Drive-Thrus: Its Affects on Retail Investments
As a follow up to our article, “Drive-Thrus: The Engine of QSR’s,” we felt it was important to create a part two of sorts to better describe how drive-thrus can impact your retail investment decisions. There’s no question, the rise of drive-thrus in the industry is transforming the retail investment landscape. However, while it presents many lucrative opportunities, it also poses challenges to consider for traditional retail investments. Let's explore this two-sided impact.
The Rise of the Drive-Thru Advantages
For investors in retail properties, drive-thrus can be a goldmine. Here's why:
Boosted Property Values: Properties equipped with well-designed drive-thrus are highly sought after by QSR tenants. This translates to higher rental rates for landlords. Studies suggest adding a drive-thru can increase a property's value by 10-20% and generate 10-15% higher sales volume for the tenant [1, 2]. We believe these numbers to be even higher.
Increased Demand: The surge in drive-thru usage creates an ever-increasing demand for existing retail spaces that have drive-thrus or can be easily modified to accommodate one. This often increases the demand in areas with limited developable land. Consequently, investors holding such properties are very likely to see increased interest from potential tenants.
Location, Location, Location: Drive-thru success hinges on convenience and easy access. Land near busy roads with high traffic volumes becomes prime real estate for QSRs. Investors with property in such locations will see a much greater return on investment.
Risk and Reward: Investors can expect a win-win for both risk and reward. The ability to lease the property will be a fairly easy task and even better, as briefly mentioned in property values, potential tenants will pay a substantial premium over traditional retail spaces. In many cases, we are seeing more than double average rental rates for drive thru locations.
The Potential Drawbacks for Drive-Thru Properties
While drive-thrus have many powerful advantages, retail investors will face challenges as well:
Approvals: Drive-thrus create a lot of traffic and present a certain appearance for a neighborhood. For this reason, townships and cities tend to be very strict in handing out these approvals. A zoning board’s requirements for a drive-thru can include a minimum lot size, minimum parking, specific plans for ingress and egress of the property, queuing lines hidden from street view, and general neighborhood consensus… just to name a few. This is in addition to possible restrictions dependent on food and drink establishments. Consequently, receiving approvals for a drive-thru can be daunting in both time and cost. This is a primary reason for a decreased supply of drive-thru locations which brings us to our next point.
Decreased Supply: Following the law of economics, increased demand means a decrease in supply. This is very much a double edged sword. The barrier to entry with many of these properties in more constrained markets can be quite the challenge when you’re the buyer. Returns will often be lower and options limited.
Foot Traffic Decline: The convenience of drive-thrus could lead to decreased foot traffic in nearby stores. This could negatively impact retail that rely on impulse purchases from customers browsing physical stores. For this reason, we are big fans of shopping centers with pad sites where the investor will receive both dynamics.
The Takeaway: A Market in Transition
The rise of drive-thrus presents a dynamic situation for retail investments. Here are some key takeaways for investors:
Understanding the Trends: Staying informed about the evolving retail landscape, particularly regarding drive-thru dominance, is crucial for making informed investment decisions.
Evaluating the Site: Site strategy becomes even more critical. Properties near busy roads with high visibility are likely to remain valuable and increase in value at a greater rate.
Understanding the Location: The retail landscape will continue to adapt. Success lies in understanding where these trends differ block-by-block, city-by-city, township-by-township, and creating a retail experience that caters to the demands. Would a Burger King in Brooklyn, NY require a drive-thru like a Burger King in Westbury, NY? Probably not, chances are the foot traffic is much higher in Brooklyn versus a more suburban Westbury. Even certain markets within Brooklyn will be different, pay close attention to the “feel” of the immediate area.
In conclusion, drive-thrus are a powerful asset for investors in retail locations, however one must weigh the aforementioned advantages and disadvantages to plan accordingly.
Sources:
[1] Quantum Real Estate Advisors: https://qreadvisors.com/reports/
[2] Quantum Real Estate Advisors: https://qreadvisors.com/reports/