Restaurants On The Brink?
The latest ingredients making up Atlanta's growing restaurant business may instead be a recipe for disaster.
1. TAKE ONE PART SQUARE FOOTAGE
“We are rapidly dangerously outstripping demand in town,” says Revel's George Banks (here with partner Kristi Rooks), one of the city's veteran retail real estate consultants. The numbers certainly show that. From 2008, the number of places to eat rose from 2,980 establishments to 3,332 by the end of 2015, according to the Georgia Restaurant Association. And this year, nearly 80 new restaurants are scheduled to debut, most of them ITP. It's not just pure restaurant buildings that are popping up. The multifamily mixed-use craze is adding plenty of street-level restaurant space throughout the city as well. “If you look at the number of square feet proposed for new restaurants just inside the city limits, we're going to rapidly build our way into a glut of restaurants,” George tells us.
2. ADD A TABLESPOON OF SLOWER RESTAURANT REVENUE GROWTH
It's not that people aren't spending money to eat out. But they're not lavishing dollars on restaurants as they were doing in previous years. According to restaurant accounting firm NetFinancials, total restaurant sales increased 2% in 2015 compared to the previous year, with a total of some $285M spent. Perhaps more troubling though, says NetFinancial's Robert Wagner, is how quickly that spending growth decelerated. At the start of 2015, restaurant revenues actually jumped 5.5%. But by Q2, that dropped like a hot plate grabbed with a bare hand to 1.6%. It got no better the rest of the year: Q3 was .7% and Q4 .8%, adding to the three slowest quarters NetFinancials has recorded in the six years it's tracked restaurant performance.
Things improved somewhat at the beginning of this year, with a 3.5% increase during Q1. “So I'm thinking maybe we absorbed all these [new] stores,” Robert tells us. Then the latest stats reversed course again, only climbing 1.8% for Q2. But the data became even more disturbing to Robert as he delved even further: 46% of the restaurants the firm surveyed for its study actually reported sales dropped from the previous year. “That's by far the worst and highest percentage of restaurants with negative sales comps since we started this survey,” he says.
3. ADD A DASH OF APARTMENT RENTS, ELECTION ANGST AND RESTAURATEURS PICKING BAD SITES
Georgia Restaurant Association's Karen Bremer has seen a few restaurant cycles: How in the halcyon days of the '80s, restaurants in the city on a Friday night were doing bang-up business. Then as the metro area sprawled, traffic became an issue, and workers went home to the 'burbs and stayed there, making Friday nights the slowest day of the week for city eateries. Now things are changing: People are moving back into the city, and bringing a desire to go out and eat. But, she notes, the growth of restaurants in Atlanta may be outpacing the growth and stability of the new housing stock. “We may have put the cart before the horse,” Karen says.
Atlanta's apartment rents aren't helping consumer spending on restaurants, either, both Karen and Robert say. Average rents inside I-285 for apartments are now at $1.74/SF. That's up 10 cents from a year ago, according to Haddow & Co. And most, if not all, of the new apartment towers cropping up within the city are asking at least $2/SF. Couple that with a population of mostly Millennial renters who already are spending at least 30% of their income on rents. And if they want to stay in the city, in new apartments, that percent could very well rise. That could easily eat into restaurant profits, experts say.
And finally, the presidential election is adding a hefty amount of uncertainty, which could be cooling spending. “I will have to say that I think there's a lot riding on this election and a lot riding on people's perceptions right now [whether] we will have continued economic prosperity,” Karen says.
For The Cheroff Group's Penelope Cheroff, it's not all doom and gloom. In fact, she doesn't see a bubble, just some neighborhoods that may be getting a little too crowded. If anything, she tells us, she's hoping for some fallout among restaurants, which would open up real estate for her pipeline of clients clamoring for intown space.
Is Atlanta's restaurant industry facing a popping bubble? Hear from other renowned experts at our Retail & Restaurant Roundup 7:30am, Thursday, Aug. 18, at the JW Marriott Atlanta Buckhead, including Master Chef Tom Catherall, Marcus & Millichap's Michael Fasano, Halpern Enterprises chairman Jack Halpern, The Loudermilk Cos' Robin Loudermilk and North American Properties' Ron Pfohl. Register here.