Investors intent on purchasing commercial real estate that can realize steady returns during daunting economic times should keep an eye out for the rare sale of a property tenanted by a fast-food restaurant, experts say. Even better if it has a drive-through.
The pandemic barely affected fast-food restaurant sales, which dipped just 7 per cent during 2020 but fully recovered by mid-2021. Now sales are up 8 per cent, to an all-time high of $38.2-billion, according to figures provided by Statistics Canada to industry association Restaurants Canada.
“The same thing happened during the recession of 2008,” says Chris Elliott, Restaurant Canada’s senior economist. “It’s very hard to see the recession” on fast-food industry sales charts, says Mr. Elliott. “There’s barely a blip.”
McDonald’s, Burger King, A&W, Dairy Queen, all these fast-food companies have been in very high-growth mode. These tenants are very aggressive about looking for the next opportunity to expand their brand in the country.— David Longpre, principal at Dalon Equities Ltd.
And while today’s high inflation rate may tamp down other types of consumer spending, Restaurant Canada’s new forecast predicts that sales at “quick-serves” (in industry parlance) will continue their upwards march, rising 14 per cent through 2023.
“Quick-service restaurants are better positioned because of the average cheque size per customer to weather some of the uncertainty that’s happening out there,” says Mr. Elliott. “While people may postpone making a big-ticket purchase, they’re still looking for those small indulgences” enjoyed at these restaurants.
Bolstering Restaurant Canada’s sales growth prediction is a steady increase in the number of restaurants held by the country’s fast-food chains.
Yum! Brands, representing KFC, Pizza Hut and Taco Bell, among others, states in a 2020 company report that in Canada, it plans to add 200 more KFC stores to its clutch of 600; expand its 400 Pizza Huts to 500, and grow Taco Bell, which has the smallest footprint, into a 700-strong restaurant brand.
Tim Hortons, Canada’s largest fast-food chain with 3,802 stores, added 366 locations from 2019 to 2021. Despite a dip in stores in 2021, the number of Canadian Starbucks stores has now increased by 344, according to Starbuck Corporation, for a total of more than 1,400, the highest ever. Again, during the pandemic, McDonald’s Corporation, with 1,400 restaurants in Canada, released the growth strategy report, “Accelerate the Arches,” which set a $1.2-billion global budget for new stores.
“McDonald’s, Burger King, A&W, Dairy Queen, all these fast-food companies have been in very high-growth mode,” says developer David Longpre, who builds fast-food restaurants in Western Canada. “These tenants are very aggressive about looking for the next opportunity to expand their brand in the country.”
In the mid-1980s, Mr. Longpre’s Vancouver-based company Dalon Equities Ltd. started building large, grocery-anchored plazas, such as New Westminster’s Columbia Square and five others.
But after developing a Tim Hortons restaurant in Chilliwack, B.C., in 2015, the company decided to stick with the quick, profitable formula of purchasing land, building a nation-brand quick-service restaurant, and then selling the whole deal to an investor.
“These smaller deals, you’re in and finished almost within the same economic cycle,” says Mr. Longpre. “They’re leased from day one. They are very financeable because of the major brand involvement.”
Mr. Longpre says “the expanding tenant demand” for his buildings means “we might get four or five offers from various parties. There’s a fair amount of family money out there, and they’ll pay $2-million for a Tim Hortons.”
Vancouver-based corporate investor Strongman Group has never bid on one of the seven fast-food restaurants built by Dalon but, among the company’s real estate portfolio of 50 retail properties across Canada, there are several national-brand quick-service restaurants: three Tim Hortons; two Starbucks; two Dairy Queens; a Domino’s Pizza, and more.
“We really like this type of investment because national-brand restaurants are excellent tenants,” says Strongman Group president Nick Argue. “They spend a lot of money on [automation] innovation and keep track of menu trends. They’re absolute pros.”
“For an investor like ourselves, who wants the cash flow and likes to own property, a national-brand tenant offers certainty that they’re going to make good on payments,” Mr. Argue continues. “The corporate covenant [which guarantees lease payment should the franchisee fail to pay] of a Tim Hortons or a Starbucks – that’s very attractive from an investor point of view.”
Since big-brand quick-service restaurant real estate is often owned long-term by the franchisee or the corporation (McDonald’s, for example, is infamous for its real estate wealth, owning 45 per cent of the land under its 36,000 global restaurants) – it’s a rare occasion when investors can buy this type of property, says Curtis Leonhardt, first vice-president, investments at Marcus & Millichap’s Vancouver office.
And when they do own the ground under the Burger King or Dairy Queen, investors tend to hold on to it for decades, thanks to cap rates of 4 to 8 per cent and “virtually hands-off” triple net leases that typify national-brand rental contracts, says Mr. Leonhardt.
Fast-food chain restaurants with a drive-through are especially unlikely to come to market, says Mr. Leonhardt.
Even before the pandemic made them extra popular, drive-throughs generated between 50 and 70 per cent of fast-food sales, according to U.S. market research firm The NDP Group. And now, developers like Mr. Longpre can’t build them any more in many cities across Canada because of moratoriums, due to traffic congestion and pollution.
During the past two years, Marcus & Millichap, a North American-wide specialist in sales of this asset, has sold just 13 drive-through units in Western Canada. That number was “about the same” two years prior to that, he adds. National-brand quick-service drive-throughs “are difficult to source,” says Mr. Curtis. “They’re seldomly sold.”
The demand for drive-through property means sales can be transacted off-market. Investors, like Strongman Group’s Mr. Argue, keep such constant lookout for them that brokers know to call him about any potential sale. “We rely on brokers with whom we have close relationships, and we like off-market buying opportunities rather than properties publicly listed for sale,” says Mr. Argue.
Last month saw the rare sale of an A&W with a drive-through in Metro Vancouver’s city of Burnaby. Marcus & Millichap already knew “multiple parties” interested in bidding for it, so no listing was required. It sold last month for $9,650,000.
In this particular case, though, the property buyer won’t be counting on the long-term steady income of a business selling root beer and Mama Burgers.
The purchaser, who paid more than $3.5-million over the assessed value of the property, is taking the alternative route to successful investment in a drive-through restaurant.
“The buyer will look to develop,” says Mr. Curtis.