Restaurateurs Gamble On Available Space

Kevin Kestner might be just as comfortable at the poker table as he is the dinner table.

Kestner, who along with his wife, Jennifer, owns Fayetteville’s Mellow Mushroom, began making plans to open the funky yet family-friendly pizzeria in 2006. That was near the height of Northwest Arkansas’ commercial real estate boom.

But by the time Kestner’s grand opening date approached  — Thanksgiving week 2008 — the market had taken a well-documented dip. Still, Kestner never buckled. In addition to an unwavering faith in his product and a love for his location, Kestner had invested too many playing chips to fold his Mellow Mushroom venture.

“We were pot-committed at that point,” Kestner said with a smile, using a poker term to explain his gamble on establishing a successful restaurant.

Fast-forward more than six months, and Kestner’s chip stack has grown considerably. According to the most recent figures available via the Fayetteville Advertising and Promotion Commission, a span covering December 2008 through April 2009, Mellow Mushroom ranks among Fayetteville’s top 20 sit-down restaurants in total sales.

“It’s been a fun ride,” Kestner said.

Edgar Montez, who owns the local string of La Huerta Mexican Restaurants, has enjoyed similar success. Montez is opening a new store in Springdale, in the building formerly occupied by Lone Star Steakhouse.

Just like in poker, though, losers mingle with the winners in the restaurant industry, and Northwest Arkansas is no exception. Proof lies in the handful of vacant restaurants currently stretching throughout Benton and Washington counties.

“What we had in the restaurant business was similar to what we had in the housing business and retail business and everything else,” said Kirk Elsass of Lindsey and Associates. “It was too much, too quick. There’s just not enough mouths out there to support all those places.”

This problem is especially true in the case of national-level chain restaurants. There are four former homes of national chain restaurants currently on the market in Northwest Arkansas, as well as the building that housed the regionally based Shorty Small’s.

Translation: Even in an industry that last year generated almost $300 million worth of sales in Fayetteville and Bentonville alone (sales totals for Springdale and Rogers are unavailable because those cities don’t collect a “hamburger” tax), betting on a restaurant has proved to be a dicey proposition for many in Northwest Arkansas.

“Our peak of development has allowed us to have a wide range of menu choices from national chains as well as regional franchisees that we would have been unable to experience without that high-growth, high-development period,” said Cindy Morse, the president of Equity Commercial Realty. “Now we’re experiencing the downside and a stabilization period.”

Morse said that’s particularly true in the case of the national chains.

“This is a franchisees market vs. a national market, and the national decision-making is quick,” Morse said. “They cut their costs quick in a situation like that.”

The evidence supporting Morse is overwhelming. Add the Shorty Small’s building to the four former national-chain stores, and there’s nearly 42,000 SF of restaurant space — at a total asking price of $9.21 million — available in Northwest Arkansas. That’s an average price of $219 per SF.

The total of available square feet jumps to more than 54,000 if the spaces formerly occupied by Chili’s in Springdale and Fuddruckers in Rogers are counted. Neither of those buildings are for sale, but both are available for lease at $18 per SF and $22 per SF, respectively.

Fayetteville, in particular, seems to have reached the saturation level to which Elsass referred. All but one of the buildings for sale are located in Fayetteville. That amounts to 31,257 SF and $6.63 million worth of space in that town.

Joe Fennel, the owner of Bordino’s and a local restaurateur since 1980, said the proliferation of eateries in Benton County is a big part of what has affected his business on Dickson Street and other Fayetteville spots. According to Streetsmart NWA, there were a total of 14,489 full-service restaurant seats in Benton County vs. 12,812 seats in Washington County at the end of the first quarter.

“The customer that used to drive to Fayetteville from Benton County doesn’t drive to Fayetteville except every once in a while,” Fennel said. “With so many choices in Rogers and Bentonville now, there’s not enough customers to fill all the seats on a regular basis from a repeat-business standpoint.”

Location appears to be a factor in Fayetteville, too. While the empty buildings that formerly housed Shorty Small’s, Ryan’s, O’Charley’s and Smokey Bones are visible from major thoroughfares, they aren’t easily accessible.

“Some of those buildings might just be two blocks off the beaten path,” Fennel said. “But unfortunately sometimes that’s all it takes.”

Other factors also figure into the equation. Darden Restaurants, which operates Olive Garden and Red Lobster among its line of six restaurants, closed its Smokey Bones line, leaving an available building in Fayetteville. Likewise, Chapter 11 reorganization at Ryan’s left two spaces empty in Northwest Arkansas, one in Fayetteville and one in Rogers.

Another common mistake made by some opening restaurants was even more elementary. Several local commercial agents said land and lease prices were simply too high during the boom period.

Both prices are key components of a successful formula when a restaurant is opened, and hitting the right numbers is critical.

“We way exceeded those numbers,” Morse said.

Elsass said lease space was “$20-plus” per SF at its peak, but has dropped in most cases since then. End-cap space might be an exception, another Realtor said, but he agreed that a 10 percent to 15 percent drop in lease rates generally is a fair assumption.

Regardless, a glut of vacant space is the result, and there’s no easy way to fill it, especially in times of a down economy. For starters, Morse and Fennel said prospective local owners often are hesitant to take on such big spaces, much of which is consumed by large-scale kitchens.

There’s also the aesthetic challenge potential owners face when moving into a space with a theme as specific as a Smokey Bones.

“That narrows down the concept of the restaurant you can put in there,” said Alan Cole of Colliers International.

Fennel said it’s also unlikely a national chain would move into such a space, especially ones that have been empty for an extended period of time. Many of Northwest Arkansas’ vacant restaurants have been so for a year or more.

“If the chains thought they were viable, they would’ve already picked them up,” Fennel said. “Plus, if they want to come in here, they’re probably going to want a new building and they’re going to put it right where they want it.”

Despite these woes the industry remains appealing to many. Total restaurant sales in Bentonville rose from about $55.3 million in 2004 to about $79.2 million in 2008, an increase of roughly 43 percent.

Total sales in Fayetteville jumped from about $175.6 to about $217.1 million during that same stretch, an increase of about 23 percent. This is true despite a drop of about 2 percent between 2006 and 2007, the only such drop since the Fayetteville Advertising and Promotion Commission began collecting a 1 percent city hotel-motel-restaurant tax in 1977, executive director Marilyn Heifner said.

Perhaps that’s why brokers believe the currently vacant space will one day be filled.

“If the price is right and the opportunity is right,” Cole said, “somebody’s going to take it.”

“I think it’ll come back as this area continues to have gradual growth,” Elsass added. “In fact, I think you’ll see those places get filled and some of those national chains come back within two years. It’ll probably just be a more conservative approach.”

A sound business approach, Morse agreed, is key.

“Good restaurant operators will always do well regardless of market conditions,” she said.

On that much, at least, owners like Fennel agree.

“It’s like anything,” Fennel said. “The strong survive and the weak go away.”

For his part, Kestner is thankful he followed his gut instincts. His relatively small — 120-seat, 4,000 SF — restaurant is thriving while others try merely to survive.

Kestner has plans to cover Mellow Mushroom’s 60-seat patio later this month, and enclose it during winter months. He’s even eyeing possible locations for a second store in Benton County.

“Sometimes I think we’ll just stick with one and grow the business here,” Kestner said, “but we just really believe in the product.”

It’s the same bet he’s already made once, and like any good poker player, he knows it’s all about the percentages.

“It was just a matter of us executing, I thought,” Kestner said. “It’s labor and food cost, and you better keep your eyes on the numbers. It’s pennies and seconds, and that’s what we do.”