In a real estate market that’s as dynamic as today’s, staying informed about current trends and economic indicators is paramount. Key economic indicators like GDP growth, unemployment rates, and consumer confidence indexes should play a crucial role in shaping your investment decisions.
For instance, during periods of economic uncertainty, consumers may cut back on discretionary spending, affecting sectors like high-end restaurants, luxury retail, and automotive services, while bolstering the performance of discount retailers or quick-service restaurants. Recognizing these patterns can help you mitigate risks and identify new opportunities, providing you with a strategic advantage in a competitive marketplace.
Let’s consider a real-world example. Imagine you’re the owner of a fast-food franchise in a bustling city center. You’ve been noticing an increasing trend toward suburban living, spurred by the rise of remote work. This demographic shift could significantly affect the foot traffic your franchise relies on, and it’s worth considering relocating. For a franchisee that doesn’t have the capital to relocate, it may be time to explore the ghost kitchen model to tap into revenue unbound by the geography of the current location.
Timing considerations: Balancing long-term stability with the ability to capitalize on market opportunities
Striking a balance between seizing opportunities and maintaining long-term stability is challenging no matter where you got your MBA (or OTJ) degree from.
To master the timing aspect, it’s important to constantly assess the market conditions relative to specific sites. Let’s take an automotive service franchisee who operates a site in a rapidly gentrifying neighborhood. Property values are skyrocketing and zoning of your lot has just become more favorable to developers, presenting a potentially lucrative opportunity to sell. However, selling now could also mean losing out on future appreciation and disrupting your business operations. How do you decide what to do?
The decision hinges on several factors, including your investment goals, financial situation, market forecasts, and the performance of your franchise. Some questions to ask yourself:
- Could the proceeds from the sale be used to open a new location in a more advantageous area?
- Does a sale-leaseback, which unlocks trapped equity in the real estate without stunting business operations, make sense to explore?
- What are the tax implications of selling now versus later?
- Do you anticipate any major changes in your franchise’s operational requirements in the future, such as the need for more or less space, that might necessitate a property change?
- How might external factors, like changes in zoning laws or tax codes, influence the timing of your real estate decisions?
These are just a few questions franchise owners must grapple with when timing their real estate decisions.
Exit strategies: Planning for eventual retirement or business disposition
Just as a chess player anticipates their opponent’s moves, a savvy franchisee must think ahead to the endgame. Whether you own or lease your properties, having a well-planned exit strategy can help you navigate uncertain market conditions and align your decisions with your long-term investment goals.
For franchisees who own their real estate, consider implementing a sale-leaseback strategy, which allows a franchise owner to sell the property and then lease it back from the new owner; typically, the lease signed with the new owner is a triple-net (NNN) lease. With a well-structured lease, a franchise owner will have full operating control over the space and the freedom to sell the business to another operator once they’re prepared to exit.
A sale-leaseback can provide a significant cash infusion, freeing up capital for other investments, business expansion, or franchise improvements, driving further value to the business before an exit. While this strategy is a bit more complicated to a package sale of real estate and business, separating the two almost always makes a franchise owner significantly more money.
Franchise owners who lease their property can add value before an exit by negotiating more favorable lease terms or moving to a more advantageous location to drive revenue projections. However, these decisions require careful analysis of market conditions, future franchise performance, and potential relocation costs.
As the end of a lease approaches, you may ask yourself: Can I negotiate a lower rent given current market conditions? Would a different location provide better visibility or foot traffic? What are the costs associated with relocating, including potential business disruption, moving costs, and customer attrition?
Conclusion
In this rapidly evolving and often unpredictable market, these strategies are a necessity for franchise owners seeking to maximize returns and safeguard their investments. As we navigate these changing tides, let us remember to stay informed, be flexible, and plan ahead—the hallmarks of being successful not only in the world of franchising, but in life itself.
Jason Fefer is an Associate Director of Marcus & Millichap’s Net Leased Property Group on a large team alongside his partners Robert Narchi and Tyler Bindi. They structure sale-leasebacks and negotiate leases on behalf of some of the largest franchisees across all sectors including the restaurant, automotive, and retail space. He can be reached at 818-669-2388 or jason.fefer@marcusmillichap.com.