Research: Restaurant Sector Data Reflects Improvement (Opinion)

The focus of this article is the restaurant sector of the commercial real estate market in Benton and Washington counties.

Streetsmart NWA researches data pertaining to both competitive full-service and fast-food/buffet restaurants in the Northwest Arkansas area.

In Q1 2011, our research supported there were almost 31,500 competitive full-service restaurant seats and slightly more than 14,000 fast-food/buffet restaurant seats in the five major cities comprising the two-county area. These cities are Fayetteville, Springdale, Rogers, Bentonville and Siloam Springs.

Fayetteville has the largest number of full-service restaurant seats in the two-county area, followed by Rogers, Bentonville, Springdale and Siloam Springs. With respect to the number of fast food/buffet restaurant seats, Fayetteville again is first, followed by Springdale, Bentonville, Rogers and Siloam Springs.

The higher the number of people per restaurant seat, generally the better the situation for individual restaurant properties. Fayetteville, Rogers and Bentonville each reflect a high number of full-service restaurant seats in comparison to their population base. (See chart.)

For comparison purpose, in Q1 2011, based on the 2009 population estimate, our research supports that Little Rock reflected 9.6 people per full-service competitive restaurant seat. 

Despite significant competition in the restaurant sector in the two-county area, as evidenced by the high number of seats, overall conditions appear to have improved over the past year. Vacant restaurant properties have slowly been occupied. A few former national chain properties remain vacant; however, increased interest by potential new occupants is indicated.

Fayetteville and Bentonville each collect restaurant tax receipts while Rogers, Springdale and Siloam Springs do not. Fayetteville collects 2 percent on restaurant sales while Bentonville collects 1 percent. Quarterly year-over-year comparisons reflect that Fayetteville experienced a 4.2 percent increase in restaurant tax receipts between Q1 2010 and Q1 2011. This followed a 4.4 percent decline between Q1 2009 and Q1 2010.

Bentonville also experienced an increase in restaurant tax receipts between Q1 2010 and Q1 2011. The reported increase was 7.8 percent. This followed a slight decline of 0.54 percent between Q1 2009 and Q1 2010. Yearly comparisons between 2009 and 2010 also show improvement in restaurant tax receipts in Fayetteville and Bentonville.

Fayetteville experienced an increase in restaurant tax receipts in 2010 over 2009 of approximately 2 percent. The increase for the same time period in Bentonville was indicated to be 4.3 percent.

As demand in the restaurant sector improves, and vacancy declines, appreciation in property values will follow. This is true despite rent levels that are expected to remain rather flat until the economy improves and consumer spending increases.

RealtyRates.com reports a decrease in capitalization rates for the All Types – Restaurant category of 34 basis points between Q1 2010 and Q1 2011. Property value has an inverse relationship with the capitalization rate. The lower the rate, the higher the value and vice versa. This assumes net operating income remains constant.

There are risks for continued improvement in the restaurant sector, as well as for the overall retail market. These risks include increases in gasoline prices, and deferred or abandoned infrastructure investment as a result of government budget crisis. Retailers will likely be forced in the future to pay closer attention to linkages and connectivity.  

Tom Reed is a partner in Streetsmart NWA, which produces reports pertaining to the residential, multi-family, and commercial sectors of the real estate market. Company offices are located at 2804 Main Drive, Suite C, Fayetteville. The phone number is 479-75-9100.