Ghost Kitchens – the Future of Restaurants?

Few industries have suffered as much from the pandemic as restaurants. With many people avoiding dining out, even when restaurants are allowed to keep dining rooms open, restaurants are closing left, right and center, with independent operators hit hardest. About 7.5% of mom-and-pop restaurants closed in 2020 and the number is likely to rise. Sports bars and other restaurants that sell an experience as much as food are obviously suffering more than holes in the walls which have often seen as much of their food go out on delivery as land in the dining room.

For some chefs, the answer is the so-called “ghost kitchen.”

What is a Ghost Kitchen?

 

Essentially, it’s a restaurant without a dining room or counter. The establishment has a professional kitchen, but only offers food on delivery, either employing their own delivery personnel or using a delivery service such as DoorDash.

Ghost kitchens would undoubtedly have shown up anyway, with delivery sales increasing 52% year-over-year. Some ghost kitchens are add-on brands to existing restaurants, helping out businesses that have traditionally struggled with delivery and takeout, while others are completely independent. However, they are definitely a growing sector.

The pandemic has created a large number of new virtual restaurants. For example, Sunset Squares Pizza delivers sourdough pizza Thursday through Monday in San Francisco, with a limited on demand menu and the ability to order more items ahead of time.

What Kind of Space Do Ghost Kitchens Need?

There are two kinds of ghost kitchens in terms of physical space:

1. Commissary: Chefs rent the amount of space they need in a shared kitchen space, generally alongside 10 to 20 other restaurants. Some of these commissaries are owned by the food delivery companies. Most ghost kitchens are in these spaces.
2. Back of house: This is when a chef starts a separate delivery-only business in the kitchen of their existing restaurant. This is often used as a way to experiment cheaply. Chipotle, however, has separate make lines in every location, one for the counter and dining room, and the other for digital orders.

Simon Property Group has been looking into ghost kitchens as a way to use space in malls that does not get good foot traffic and tends to have high turnover. In a few cases, independent ghost kitchen locations make sense. Wendy’s, for example, has set up virtual restaurants instead of full service locations in areas where delivery volumes are particularly high.

Temporarily, ghost kitchens are also springing up in trailers in underused parking lots. This model works well for now but is likely to disappear in the future. Successful parking lot ventures thus may be looking for real estate in the future.

Where do Ghost Kitchens Make Sense?

A ghost kitchen needs a high density of potential customers within a three to five mile radius, hence the growing trend of using underused space in malls. Most people aren’t willing to wait more than 30 to 40 minutes for a meal and longer delivery trips increase the risk of a fall off in quality and freshness.

Good communications are also important, as is enough parking for multiple delivery vehicles. For most startups, space in a multi-kitchen site is the best option. For the most part, virtual restaurants are surging in densely populated urban areas where delivery volume is high and where there has been a stronger shift away from in-person dining. However, the model is now beginning to move to smaller towns. For existing restaurants, a separate back of house ghost kitchen may make sense when the delivery volume and dine-in are similar.

What are the Benefits of a Ghost Kitchen?

For the restaurateur, the primary benefit of setting up a virtual restaurant rather than a dine-in location is the much lower cost. There is no need to rent or buy a brick and mortar location, no need to decorate a dining room, and fewer employees are needed. In the current situation, dining rooms are essentially unused overhead.

This also allows for experimentation in new brands and concepts. The shorter menu can also be an advantage when customers are in a hurry.

For landlords, renting out underperforming mall space to ghost kitchens can bring an advantage. If you have space that due to design tends to be missed by mall traffic, and thus seldom holds a tenant (for example, space that is down a side corridor that ends at an office building rather than the parking lot), renting it to a virtual restaurant can give you money you otherwise might not have obtained, even if it tends to be a lower ROI than another brick and mortar location.

Traditional industrial sites in denser suburban areas also might benefit from renting to ghost kitchens. Space that is too small for e-commerce fulfillment may be perfect for a smaller ghost kitchen, and several ghost kitchens can cluster together in a strip and share delivery services. The key is to ensure there is sufficient customer density within the key delivery range.

Are Ghost Kitchens the Future?

Virtual restaurants are undoubtedly here to stay. The delivery sector is large and growing, and customers are already somewhat used to the concept of there being restaurants they go to for eating in and those they generally get delivery from.

However, as the pandemic ends there will be a resurgence in demand for eating in. Pent up demand is likely to result in improved income for physical restaurant spaces and it is very likely that there will be a window of time when starting new restaurants will be highly advantageous.

Ghost kitchens may also become a route through which new restaurants are started, due to the much lower capital outlay. In California, it typically costs $275,000 to open a restaurant…and $20,000 for a ghost kitchen. This means that there is a perfect route to market that starts with a virtual restaurant and then expands to an actual restaurant if demand warrants it.

Another sector of the market that was growing heavily before the pandemic and is likely to grow again afterwards is food trucks. Some food truck operators are also renting ghost kitchens to do daily prep in a larger space than the truck allows. Industrial property managers should be looking into this growing sector even as things renormalize in the restaurant sector.

Essel specializes in helping industrial property developers manage environmental risk through acquisitions and operation. We have the expertise to guide you through the challenges and opportunities associated with properties in the industrial space.