Here s a look at today s hot restaurant markets, and the factors that contribute to their success.

SIX TRENDING CITIES Traditionally, commercial real estate investors measured restaurant performance prospects by the location s average household income, and extrapolating traffic counts. Today s market requires a more strategic approach. Successful restaurants are increasingly becoming a destination with a unique atmosphere, where a consumer can grab something in the most efficient way possible. An investor needs to take into account the neighborhood they are trying to serve, the surrounding competition, and if they can cater to both the daytime and nighttime crowd. Here s a look at today s hot restaurant markets, and the factors that contribute to their success. BY GARY CHOU SVP & SENIOR DIRECTOR, STNL GARY.CHOU@MATTHEWS.COM (310) 919-5827

Atlanta Atlanta -Sandy Springs -Roswell GA 5.7M 5.8M 1.5% Atlanta is Georgia s most populous city and the third largest metropolitan region in the Southeast. Buoyed by a booming job market and rapid Atlanta MSA development, independent restaurant owners have seen their businesses flourish throughout 2017. As evidence of the growth, Atlanta restaurant sales volume increased one percent in Q3 2017 compared to Q3 2016, according to Atlanta-based Net Financials. Atlanta restaurant owners anticipate that the positive momentum of 2017 will continue throughout 2018. Owners need that momentum not only to fatten their returns, but also to hedge the growing saturation within the restaurant sector. According to industry professionals, more than 650 new restaurants, from fast casual to fine dining, opened in Georgia last year, 80 percent of which were in the Metro Atlanta area. In contrast, only around 86 metro Atlanta restaurants closed in 2017 and Q1 2018. With rapid growth in Metro Atlanta, availability of commercial real estate is becoming an issue, particularly with restaurants. Site availability is back to 2007 levels, and competition for prime location real estate is running high for new independent and franchise restaurants. Restaurant revenues will need to meet or exceed those attained in 2007 to operate profitably, or the industry could reach a tipping point. Some positive signs for restaurant growth are the influx of out-of-state and in-state population, and the relocation of people chasing new job opportunities. The apartment component of mixed-use developments is a popular destination for these newbies. Many of these new residents dine out more than three times a week. In terms of fare, chefdriven restaurants are the darlings of retail developers across Metro Atlanta. Atlanta has approximately two years of continued job growth. The surplus of job seekers is expected to help buffer the rapid increase in the number of restaurant outlets. Additionally, the current wave of development is expected to drop off in 2018 as restaurant owners begin downsizing. chef driven going healthy redesigning interior delivery pop-up concepts

Los Angeles - Long Beach - Anaheim CA Los Angeles 13.3M 13.3M 0.2% For the third consecutive year, Los Angeles has been ranked as the most attractive commercial real estate market - not only in the United States, but the entire Western Hemisphere, according to the Los Angeles Business Journal. In addition, Los Angeles overtook New York City in 2017 as the top destination for overseas money, bringing in around $23 billion in foreign investments, as reported by the Association of Foreign Investors in Real Estate. As a result of this foreign investment explosion, Los Angeles, and particularly the downtown area, is undergoing a construction boom. Foreign investment is adding thousands of residences, construction jobs, shops and restaurants to the market. Chinese and Korean investors are major investment sources for new restaurants. The drivers of restaurant growth downtown are millennials. Los Angeles saw an 8.1 percent increase in millennials moving to the city from 2010 to 2015, according to RCLCO. These new Angelinos tend to eat out much more often than other demographic groups, and are willing to drive 45 minutes in Los Angeles traffic to get to the latest trendy restaurant. The restaurant market has responded accordingly, with new outlets flocking to neighborhoods in and around the Los Angeles downtown market. However, low vacancy rates and high operating costs are posing a problem for new and existing restaurants. Restaurant unit sales for 2018 are projected to be flat compared to 2017, potentially causing a financial squeeze for operators from multiple directions. Many restaurants are being forced out of business and are being replaced by others that are willing to pay higher rents for prime locations. With the shortage of locations, second generation restaurant space is becoming increasingly favorable and pre-leasing 18 to 24 months out is becoming an option. As Los Angeles restaurant goers gravitate toward more healthful fare, competition among fast food chains has also increased. Chains such as McDonald s, Burger King, Subway, and IHOP are all competing to offer the lowest-priced menu. For example, McDonald s has a $1, $2, and $3 menu, Burger King offers two Whoppers, French fries, and a drink for $5, Subway has $5 foot-longs, and kids eat for free at IHOP. Despite the challenges, Los Angeles continues to ride on a wave of strong economic growth. With a healthy stock market, low unemployment, and the potential that the new tax bill will put additional dollars in consumer pockets, restaurant owners and investors are bullish. ethnic concepts food trucks food halls online delivery services instagrammable atmosphere

Nashville 1.8M 1.9M 1.8% Nashville - Davidson - Murfreesboro - Franklin TN Nashville is one of the fastest growing cities in the country, and the restaurant industry has grown 16 to 17 percent year-overyear for the past five years. Since 2010, Nashville has added 490 restaurants for a total of +2,600 locations, which is half of Tennessee state s 5,300 restaurant count. The growth in Nashville s quick service restaurants (QSR) is alluring. Nashville had 2,887 QSR locations in 2016, and this number is projected to grow six percent from 2015 to 2020, according to The NPD Group. Many QSR restaurants are taking Nashville s food trends and incorporating them into national menus. For example, Arby s introduced Nashville Hot Fish, and KFC introduced Nashville Hot Chicken. Nashville has big plans for the future, with rosy prospects for restaurants. The city plans to open a giant food hall and music venue Downtown in 2020 that includes a restaurant complex showcasing dozens of regional chefs, restaurateurs, and entrepreneurs. It is expected to be a major culinary destination drawing locals and tourists alike. With all the new development, the Nashville market may become oversaturated. Some restaurant industry experts are bearish, noting too many restaurants and too few customers are the recipe for a struggling dining market. The restaurant count has grown every year since 2010 but dropped slightly in 2016 as a result of increased competition. But Nashville s restaurant growth is not limited to QSR. The number of new restaurants, retail, hotels, and residential complexes in downtown Nashville has skyrocketed. Dining communities are springing up all over the city, from chef-driven restaurants to trendy eateries. In 2017, 92 new restaurants opened, and according to Nashville s Convention and Visitors Corporation, 2018 is expected to bring 51 new restaurants to downtown Nashville. As evidence of Nashville s new status as an up-and-coming culinary scene, a number of Tennessee restaurants are gaining traction nationwide. In 2017, Nashville-based chains with three or more locations grew by two percent. Increased competition is not the only challenge for Nashville restaurants. Labor shortages are leading to growing labor costs, while rising property values and rental rates are squeezing operators. Restaurant closings in 2018 include longtime favorites, high-profile restaurants, and trendy newcomers. Nashville is a major tourist attraction, and that population keeps the restaurants busy. But fundamentally, the city needs more employment from non-restaurant businesses and an influx of in-state and out-of-state restaurant lovers to sustain its continued growth. food halls chef driven restaurants delivery services healthy local food regional flavors served nationwide

Austin -Round Rock TX Austin 2.0M 2.1M 2.7% As one of the top destinations in the country for job seekers, Austin is growing at a very healthy rate, surpassing two million people in 2016. The city has one of the highest percentage growth rates among major metropolitan areas in the United States: a 19.82 percent increase in population growth from 2010 to 2016. Austin s employment and economic growth is particularly strong in the tech sector. This is fueling a strong real estate market, with a marketing focus on making the city an attractive destination for young professionals and college graduates. In formulating their strategies, developers are targeting a millennial workforce and building workplaces to match evolving trends. New and existing restaurants are finding Austin to be a challenging environment, resulting in increased turnover rates. Rents, property taxes, and operating costs were all high in 2017. Triple net properties are paying rents as high as $28.78, according to CoStar. restaurants in Austin have remained relatively steady: 92 restaurants opened and 62 closed in 2017. The pace in 2018 is expected to be more conservative, with the opening of 22 more new restaurants. Restaurant landlords may need to come up with new strategies. Austin is experiencing high turnover rates, especially near the University of Texas, where restaurants are not financially strong enough to make it through school breaks. Even restaurants with favorable locations cannot survive if rent increases continue to outpace revenues. Restaurant mix is changing, too. In newly-gentrified areas like East Austin, many restaurants are changing fare and format to cater to millennial needs. Owners are closing once-popular concept restaurants and converting them to casual dining, pop-up restaurants, sandwich shops and the old Texas standby diners. These old-but-new restaurant formats are a good match for Austin s laid-back atmosphere. After a shaky 2016, Austin s restaurant market is expected to find its footing again in 2018. The supply and demand of pop-up restaurants sandwich shops Community Driven Restaurants diners culinary diversity

Chicago - Naperville - Elgin IL Chicago 9.5M 9.5M -0.1% With a metro population of 9.5 million people, Chicago is the third-most populous city in the United States. However, for the third year in a row, Chicago is also the only major metropolitan area in the nation that has shown signification population loss. Despite the influx of a number of large employers moving back to the Windy City, longer-term trends of an aging population, and an exodus of young residents seeking better opportunities elsewhere result in a net loss in population. Despite these trends, Chicago is in the midst of a restaurant boom. In 2016, Chicago saw a significant amount of highquality, first-rate restaurants open in the market, ultimately making 2016 the city s greatest dining year ever. Fueled by the success of other restaurants in the city, Chicago is now seeing other chefs and investors expand their business to the city at a rapid pace. In the summer of 2017 alone, 43 new and coming-soon restaurants opened up in Chicago. Whether Chicago s restaurant growth is sustainable is open to question. There is turbulence in the market, with the closing of a number of high-profile restaurants and the disappearance of more mom-and-pop eateries. As the restaurant market expands and everyone begins competing for the same dollar, there are fewer destination establishments, and restaurants are starting to compete with adjacent restaurant strips for business. Challenges in Chicago s restaurant sector are a reflection of the overall struggle in the market s retail sector. Many small retail businesses are going under as they try to compete with online retailers. As closures continue, chefs and owners see opportunities. As a result, real estate brokers are turning to restaurants and bars as a solution to fill retail vacancies in and around the city. Chicago s neighborhoods are changing, too. Apartment rents in many neighborhoods have increased to the point where millennials are moving outside of city neighborhoods to areas where they can afford to live. As the population shifts, more restaurants and bars open up in West Loop, River North, Ukrainian Village, Bridgeport and Logan Square. In Andersonville alone, there are 73 restaurants, cafes, and bars. Additionally, the craft beer industry has exploded - there are 65+ breweries within Chicago s borders and another 100+ in the suburbs. craft breweries chef-driven restaurants new neighborhoods retail products bars

Dallas - Fort Worth - Arlington TX Dallas 7.2M 7.3M 2% Dallas-Fort Worth is one of the country s economic powerhouses. Spurred by a growing economy and an increasing number of job opportunities, the area attracted an influx of domestic and international residents and gained 146,000 people in 2017. That growth has spurred investment, $5 billion in capital entered the market, fueling a large supply of new apartments in the pipeline. The Dallas-Fort Worth restaurant sector is struggling to keep pace. In 2016, Dallas-Fort Worth had a total of 14,965 restaurants, with around 6 percent of them being quick service restaurants (QSR). The region accounts for just under four percent of the total QSR market, a direct result of the area s population growth, business-friendly climate and absence of state tax. Primarily dominated by a mix of national players like McDonalds and Starbucks, Dallas-Fort Worth also has a strong performance of regional players like Whataburger. However, despite the cities love for burgers, new concepts and trends are entering the market to cater to an influx of millennial professionals and Gen-Xers who have relocated to Dallas. The restaurant world is changing as chefs and restaurateurs see the opportunity that Dallas-Fort Worth s new population provides. The most significant of these trends is fast-casual healthy food. Another strong trend is food halls as destinations in retail centers. Growth is expected to be strong in underserved markets such as Fort Worth and Lake Highlands, where a shortage of better quality restaurants presents opportunities. As might be expected in such a hot market, restaurant landlords are increasing rents. Consequently, industry experts predict an increased number of restaurant closings and turnovers, especially in oversaturated neighborhoods such as Plano, Frisco, The Colony and Deep Ellum. Another challenge for restaurant operators are online food delivery and catering services. Once a minor factor in the industry, these services are a favorite of millennials and are eating away at revenues in some neighborhoods. Overall, 2018 will likely be a shake-out year as Dallas-Fort Worth restaurants adapt to a changing landscape. California inspired Restaurants Healthy Food Concepts Food Halls moving online fast casual