The new anchors: In online shopping era, retail centers have increasingly turned to restaurants to boost traffic

Courtesy photos from John's Incredible Pizza

The IncrediBear poses at the Twister ride in John’s Incredible Pizza at the Boulevard mall Jan. 27, 2016. The pizza chain caters to families with arcade games, bowling, bumper cars and laser tag.

Goodbye Dillard’s, hello IncrediBear. More than 200,000 square feet of space at the Boulevard mall sat empty for years after Dillard’s shuttered its massive store in 2008, leaving an enormous hole in the central valley’s grandfather of retail centers.

Seven years later, California-based John’s Incredible Pizza — fronted by its IncrediBear mascot — leased more than a quarter of that space for the first local location of its brand of arcade and pizza entertainment.

As major bricks-and-mortar retailers struggle in the e-commerce era, restaurants serve as new anchors for shopping centers searching for ways to lure customers inclined to let Amazon do the walking. Most will not occupy the large space in a major center like John’s, but reliable quick-service and fast-casual restaurants still provide a reason for cars to stop.

“I do think you’re hitting on a trend,” said Adam Malan, director of brokerage with Logic Commercial Real Estate. “The fundamentals of prior cycles in real estate would have the anchors and junior anchors as the main draw to bring in customers, and then you’d have restaurants and supporting shop space and retailers that would occur around those anchors. That’s what drove traffic.

“With the struggles we’re seeing in anchors and junior anchors, often it’s a hot sexy new restaurant that comes to the pad that brings more people in. Restaurants are extremely active, probably the most active user group in retail.”

That activity follows customer demand: in 2015, the U.S. Census Bureau reported that restaurant sales surpassed grocery store sales for the first time in American history. Industry experts anticipate that gap will widen in future years, according to a 2016 report from real estate brokerage CBRE.

“We’re finding that a lot of our interest that we have in our retail properties really does stem from food and beverage,” said Jennifer Ott, CALV president and executive vice president for retail with ROI Commercial Real Estate. “We’re seeing a lot of service, experiential and entertainment as well.”

A prime restaurant location can fetch rent significantly above the local market average, Ott said.

“If I get a really nice 2,500-square-foot end cap that you can put a patio on, my first call will be to a restaurant tenant,” Ott said. “Odds are, I’ll be able to get $2.50 or $2.75 (per square foot.)”

Colliers International reported that for the second quarter of 2017 in Southern Nevada, the average asking rate for retail leasing was $1.36 per square foot.

The strength of the restaurant segment shows no sign of weakening either. CBRE reports that in 2015, food and beverage service sales bested their pre-recession peak by 37 percent. Restaurants have outperformed every other retail category since 2008, and represented a sector-leading 15 percent of core retail sales in 2015, narrowly outpacing grocery stores (14 percent) and department stores (12 percent).

National Restaurant Association research predicts restaurant spending to climb to $799 billion in 2017. That would be a 4.3 percent jump from 2016 for an industry that employs one out of every 10 employees in the U.S.

“There are a lot of the smaller centers going toward restaurants,” said Jay Heller, NAIOP president and principal of Heller Companies, a local real estate development firm. “I think it drives the traffic there more, and I think the rents too.”

Established brands such as Starbucks, Raising Cane’s, Cafe Rio, Five Guys and In-N-Out offer stability and a likelihood of paying higher rents for brokers, with tested appeal and significant corporate backing that minimizes the risk of failure. Beyond their gravity, the familiarity of those names plays particularly well in Southern Nevada.

“I don’t think that draw toward chains is unique, but it’s exceptionally strong here as it relates to other markets,” Ott said.

In particular, the Frappuccino shines brightly — Starbucks guarantees steady traffic through a shopping center seven days a week, particularly during the operating hours of most retailers. Malan represents Starbucks in Southern Nevada, where the coffee chain has added a dozen stores in the past two years and has another two dozen in various stages of leasing and development.

“Landing a user like that, that draw and the customer following they bring will probably do as much as any for our efforts in leasing junior big box and anchor vacancies,” Malan said. “Flat out — I have an email from a broker of another national tenant restaurant, ‘Is Starbucks there for sure? Because if they are, we’re interested.’ ”

Beyond coffee and burgers, Heller sees retail centers prioritizing experiences over goods, including the social aspect of dining that e-commerce cannot replace.

“Certainly there’s been a trend with restaurants being more of a lure for traffic to centers where they’re replacing the bricks-and-mortar traditional anchor stores,” Heller said. “In a broader sense, it’s more of a cause from internet and e-commerce. We’re even seeing a generation shift from millennials and the one-click ordering, from one-click to knock on the door. Retail centers are looking for that draw. Those are certain things that you can’t really get over the internet. If it’s an experience or a value — some type of experience: dining, entertainment or some type of a value store as an anchor or an attraction.”

Millennials eat out more frequently than previous generations, but spend less than their parents when they do. CBRE reports people from 25-34 years old spent an average of $2,921 per year on food outside the home as of 2016. That lags behind the 35-54 demographic, which shells out about 14 percent more on average because of increased disposable income.

As all age groups extend their spending on restaurants, some in the retail industry offer words of caution about riding the trend too far away from established fundamentals in growth. A recent report by the International Council of Shopping Centers titled “The Successful Integration of Food & Beverage Within Retail Real Estate” offers a moment of pause in heated restaurant expansion.

“More restaurants and bars do not necessarily equate to success for shopping centers, as this huge expansion in space allocation comes with opportunities (e.g., increased shopper traffic and sales) but also risks (e.g., oversupply),” the report reads. “But overall, F&B can now act as an anchor.”

That goes not just for centers attempting to backfill for departed K-Mart and Sports Authority stores, but for new developments as well. Heller points to smarter retail growth tied to nearby residential development, emphasizing that pre-leasing spaces often is needed to secure construction loans in the post-recession environment.

Quick-service or fast-food restaurants like Malan’s clients fit that need.

“A lot of your pre-leasing right now is coming from restaurants,” Malan said. “Those are the ones that are aggressive right now, that are willing to commit.”

The CBRE report concludes “for landlords, the key to success in widening restaurant offerings involves curating a unique and diverse offer that caters specifically to the intended customer base, while mitigating the risk of lower-credit and independent tenants through careful selection and openness to innovative lease structures.”