where deals die.

“Operators don't have a way to broadcast demand without burning their brand publicly or tipping competitors. That's an inefficiency we've attacked directly, including letting brands run anonymous site searches until they're ready to reveal.”

A solution? Invert the model, Weiss suggests. 

“Post the demand, let supply compete for it. When a brand's criteria are visible to every landlord and developer holding matching product, the off-market problem, the matching problem, and the speed problem all compress at once. That's the direction the industry is heading whether it comes through us or not, because scarcity punishes inefficiency, and the old process is nothing but inefficiency.”