Investor Confidence in Dining Out Fuels Sales of Restaurant Properties Across the US

Investor Confidence in Dining Out Fuels Sales of Restaurant Properties Across the US

Investor Confidence in Dining Out Fuels Sales of Restaurant Properties Across the US 300 200 Prakas & Co

Investors are once again showing interest in the restaurant industry as demand for sit-down dining experiences continues to improve across the country. Two recent restaurant portfolio deals, alongside Darden Restaurants’ acquisition of Ruth’s Chris Steak House, highlight this renewed investor confidence.

According to CoStar data, Necessity Retail REIT has sold 44 Bob Evans restaurants to Miami-based Orion Real Estate Group for $93 million. Orion Real Estate Group, known as the most active buyer of restaurant properties in the past five years, has shown a continued interest in such investments. In a separate deal, Four Corners Property Trust acquired 13 Darden-operated properties for $79.5 million.

Darden, the parent company of popular restaurant chains such as Olive Garden, LongHorn Steakhouse, and Cheddar’s Scratch Kitchen, has been optimistic about the return of dining out in the United States. The company recently demonstrated its confidence in sit-down restaurants by acquiring the upscale Ruth’s Chris chain for approximately $715 million in a deal that closed in June.

The restaurant industry faced multiple challenges even before the onset of the COVID-19 pandemic in early 2020. JLL’s 2023 report on the industry highlights challenges such as shifting consumer preferences towards drive-thrus, rising costs, labor shortages, and increased economic uncertainty due to higher interest rates.

These challenges impacted sales of restaurant properties, as indicated by CoStar data. The first half of this year saw single-tenant restaurant sales amounting to $455 million, significantly lower than the $996 million recorded last year and the $652 million from the same period in 2021. However, the Darden-Ruth’s Chris deal stands out as one of the largest restaurant sales this year, suggesting a growing willingness among consumers to dine out once again.

Consumer demand for dine-in experiences has been on the rise, surpassing grocery spending since March 2021, according to JLL. Their data shows that for every $100 spent on groceries, consumers now spend $130 on dining out. Although dine-in restaurant traffic in February was still 6.8% below the 2019 levels, there has been a positive trend with a 6.2% increase compared to the same period last year.

Four Corners’ recent acquisition aligns with its strategy of expanding its portfolio by adding more fine-dining establishments, including the Ruth’s Chris chain. Darden’s strong financial performance and its commitment to opening new eateries further support investor confidence in the restaurant industry. Rick Cardenas, President and CEO of Darden, emphasized that consumers still value dining out as an affordable luxury and continue to seek value in their spending choices.

While lingering high interest rates and the possibility of a future recession could potentially limit the speed of the industry’s recovery, Four Corners remains optimistic. The net-lease REIT reported rising sales for its largest restaurant tenants, benefiting from moderating labor and commodity costs. Olive Garden and LongHorn Steakhouse, both owned by Darden, saw same-store sales increase by 12% and 11% respectively in the first quarter.

Orion Real Estate Group’s acquisition of Bob Evans restaurants marks a return to portfolio purchasing for the company. CoStar data reveals that this deal comes after its previous major restaurant acquisition in 2021. Over the past five years, Orion has acquired approximately $280 million worth of restaurant properties. The 44 Bob Evans restaurant properties are spread across several states, and Necessity Retail’s most recent quarterly report states that the lease for these properties has 14 years remaining.

By strategically timing the deal, Necessity Retail aims to maximize value for its investors. The company remains focused on optimizing its portfolio and building a pipeline of similarly favorable dispositions, according to Michael Weil, CEO of Necessity Retail.

As investor confidence in the restaurant industry grows, these recent transactions reflect a positive outlook for the future of dining out in the United States.

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