Hospitality & Restaurant Industry Dynamics and Their Impact on CRE
Hospitality and Restaurant Industry Dynamics and Their Impact on Demand for Commercial and Industrial Real Estate
Commercial real estate has become more dependent on the hospitality & tourism industry, especially in FL, to obtain profits. There has been a role reversal to which industry brings in more customers, retail or restaurants, and food service is found to be having the greater impact. This new function of hospitality real estate has caused a drastic shift in the relationship it has across all commercial real estate asset classes, not just retail.
VISIT FLORIDA Statistics on Travel & Tourism released on 2/15/2023 by Gov. DeSantis’ office
- FL welcomed a record 137.6 million visitors in 2022; increase of 12.9% over 2021
- 2 million travelers between October – December 2022; 6% increase from Q4 2021
- 1 million domestic visitors in Q4 2022; 21 consecutive months of growth beginning in 2019
- 0 million overseas travelers in Q4 2022; increase of 35.5% from Q4 2021
- 1 million Canadian visitors during Q4 2022; an increase of 278% from Q4 2021.
- Air travelers accounted for 38% of visitors, compared to 41% in 2019; almost pre-pandemic levels
- Hotel room nights sold increased by nearly 13% in 2022 over 2021
- Occupancy is at 70.5% which rose by 9.4% from 2021; demand growth significantly exceeded the expansion of supply
- 0 million overseas travelers in 2022; increase of 73% over 2021 (pandemic and vaccine related)
- 29 new attractions across the state, 7 in the southern region
- 32 new hotels, 11 in the southern region
- 14 new restaurant concepts, 5 in the southern region
DANA YOUNG, VISIT FLORIDA PRESIDENT AND CEO. “Quarter after quarter, Florida continues to dominate the travel market and our competition, which could not be achieved without the hard work of our local tourism partners. Florida is breaking records despite overseas visitation remaining 28 percent lower than 2019 …At VISIT FLORIDA, we are committed to building on this growth to ensure Florida continues to be the No. 1 vacation destination in the world.”
The Hidden Dynamics of Hotels
Things were much more forthright in the hotel industry 50 years ago but in more recent years, due to major unforeseen changes industry-wide in overall ownership and operations structures, hotel property owners have a less straight-forward choice of how to manage their investment since they often no longer personally manage their own properties. In a case where the property owner does in fact run the day-to-day operations, the ownership calls all the shots and holds all the power, as well as all the HR and fiscal responsibilities.
However, bearing in mind each investors’ risk vs. reward tolerance level and rising costs due to inflation and other outside factors and market influencers, there have become more and more options as to how a hotel’s financial and operational management breakdown can be structured.
There are two major categories you can choose from should you opt not to personally own and operate your hotel. The alternatives are an owner leasing the hotel to another company under a landlord/tenant relationship structure or the owner can partner with a hotel/hospitality management company to operate the property under branding contracts.
When using a hospitality management company, the decision must be made on whether to run as an independent hotel concept or to run as a flagship hotel with a recognizable brand such as Marriott or Hilton, or even smaller local brand such as The Goodtime Hotel by Groot Hospitality (David Grutman). Deciding to move into the branded field again breaks down even further when having to deciding to either franchise the hotel or have the branded company run and manage the property as a corporate location. Bear in mind, 90% of the time when you see a Hilton logo that hotel is not owned by Hilton, it is most likely owned by a real estate investment company that pays Hilton for its name and the marketing, training and operating systems that come along with it.
The deeper into the operations of the hotel you dive, the more complex these branding and management contract relationships can be. When making these decisions, the hotel owner should always consider the long-term goals for the property and how that translates into the contracts and the overall operations costs. Franchise fees and the rules & regulations governing their locations can vary greatly from brand-to-brand and a property managed directly by the brand can have several layers of contracts involved, however as in the case of Hilton, Hilton Managed properties have far more tools and insights than Hilton offers to a franchised property, and this should be considered when projecting for the extended success of your project.
On the downside, the hotel owner gives up a great deal of power and control over the property when choosing to go with the one of the various options that do not include self-operating. Brand standards are strict and costly, management contracts tend to restrict an owner’s voice and authority over the hotel while a leased property completely removes the owner from having any say in the operation of the hotel at all. On the other hand, going independent is an often costly and risky proposition leaving the ownership to decide everything from operations and IT systems, to staffing, marketing and facilities maintenance, and if you are not experienced in hospitality, it can be a formidable and precarious undertaking.
Restaurant Industry Dynamics
Commercial real estate across all assets classes has an altered relationship to food service and hospitality real estate from what it used to be in the US as a whole, Florida, and South Florida more specifically, than back in the days when Walt Disney first brought his theme park to the central part of the state. Disney settled on Orlando as the perfect site, convinced by its year-round sunshine, easy road access and cheap land, since most of its was covered by swamps. In 1965, Walt Disney made an announcement that would forever alter the course of Orlando’s, and Florida’s, history.
From those days of early development and leading into the days of shopping malls, traditionally food service was dedicated to the food court area of malls and shopping centers, with limited selections and quick bites, but that is no longer the case today. These days, restaurants and hotels have become a central figure in the design of multi-use projects and neighborhood gentrification plans.
One study conducted by the International Council of Shopping Centers, focused on “The role of food service in the retail atmosphere”. In this study, it was found that people are eating out now more than ever and restaurants at all price points are seeing increased traffic. Also discovered was that food service as an industry has a halo effect on the neighboring stores, and as a result, said stores experience periods of growth and recession in direct correlation to the performance of the surrounding food service establishments. Because of this relationship, restaurants are now used as anchors in marketing commercial real estate projects as a means to attract other core tenants in place of big-box retail chains that have been used in the past.
According to the Broker List, by 2025, a worldwide look at demand for retail space dedicated to Food & Beverage indicates that it is expected to rise by 20% for the US, Canada and the UK and could exceed 30% in Asia.
The effect that food service has on CRE is on the rise, but do not forget to consider the layout of your project seeing as people are more likely to shop after dining if stores are easily accessible and close by. Studies have shown that the flow of retail space that is conducive to cross-shopping means the greater traffic the dining areas produce directly translates to more traffic to the adjoining shopping and gathering areas.
Also, putting an effort into the online presence of a brand and adapting to the current tendencies of their clientele is necessary in order to cater to customers’ wants and will dually have a positive effect on the local economy. Food service has seen a growth in health-oriented, chef-driven, and fast-casual dining concepts, as well as a pandemic-driven uptick in third-party food delivery services, further impacting the local economy and markets.
Fine Dining and Michelin Stars
In fine dining, a Michelin star is commonly seen as the ultimate certification that a restaurant meets a particular standard of excellence.
- One MICHELIN Star is awarded to restaurants using top quality ingredients, where dishes with distinct flavors are prepared to a consistently high standard.
- Two MICHELIN Stars are awarded when the personality and talent of the chef are evident in their expertly crafted dishes; their food is refined and inspired.
- Three MICHELIN Stars is the highest award, given for the superlative cooking of chefs at the peak of their profession; their cooking is elevated to an art form and some of their dishes are destined to become classics.
With each additional star awarded, restaurants often see an incremental increase in business. Master of the Michelin-star game Joël Robuchon, who holds the title of being awarded most Michelin stars in the world, said that “with one Michelin star, you get about 20 percent more business”. L’Atelier de Joël Robuchon’s location in the Miami Design District is the only restaurant in Florida to earn two stars. Named after the French word for workshop, L’Atelier Miami reflects the culinary concept of the late Chef Joël Robuchon (d. Aug 2018) and showcases the highest craftsmanship in even the simplest of dishes. As a result, Michelin stars attract diners willing to pay hundreds of dollars per person.
As we have already seen, a restaurant’s success can, and does, have a direct impact on the achievements of the surrounding retailers as well as the development of the nearby neighborhoods.
Miami has 12 Michelin Stars across 11 locations, including 8 new stars as of February 10, 2023:
Brasserie Laurel, Cuisine: French, Location: Miami WorldCenter, Chef: Michael Beltran
Fiola Miami, Cuisine: Italian, Location: Coral Gables, Chef: Fabio Trabocchi
Lido, Cuisine: Italian, Location: Four Seasons Hotel – The Surf Club
Lion & the Rambler, Cuisine: American, Location: Coral Gables, Chef: Michael Bolen
Rosie’s, Cuisine: American, Location: Overtown to Little River, Chefs: Akino and Jamila West
Tambourine Room, Cuisine: Contemporary, Location: Carillon Miami Wellness Resort (Miami Beach), Chefs: Tristan Brandt and Timo Steubing
The Gibson Room, Cuisine: American, Location: Coral Way, Chef: Michael Beltran
Walrus Rodeo, Cuisine: American, Location: Buena Vista, Chef: team behind Boia De
Supply Chain Dynamics
In the below diagrams, each component is in itself a value chain with a potential set of backward linkages. For example, the chain for Tours & Activities could involve equipment purchases or rentals for the activities, maintenance of the equipment at a local shop, hiring drivers and guides to run the activities and contracting with local operators for the offsite activities. Also in this example, a visitor would book a package that includes the room, a resort credit for the restaurant, and an onsite jet-ski rental, with air fare, car rental, an eco-tour with a local guide, and offsite dinner reservations booked separately.; alternatively, the visitor might book only tours and/or only air fare. Guests in the hotels spend money for activities, tours, food, beverages, souvenirs, the support services and ground transportation—all of which, of course, requires production, storage and delivery.
Hospitality real estate is a growing industry that will continue to be an advantageous business prospect. Keeping this information at the forefront of your mind when dealing in hospitality real estate transactions will help lend to a more prosperous relationship between hospitality & tourism brands, restaurants, and commercial real estate professionals.
About the author
Tracy Kohn, CCIM is a commercial real estate broker and partner with Kohn Commercial Real Estate, Inc. She has a passion for technology and innovation, and she is on a mission to create a commercial real estate platform using blockchain technology. She wants to share her journey and insights with you as she explores the Web3 space and learns how to leverage crypto and blockchain for her business.
Tracy has been using computers since the 1980s and built her own computer from scratch in 1999. She has worked with software & web developers and digital designers since the early 2000s. She also has a rich background in restaurant operations and large-scale event production, working with famous chefs, brands, and venues for over 25 years.
Tracy is not a financial advisor, nor in the tech industry, and is not a software developer. All statements made in this blog are her personal opinions and have been compiled through her own research and trial and error. It is strongly recommended that you do your own research and make sure you are comfortable with your decisions prior to taking action regarding your own Web3, crypto and blockchain journey.
Tracy is excited to be one of the pioneers in the commercial real estate space moving into the future. She aims to provide a complete digital and physical brokerage experience that allows for the smooth and transparent connection and completion of real estate transactions across the world.