With the failure of proposition HH, the Colorado legislature is on the hunt for tax…
“Ghost Kitchens” are on the rise? What are they anyway (no they are not haunted kitchens)? What is causing this new phenomenon? How will this impact real estate? My first experience with a “ghost kitchen” was in Breckenridge Colorado about three years ago where I financed one. After talking with the restaurant owner, I quickly realized he was on to something with radical changes coming down the pipe for the restaurant industry and in turn commercial real estate.
What is a ghost Kitchen/ Dark Kitchen?
Virtual—also called cloud or ghost—kitchens are stripped-down commercial cooking spaces with no dine-in option. Their goal is to function as hubs for online delivery and catering orders. They circumvent the need for costly buildouts in premium locations and help owners optimizes their space. Less prime real estate also means more space to accommodate delivery and catering vehicles that would otherwise jockey with customers for parking space. Ghost Kitchens are an ever-more-appealing prospect as the $17 billion U.S. online food delivery market climbs toward a projected $24 billion by 2023, according to data portal Statista.
I first encountered a Ghost Kitchen in Breckenridge Colorado. A local restaurant owner couldn’t keep up with the take out/delivery demands and decided to buy another space in a class C location that had a commercial kitchen. The kitchen had no dine in option so the location didn’t matter. The owner saved thousands on the initial cost of the real estate as well as ongoing savings from reduced staffing and lower taxes.
Why are ski towns leading this trend?
- Extreme Real estate costs: It is no surprise that markets like Aspen, Breckenridge, Vail, Steamboat and other ski towns are extremely expensive. Rental rates, sales prices, and high property taxes all have to be factored into the profitability of a restaurant. Take Aspen for example. All of the restaurants on main street are expensive. You can’t buy a 10-dollar sub from Subway as the price dynamics don’t work. This is driving restaurants to innovate in order to survive
- Very high Labor costs/ Labor shortages: Ski towns are notorious for high labor costs due to high cost of living and a limited labor pool. The Minimum wages paid in most ski towns is well over 20 dollars an hour (not a formal min wage, but market demands this). I recently saw a sign in Breckenridge for the chain Mattress King offering salaries between 20-30/hour.
- Food price points: With Labor and Real Estate costs so high it is difficult to make it in the industry unless you are at the higher price points and able to absorb the costs. The local sub shop is getting hammered as they can’t sell enough volume at the right price point in order to make the numbers work.
Extremely high labor costs and real estate costs along with consumer demand for certain price points is driving the industry to either adapt or get left behind. This trend is most profound on restaurants in the middle as high end restaurants can absorb the increases with slightly higher costs while lower price points can also somewhat absorb the costs with volume and efficiency. The structural changes within the restaurant industry will have profound long term impacts on real estate as the trend of ghost kitchens catches on in other markets.
What does this mean for commercial real estate?
Commercial real estate will be impacted by the structural changes within the industry. There are three primary impacts
- Smaller footprint locations: Gone are the days of large restaurants like Ruby Tuesday or Chiles. The larger footprints will be a relic of the past as more consumers migrate to takeout and delivery, the large overhead of both employees to staff these locations and the real estate costs will make large format restaurants obsolete.
- New demand for commercial kitchens in “B” locations: There will be increased demand for B locations. Not on main street but within a reasonable distance for delivery. These will not be C locations next to an autobody or traditional industrial use, they will be unique properties in more of an office/retail/mixed use setting. Demand for these spaces will soar to keep up with the changing preferences for delivery.
- A we work model for the food industry: A few companies are already starting a “wework” model for kitchens where a restaurant can rent commercial kitchen space by the day, hour, etc.. You will see corporate giants get into this space quickly and put in for example 3 fast food chains into shared space with common delivery drivers (like grubhub, doordash, ubereats).
Extremely high labor costs and real estate costs along with consumer demand for certain price points is driving the industry to either adapt or get left behind. The restaurant industry is just beginning to see the impacts of the “sharing economy”. The restaurant industry is starting to look like the lodging industry where smaller players are entering the market using platforms like Airbnb to become hoteliers while traditional hotels have had to adopt. The structural changes within the restaurant industry will have profound long-term impacts on real estate as the trend of ghost kitchens catches on in other markets. We are just seeing the beginning of the radical transformation coming down the pipe and commercial real estate along with the restaurant industry will have to adapt rapidly.