Restaurant Sector Doing Reasonably Well

It's a tough time for retail real estate.

It’s a tough time for retail real estate—considering that demand for the property type overall is sluggish, due to the hangover from the building boom in the 2000s, the persistently paltry pay increases that most Americans are receiving and the increasing fondness of consumers for buying things (some things, anyway) with their computers and, increasingly, their hand-held devices. As an indication of things to come, sales on Cyber Monday were predicted to top last year, though as of Monday night, conclusive data on online sales for the day wasn’t in.

Even so, there are some subsectors of retail that are doing better than the norm. One of those is restaurants, or in the parlance of the Census Bureau, eating and drinking establishments, which counts everything from fast-food eateries attached to gas stations along the Interstates to posh Michelin-starred places tucked in core urban or suburban areas. Most of them pay rent to some kind of retail landlord, and in some cases are an important part of a retail mix, especially for larger malls and lifestyle centers. So a strong restaurant sector is good for retail real estate.

According to the Census Bureau’s most recent retail sales numbers, eating and drinking places enjoyed a 5.5 percent increase in sales in October 2015 compared with the previous year. That’s not the top category for retail sales, but it’s among the stronger ones. More data on the sector came out on Monday: Driven by stronger same-store sales and a more optimistic outlook among restaurant operators, the National Restaurant Association’s Restaurant Performance posted a moderate gain in October. The index—a monthly composite index that tracks the health of the U.S. restaurant industry—came in 102.1 in October, up from 101.4 in September. Also, October represented the 32nd consecutive month in which the index stood above 100, which signifies expansion in key industry indicators.

One reason for the relative health of restaurants might be that there’s less bifurcation of the sector than many other retail sectors. Department stores, for example, are suffering as dollar stores and Walmart take business at one end, and upscale retailers take business at the other; there’s no similar dynamic in restaurants. Also, while hand-held devices might facilitate take-out orders, that isn’t much of a substitute for the experience of going out to a restaurant, especially as a social occasion. That’s true even for more modest establishments, because not all (or even most) social occasions in restaurants require an upscale setting. So as long as the economy remains relatively healthy, restaurants will probably benefit from it, and be a bright spot in retail space absorption.