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Soaring food costs have spurred a boom in restaurant real estate, but analysts warn this trend may be unsustainable.
As soaring food costs make headlines, a deeper analysis reveals that it's not just the prices but also food spending that has escalated remarkably. According to a recent Wall Street Journal article, an unlikely sector is benefiting from this inflationary surge: the restaurant industry, which has become a new darling in real estate.
Traditionally viewed as risky tenants due to high failure rates, restaurants are now being approached as anchor tenants by landlords who are increasingly reliant on the foodservice sector. This shift is attributed to a combination of low unemployment, rising wages, and lifestyle changes, particularly among millennials who have increased their spending on dining out.
However, this boom may not be as promising as it appears. George Gammon suggests, in an episode of Rebel Capitalist, that the upsurge is the result of a bullwhip effect, fueled by government-induced economic distortions during 2020 and 2021. This artificial demand for dining out, while boosting restaurant leases to over 19% of all retail leases in 2022 – the highest since 2007 – raises questions about sustainability.
The data indicates that households are now allocating nearly 53% of their food budget to dining out, a striking increase from 2003. Yet, this trend may be a temporary reaction to stimuli, such as the distribution of stimulus checks, rather than a permanent shift in consumer behavior.
With personal anecdotes mirroring this pattern, the concern is that once the economic assistance wanes and the artificial demand recedes, the restaurant industry could face a significant downturn. If wages among the younger demographic decline or asset prices drop, the resulting decrease in spending power could lead to a domino effect impacting restaurants, landlords, and ultimately, the banking sector.
This precarious situation points to a potential correction in the future, where the temporary increase in demand, mistaken for a long-term trend, could reverse and lead to a contraction in the economy. As the industry grapples with this volatility, the implications of government policies and their effects on consumer spending and the broader economy remain a critical topic for observation.