Ghost kitchens are on the rise. It’s important to consider if your commercial real estate is ready for the coming transformation, as well as what is causing this new phenomenon. The impacts of this trend already is making waves in Colorado mountain towns and Denver.
Ghost kitchen/dark kitchen. Virtual – also called cloud or ghost – kitchens are stripped-down commercial cooking spaces with no dine-in option. The goal is to function as hubs for online delivery and catering orders. They circumvent the need for costly build outs 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 compete 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. A local restaurant owner couldn’t keep up with the takeout/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. There was ample parking for delivery drivers. The owner saved thousands on the initial cost of the real estate as well as ongoing savings from reduced staffing and lower taxes. The owner was definitely on to something as consumer demands for food delivery have changed rapidly and will continue to evolve.
Ski towns. Colorado ski towns are leading this trend for a couple reasons.
The first reason is the 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 sub from Subway as the price dynamics don’t work. This is driving restaurants to innovate in order to survive.
The second factor is the very high labor costs and 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 an hour (not a formal minimum wage, but market demands this). I recently saw a sign in Breckenridge for the chain Mattress King offering salaries between $20 and $30 an hour.
The third reason is mountain town food price points. With labor and real estate costs so high it is difficult to make it in the restaurant 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.
Denver and other dense urban markets will accelerate the trend. 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 since high-end restaurants can absorb the increases with slightly higher costs while lower price points also can 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 four primary impacts:
- Loss of tenants: With the new changes coming down the restaurant industry, many existing locations might not be feasible due to costs and structural changes. For example, takeout might be difficult due to parking shortages in certain locations. The ghost kitchen will accelerate the transformation and eliminate many players.
- Smaller footprint locations: Gone are the days of large restaurants like Ruby Tuesday or Chili’s. The larger footprints will be a relic of the past as more consumers migrate to takeout and delivery. The large overhead of 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 WeWork model for the food industry: A few companies already are 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. For example, three fast-food chains could go into shared space with common delivery drivers (like Grubhub, DoorDash, Uber Eats).
Summary. 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,” and it 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 seeing the beginning of the radical transformation coming. Commercial real estate owners will have to adapt rapidly to changing consumer demands so they don’t become ghosts of the past.