By Jeff Tinsley, senior advisor, SVN | J. Beard Real Estate – Greater Houston
As we reach the end of the calendar year, it’s become clear that 2021 has been a year of transition. Many new trends are emerging from the pandemic year of 2020 with regard to retail real estate.
COVID-19-induced trends within shopping, dining and entertainment have given rise to a new generation of retailers to the Houston market. Many quick-service restaurants (QSRs) are looking to reduce store sizes for future locations and focus on streamlining their drive-thru, call in and pick-up order service.
Some restaurant concepts are instilling the use of “ghost kitchens” and are aggressively looking to lease second-generation spaces in order to take advantage of the growing takeout and delivery demands.
During the pandemic, one of the hardest-hit sectors was in the restaurant industry. Following months of minimized interaction between customers and proprietors due to dining room closures, we are now seeing a greater increase in pick-up and delivery requirements. Many restaurants are now using new technology and methods in terms of how service is offered, how food is prepared and how kitchen and service areas are designed.
Furthermore, many food and beverage (F&B) service companies no longer view a dining room as a “must have” component to be successful. Many established concepts have adapted to the new consumer trends and have successfully rolled out modified components of their new business models.
As dining rooms are being less commonly used, we have seen requirements changing to smaller retail footprints with more drive-thru stacking and reserved parking for
pick-up and delivery operations.
One of the most active retail tenant groups this year was restaurants in search of second-generation restaurant space. Established and startup restaurant concepts alike were looking to take advantage of opportunities created by last year’s pandemic. These newer streamlined concepts were looking for existing restaurant spaces that they could utilize as ghost kitchens.
Ghost kitchens offer a lower-risk, less-capital-intensive way to grow a restaurant business. Many ghost kitchen users share food prep and cooking space to reduce overhead costs, as well as to service multiple concepts. Ghost kitchens have evolved from professional food prep and cooking kitchens for offsite or delivery use to now include walk-up window and drive-thru services as options for their customers.
Because of this high demand for second-generation restaurant space, landlords have been able to hold tight to their quoted rents and offer minimal amounts of tenant improvement (TI) allowances on long-term leases. In many cases, concessions such as free rent have been offered as incentives over traditional TI
Among concepts that are expanding, the QSR industry has definitely seen numerous changes with regard to the size of spaces that users are pursuing. A variety of beverage-based users in the Houston market that offer coffee, tea and daiquiri concepts have also been actively searching for these smaller drive-thru- and pick-up-focused locations.
On the soft goods and services sides, Houston continues to see strong activity from retailers such as hair and nail salons, which are looking for larger and more modern facilities that will enhance their clients’ overall experience. These retail deals usually involve a complete demolition and rebuild of retail suites via higher TI allowances.
Pet daycare and grooming service companies have also been fairly active. The economics for these concepts are much like those of salon tenants in that they require more participation from landlords to get the deals finalized.
Overall, absorption of retail space has remained healthy in the Houston area, and vacancy rates across a number of submarkets have been steadily reduced by strong leasing activity.
— This article originally appeared in the November 2021 issue of Texas Real Estate Business magazine.