Restaurants surge ahead in the construction market taking advantage of prime locations.
The construction market has seen a major surge in the Chicago area recently with McGraw Hill reporting in March that Chicago-area commercial and residential contracts are up 19.3 percent from one year earlier. One of the main drivers of this activity has been the booming restaurant industry.
As many traditional retailers still struggle to gain a foothold in a changing market, the restaurant sector has taken advantage of favorable rental rates and an abundance of prime locations. The main reason is that the restaurant industry does not face one of the major hurdles brick-and-mortar retailers are still struggling to climb — competition from online retailers.
Consumers feel more confident today logging on from home and buying everything from books to diapers online. According to market research firm Forrester, e-commerce generated $231 billion in 2012 and is expected to increase 13 percent to $262 billion in 2013. The growth of e-commerce is expected to outpace the growth of brick-and-mortar stores in the next five years.
There is very little consumers can't find online to meet their needs — unless, of course, they are looking for an experience. This is where restaurants still stand out. Whether it is a businessman looking for a quick bite or a family going out for a nice, sit-down dinner, restaurants still provide a service that can't be duplicated digitally or outsourced to a central hub in a foreign country.
As a result, the sector has been flexing its muscle and restaurateurs of all product types, from national chains and fast food giants to high-end restaurants and new fast-casual concepts, are making aggressive moves into new locations.
Over the past decade, many restaurant concepts opted to open new construction locations in outer-ring suburbs to build brand recognition, where construction costs were low and rooftops were exploding. After the housing crash, many of these locations no longer made sense.
Now, the focus is on urban infill locations, chasing density and foot traffic. Sometimes, construction costs can be two or three times what they would be in a newer suburb, but restaurateurs, like Noodles & Company, which, in pre-housing crash days, mainly existed in suburban locations, are betting increased sales will more than make up for the cost.
A high-profile example of this trend can be seen in Olive Garden's decision to build its first location in Chicago's city limits. In the past, its owners wouldn't have wanted to pay high restaurant development costs to compete with the neighborhood Italian restaurants that seem ubiquitous in a city like Chicago. But as the trend is paying off for other national chains, Olive Garden is testing the waters too.
The urban infill market can be very lucrative, but restaurant owners should also be aware of its pitfalls. In Chicago, for example, many restaurants are having trouble finding space that can support their needs. Most of the prime commercial locations are set up for retail, not restaurants.
Keep in mind, most restaurant conversion projects require some heavy lifting in the build-out phase, including such efforts as the installation of black iron duct to handle kitchen exhaust, more potent electrical equipment to accommodate for power and a larger gas service to accommodate a cook line. HVAC systems must also be properly engineered, as heat created from the kitchen can stifle the rest of the dining space if not properly regulated.
The lack of space, however, hasn't stopped restaurant activity. Instead, it's forced smart restaurateurs to align themselves with experienced construction firms that specialize in working in high-density areas and restaurant conversions. Construction costs may be high, but so are the potential returns, making it a good time to be a restaurateur.
— Chuck Taylor is the director of operations for Lemont, Ill.-based Englewood Construction. He is responsible for managing the business development efforts and client relations for the company. Taylor is also the co-author of the firm's blog, hardhatchat.com.