The National Restaurant Association projects restaurant sales to pass $1 trillion for the first time in history, with the sector expected to add 200,000 jobs this year to increase total employment to nearly 16 million people.
Arsh Mirmiran, Partner, Caves Valley Partners; Andrew Segall, Principal, Segall Group and Alex Smith, President and CEO, Atlas Restaurant Group agree that the local restaurant industry has returned to, if not eclipsed, pre-pandemic levels although rapidly escalating food prices, the continued shortage of front of house staff and the lack of new real estate projects to support expansion remain ongoing challenges. In addition, the volume of remote workers that have not fully returned to the traditional workplace continues to take a bite out of restaurant sales in Baltimore City.
Andrew Segall, Principal, Segall Group; Alex Smith, President and CEO, Atlas Restaurant Group; Arsh Mirmiran, Partner, Caves Valley Partners
App-driven ordering, Taylor Swift and remote working
Andrew Segall (Andrew) “We broker approximately three dozen restaurant deals each year but, recently, we have been the busiest with the fast-casual concept category. Made-to-order meals and a middle price point continue to resonate among consumers, and they are now in the habit of ordering with an app to either pick up their meals or have them delivered. The interior dining rooms of these types of restaurants have shrunk accordingly. Over the past four years, technology has evolved and ordering for off-premises consumption has become much more efficient. The old methods of calling the restaurant to place an order or driving up to a menu board while 10 cars wait behind, will diminish as app-driven ordering takes hold with customers.”
Arsh Mirmiran (Arsh) “Concerts were basically non-existent during the pandemic and restaurants returned to form slowly, particularly those that offered only inside dining options. It is amazing to me how expensive concerts have now become, which I learned when looking to purchase Taylor Swift tickets for my wife and daughters last year. But consumers sorely missed eating out and hearing live music and generally brushed off the higher costs to partake in both activities. It proves that people truly value the experience and are willing to pay market pricing. The pandemic closed too many restaurants but the more experienced operators with wherewithal made it through. There is a significant faction of people whose primary form of entertainment is going out to dinner with friends and family.”
Alex Smith (Alex) “Our group of restaurants returned to near normalcy in 2021 and sales continue to rise across the board. In fact, year-over-year sales have never been higher and most of our restaurants are booked two weeks in advance on weekends. The biggest issue we are facing is finding behind-the-scenes labor and replacing the veteran staff from the pre-pandemic era. Many servers left well-paid careers behind during the shutdown and never returned. Our alternative was to hire a younger workforce but sometimes they take time to train and develop. The lack of office workers working downtown also remains a concern with certain buildings in Harbor Point still only attracting about 10 percent of the workforce on any given day. Locally, restaurant health is very much location-dependent with certain concepts in the central business district still struggling. D.C. was thriving and now they are getting crushed because federal government workers have not yet fully returned.”
Shut-downs, riots & quick-service restaurants
Alex “We always placed a premium on al fresco dining and this became a greater point of emphasis post-pandemic because it resonates with our target audiences. The pandemic taught us to include language protecting us against future government-mandated shutdowns and moving to a percentage rent situation should similar circumstances arise.”
Arsh “Actually the same thing occurred after the Baltimore City riots with restaurants and office tenants asking for force majeure clauses to protect them. No one had thought about the need for riot language for many years. To help restaurants in our portfolio survive the lockdowns — particularly at Cross Street Market where consumers were unable to visit — we fully abated rents for approximately three to six months. We followed that up by reducing rents by 50 percent for several more months.”
Andrew “Quick-service restaurants accelerated their pick-up service to address consumer demand. This made these concepts more immune to the dining room closure mandates in many areas during the pandemic. Consumers have come to value fast-casual restaurants for their kitchens and not necessarily for the in-store dining experience.”
Challenges: Lack of space, rising costs
Alex “In addition to having difficulty finding front of house staff, rising food and materials costs is our biggest and on going challenge. The national cattle herd is the smallest since the 1950s. As a result, the price for premium-quality steak has never been so steep and, unfortunately, these increases are passed onto the customer. At some point, you reach a breaking point with the consumer and this is concerning. A typical hamburger at James Joyce Restaurant Irish Pub & Restaurant is $17 and five years ago this exact same meal cost $12.
Andrew “A significant problem is the lack of available product in the marketplace in which to place new restaurants. With precious little space added to inventory in recent years, many brokers and restaurants are acting like vultures to pounce on spaces as soon as they hit the market. In years past, new construction projects were the target for up to 50 percent of the deals we executed. The entitlement process has become exceedingly difficult and that is placing a wrench in new development plans. Another hidden challenge is the relative lack of liquor licenses in the surrounding counties which kills many deals.”
Arsh “Inflated construction costs, both labor and materials, are hampering, if not completely stalling new construction activity. It is difficult to pencil things out and make the numbers work in many cases. Caves Valley Partners is proceeding with two new retail buildings at Cross Keys but, without having a strong restaurant anchor in the Atlas Restaurant Group, and two other tenants close to lease execution at the time we released construction, we would not have speculatively developed this new part of the project.”
Baltimore City’s perception and renovation
Alex “It is still an uphill battle convincing national fine dining restaurants to open in Baltimore City, which is why we are proceeding with our own concepts here. When the convention industry was in full swing, we would be generating sales double to triple to what they are now. That has all but evaporated. It is critical to renovate the Convention Center and bring midweek convention traffic back to the city. Crime remains an issue, deterring regional traffic. Local leadership needs to take a more active role to diminish this trend and make people feel safe to visit the city. The work force also needs to come back to their office on a more regular basis.”
Arsh: “Baltimore is competing with the likes of Austin, Charlotte, Nashville, and other growing cities in the Sun Belt and the comparison is not favorable for tenants on most levels. Those areas are growing jobs and population faster and, in most cases, have more affluent areas. But there is tremendous hope for the future of Baltimore City with what is happening with the renovation of the Camden Yards Stadium complex and the redevelopment of Harborplace. There will be multiple opportunities for quality restaurants at both projects and the renovated baseball stadium will once again become a tourist draw. The restaurants will provide additional options to tourists in town to watch games, while also encouraging consumers living in the surrounding counties to visit the City.”