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One in four retail real estate deals in Philly area is a restaurant

Driven by demand, a younger clientele, and a challenged retail landscape, restaurants are powering many of the region's real estate deals.

A woman walks past Double Knot — a coffee shop on the ground floor with an unexpected Japanese rathskeller theme in the basement.
A woman walks past Double Knot — a coffee shop on the ground floor with an unexpected Japanese rathskeller theme in the basement.Read moreED HILLE / Staff Photographer

Driven by demand, a younger clientele, and a challenged retail landscape, restaurants are powering many of the region's real estate deals.

One in four retail real estate transactions these days is for a spot to eat and drink.

From trendy, chef-driven venues in Center City to outposts of national brands at suburban shopping centers and malls, restaurants have become go-to tenants, filling new spaces and former anchor stores and providing landlords with rents that are often higher and more reliable.

"Of over 600 retail transactions in the last 18 months, 24 percent are food and beverage," said Steven H. Gartner, managing director for retail services at CBRE Inc., the region's largest commercial real estate firm. "Many have been in new construction projects."

The Philadelphia picture mirrors a national trend: Since the recession ended, food and beverage (F&B) spending has become the fastest-growing retail sector, according to U.S. Commerce Department data. In August alone, sales nationwide were $55.3 billion, the data show.

Locally, consumer demand for better-quality and healthier food is propelling much of that growth, but so is the variety of the offerings.

"I've had great experiences here. It's less of a hit-and-miss with food," said Michael Nunes, 27, an electrical engineer from Washington in town last week on business.

"I can walk down the street, and there are three or four restaurants within a three-block radius that are all good," Nunes said as he dined on scallops, octopus, and aged New York Strip steak inside seven-month-old Double Knot on South 13th Street. "In D.C., you really have to read the reviews."

Industry observers say millennials such as Nunes, age 19 to 34, transformed the dining scene. They eat out more frequently than any other demographic.

"Millennials consider eating out a necessity, not a luxury, and they do so often. They prefer local restaurants over chains, which helps explain all the openings, especially in the gentrifying neighborhoods," said Joel Naroff, of Naroff Economic Advisors Inc.

Baby boomers "are moving into the city and more densely populated suburbs," he said, "and they generally have the disposable income and desire to eat out fairly often."

Last month, a CBRE report titled "Restaurants: Now Serving Retail Growth" highlighted trends in 18 U.S. cities. Among the reasons cited for the surge in restaurant real estate activity:

Postrecession, many entrepreneurs see retail F&B as a safe market for small-business expansion.

Recent high valuations of fast-casual chains (Shake Shack, Zoe's Kitchen) attract investors.

In the Philadelphia area, restaurants are "filling the holes left behind by struggling retailers like apparel or luxury-goods users," said Jacob Cooper, of commercial real estate agency MSC Retail.

"This activity is one of the main factors for increased retail rents across the city, as restaurants can simply afford to pay more rent than other traditional nonfood tenants," he said.

At some suburban malls, restaurants are the new anchors, as Macy's and Sears continue to close brick-and-mortar stores.

"The proportion of dining and entertainment is growing fairly dramatically as a percentage of total retail space in malls," said Joseph Coradino, CEO of mall owner Pennsylvania Real Estate Investment Trust.

Restaurants and entertainment comprise more than 15 percent of non-anchor space at PREIT malls, including Cherry Hill, Moorestown, and Plymouth Meeting. Fifteen percent is also what restaurants will cover at the Gallery at Market East as it morphs into Fashion Outlets Philadelphia.

"Restaurants do a great job of serving both the resident and the worker population, in addition to weekend evening tourists," said Lauren Gilchrist, of real estate services firm JLL's Philadelphia office.

"While retailers are continuing to reinvent themselves in order to combat the competition from e-commerce," she said, "Philly's reputation for an excellent dining scene continues to attract new restaurateurs and concepts."

"All of that is creating demand," said David Orkin, head of CBRE's restaurant practice for the Americas, launched this year to go after deals. The Big Three restaurateurs - Stephen Starr, Jose Garces, and Marc Vetri - raise the city's profile, he said.

Starr, who owns 19 restaurants locally and 13 elsewhere, has two more projects on the way after a brief slowdown while he focused on New York, Washington, and South Florida.

"Restaurants have been the catalyst for the renaissance in Center City," Starr said. "Restaurants are what brought people back downtown."

Starr said his real estate people tell him that conventional retail has become less important in a downtown environment: "Around the country, it's been replaced by the internet, and millennials have different ways of buying what they want."

The potential here is so great, however, that hometown retailer Urban Outfitters Inc. bought Vetri's restaurant group (except his fine-dining flagship on Spruce Street) for about $19 million, with initial plans to open Pizzeria Vetri spaces near its stores and other brands in the future.

Even restaurateurs are diversifying. Chef Michael Schulson and wife Nina Tinari-Schulson broke through the walls of Sampan in Midtown Village to open the much-buzzed-about Double Knot - a coffee shop on the ground floor with an unexpected Japanese rathskeller theme in the basement.

"They're actually feeding off each other," Schulson said. In October, the couple plan to open Harp & Crown on Sansom Street near 15th, a bar-restaurant, with a separate bar and two bowling lanes in the basement.

Restaurateur Chris Bisaillon and his partners at Bottleneck Management, a Midwest-based chain of bar-restaurants, had been looking for space in this market, "but one of the challenges was finding 8,000 square feet and high ceilings," he said.

So Bottleneck decided to join its Gaithersburg, Md., landlord, JBG Co., developer of the $100 million King of Prussia Town Center.

City Works, a relatively new Bottleneck brand, is being built from scratch with the requisite vaulted ceilings and a fall opening set in King of Prussia. Also on the Town Center roster are Fogo de Chão, b.good, Honeygrow, and Naf Naf Grill.

Independent restaurant concepts "help build leasing momentum and attract high-quality tenants," said Tom Sebastian, senior vice president of development at JBG. "We have seen this translate into consumer demand and other retailers wanting to be at a center with desirable restaurant and entertainment offerings."

Honeygrow moved into Bala Cynwyd Shopping Center 18 months ago, filling newly created space on City Avenue in front of a Lord & Taylor store. At nearby Wynnewood Shopping Center, Anthony's Coal Fired Pizza took over an old post office building last spring. Rockville, Md.-based Federal Realty Investment Trust is the landlord at both.

"With the right restaurant, it reduces costs to find replacement tenants. They have longevity," said Chris Weilminster, president of Federal's mixed-use division.

Just as important, he said, "they are bringing customers to my project by generating more trips for the co-tenants." 215-854-4184 @SuzParmley