1. T
he restaurant industry is one of the most dynamic segments of the national retail landscape. In 2015
Arizona is poised to lead the charge with the National Restaurant Association predicting that Arizona will
top the nation in restaurant sales growth this year and for the next 10 years. The top five states for projected
restaurantsalesgrowthare:Arizona,Florida,NorthDakota,TexasandColorado.Arizonaisinthispositionbecause
of its projected population growth, improving long-term employment opportunities and relatively high disposable
income. Additionally, current lower gasoline prices are also giving consumers more expendable income.
While the restaurant industry is often (unfairly)
maligned for not providing higher wage jobs
communities typically desire, the industry is the second
largestprivatesectoremployerinthenationwith1in10
working Americans employed in the industry. The 2015
National Restaurant Association Forecast projects that
restaurant sales growth will accelerate representing the
6th consecutive year of inflation adjusted sales growth.
The restaurant industry is expected to hit $709 billion
in sales in 2015 with 1 million locations and 14 million
employees.Inparticular,fast-casualrestaurantconcepts,
characterized by higher quality, healthier food options
with counter service versus table service experienced a
sales increase of 11.0% in 2013. Compare this to fast-
food chains, which experienced sales growth of 3.5%.
While the forecasts paint an optimistic picture for the restaurant industry, there are still some challenges that must
be met, namely:
• Rising food costs: wholesale food prices increased 5% in 2015- the 5th consecutive annual increase.
• Increased competition for customers and labor as the industry continues its expansion mode.
• Regional variability in employment and disposable income means not all areas are recovering at the
same pace. In many parts of the country it is still a slow recovery coming out of the recession.
The restaurant industry and specific brands must continue to evolve in light of the increased competition. Some of
the trends shaping the restaurant industry are as follows:
• A move toward healthful, quality dining options, including:
• Locally sourced meats, seafood and produce.
• Environmental sustainability.
• Healthy kids’ options.
• Natural ingredients with minimal processing.
• Engaging the customer through increased promotion of brand and reputation online and via social
media.
Arizona Positioned to Continue Leading the Nation in Restaurant
Growth in 2015
Michael Laatsch • published in the March 2015 issue
Landlord Representation for World of Beer
2. • Targeting offerings (food, service, value) to meet the demands of the Millennial generation who are
more likely to view dining out as a “necessity” vs. a “luxury.”.
• Optimizing and reevaluating real estate footprints and occupancy costs.
Now that we know the restaurant industry as a whole
is poised for growth, how is this national trend
presenting itself for the restaurant industry in Tucson?
• First, there is a lot of activity from new concepts
andexpansionofexistingrestaurantsinthemarket.
Oftentheseusersarelookingforsecond-generation
restaurant space in order to minimize the upfront
investment; however, this space can be difficult
to find in good locations. What’s more, many
shopping centers have restrictive use provisions
that make it even more difficult to secure prime
locations for specific concepts. These restrictions
often leave only other, more costly, alternatives like
ground-up construction or building-out a retail
shell to accommodate a restaurant.
• Multiple-unit restaurant concepts tend to get established in Phoenix first and then consider a Tucson
expansion. Where there may be 10+ units in Phoenix, Tucson may get 3 to 4 new stores once the
management team is in place to run locations in both cities.
• Fast casual “pizza wars” are supplanting the “burger wars” of years past. Currently, pizza concepts are
leadingthemarket.Newplayersinthepizzasegmentinclude:Pieology,PionicPizza,PizzaStudio,MOD
Pizza. Generally, they are all looking for high-visibility real estate in +/- 2,000-3,500 SF. Someone must
have discovered there is high profit margin in dough, sauce and cheese!
• The downtown dining scene continues to emerge: 5 Points Market & Restaurant, Barrio Cuisine Native
American Bistro, Nook and Street Taco are some of the new restaurant offerings in Downtown Tucson.
And while many of the restaurant users I work with will not even consider downtown until they see how
the users already in place will fare, others are anxious to join this growing dining and entertainment
scene.
• Fast food and fast casual restaurants are starting to secure positions in future growth areas of metro
Tucson like the southeast corridor along Houghton Road and in Marana. For example, Chipotle and
Baggins are opening their first stores in Marana, while Panda Express and Dunkin Donuts have secured
locations in the Houghton Town Center.
• Many restaurants have recently made their Tucson debut. New restaurants to the market include Costa
Vida Fresh Mexican Grill, Blake’s Lotaburger, Reforma, Yard House, Longhorn Steakhouse, Cheddar’s
Casual Cafe and Tokyo Joes, among others.
As the restaurant industry continues its season of growth, both restaurant operators and potential restaurant
landlords face numerous variables that are unique to this niche. Things that may seem straightforward with a
traditional retail real estate transaction are anything but in the world of restaurants. With that in mind, here are a
few restaurant specific issues landlords, restaurant tenants, and/or restaurant owner/occupiers need to consider:
• Increased HVAC capacity: Most restaurants require one ton per 150 sq. ft. of space compared to a typical
retail ratio of one ton per 250 sq. ft.
Tenant Representation for Costa Vida
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• Waste/grease disposal: Grease interceptors represent a significant expense if they are not already
installed. For a multi-tenant project with the potential for more than one restaurant, a common grease
interceptor may be a more cost effective option.
• Locations: Make sure you understand the local traffic patterns, including parking. Also, know the nature
of a particular restaurant’s sales (i.e. are sales primarily derived from breakfast, lunch and/or dinner?
Some combination?). It’s imperative to identify a location with the right kind of sales drivers.
• Occupancy Cost: When evaluating occupancy costs, it is critical to have a healthy ratio of rent-to-sales
in order to be successful. An achievable sales forecast for each location should be prepared as the options
are considered.
• On Franchises: Franchise operators need to be prepared to show experience and assets and must be able
to guaranty the lease throughout the term.
These are just a handful of issues that restaurant tenants and landlords need to consider in order to ensure a
restaurant’s success. Each restaurant real estate opportunity needs to be closely examined for its own unique set of
characteristics and challenges.
Going forward, I anticipate Tucson will continue to follow the national growth trend and we will continue to see
new restaurants emerge—both local, chef-driven concepts as well as national chains. Those restaurants that do
not adapt to current consumer preferences or do not conduct the necessary due-diligence will struggle to keep
up and may eventually provide future real estate opportunities for those concepts that do adapt and succeed. In
the meantime, supply of second-generation restaurant space will be constrained and the competition for high-
visibility space will continue to be fierce.
Michael C. Laatsch is a brokerage professional in CBRE’s Tucson office. He specializes in the leasing and sale of retail
properties as well as retail and restaurant tenant representation. Michael has a particular interest in restaurant-related real
estateworkandhashelpedseveralnationalusersintheTucsonmarket,includingCostaVidaFreshMexicanGrill,Potbelly,
and World of Beers, among others. He has also worked with several local restaurant operators to help them reach their real
estate goals. Michael currently represents multiple restaurant clients looking to expand or start new ventures in the Tucson
Market.MichaelholdsanMBAfromtheUniversityofArizona’sEllerCollegeofManagement.HecanbereachedatMichael.
Laatsch@cbre.com