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December 3, 2018

Major mergers and acquisitions have been shaking things up in the fast food world, signaling change for real estate investors.

Fast-food chains are increasingly on the menu for private equity firms, a boon for real estate landlords operating in the space.

Inspire Brands, a holding company controlled by private equity firm Roark Capital, bought the drive-in chain Sonic in September for US$2.3 billion. Inspire already owned Arby’s and Buffalo Wild Wings.

Luxembourg-based JAB, which holds a collection of U.S.-based coffee chains, recently acquired Pret a Manger for just shy of US$2 billion.

The new backing means brands have greater access to capital and credit, says Naveen Jaggi, President of JLL’s retail brokerage in the Americas.

“This is good news for retail investors concerned about the longevity of their investments,” Jaggi says. “Consolidation, which leads to more scalability, usually turns into a better investment for the landlord.”

Read on for all the ways fast food consolidation will impact commercial real estate.

1. Longer leases

Brands backed by powerful parent companies have the capital to sign longer-term leases, and spend more tenant improvement dollars finishing out spaces.

This is because parent companies act essentially as guarantors for the brands they’ve acquired. The backing they provide to fast food brands that otherwise might not have consistent profit margins serves to reassure landlords that these tenants are reliable.

“Their buying power leads to higher margins for landlords,” Jaggi says. “It all adds up to more certainty in the market.”

2. Branding improvements

The power of private equity will give individual franchisees the resources to try out new models and iterations of their brand.

“Private equity provides a pool of resources to fund experimentation,” Jaggi says.

With this flexibility, brands can avoid becoming irrelevant as consumers’ tastes change.

“It makes sense for investors to look to engage with brands acquired by parent companies,” Jaggi says. “They’re going to be more successful because they have flexibility.”

3. City-specific design

Patrons increasingly demand “authentic” experiences, and fast food chains are responding by localizing elements of the customer experience, from menu items to design. A Starbucks in the French Quarter of New Orleans, for example, has an apothecary-style bar and a chandelier made of brass horns, a nod to the city’s rich jazz history.

Private equity-backed F&B brands will more often have the resources to make each location distinct, Jaggi says.

4. Well-balanced shopping centers

As fast food brands expand, landlords should still ensure that their shopping centers are balanced, and do not rely too heavily on F&B as the greatest proportion of gross leasable area.

“Restaurant patrons can only eat so much,” Jaggi says.

Click to read about whether the e-commerce tax ruling is a boon to brick and mortar retail.

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Naveen Jaggi

President of JLL’s retail brokerage in the Americas.

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