The past 24 months have been a whirlwind for the Casual Dining sector. The struggle and subsequent adaptation to the declining millennial appetite for this asset class has dramatically shifted the sector. Investors have been aware for some time now that main concepts in the Casual Dining space have been declining in traffic, sales volume, and unit growth primarily due to the millennial demographic choosing faster, healthier eateries over traditional national Casual Dining brands. Millennials make up 57 percent of the consumer demographic, and are dictating the future of the restaurant industry. The industry began to see the byproduct of this in a number of ways, including but not limited to: declining sales, store closures, halting concept development, bankrupt franchisees, and corporate portfolio sale leasebacks. However, restaurant brands have begun to combat these struggles and adapt accordingly. This article analyzes past key events, current and future adaptations, and the effect these factors have had on the market.
The Declining Backstory 
Before understanding the technologies that companies have now started utilizing in an attempt to revive their brand, it is important to understand what forces influenced these adaptations in the first place. The restaurants that took the biggest hit were concepts that were heavily franchised. IHOP and Applebee’s, owned by parent company Dine Brands Global, INC, were fully franchised operated, and their struggles have been highly publicized over the past 24 months. Many of these hardships, especially when it comes to Applebee’s, have been with large franchisees. With the declining same-store sales and inflated rents at locations across the nation, franchisees of both concepts are fighting to stay afloat. These struggles led to Applebee’s closing 99 locations in 2017 and nearly 80 in 2018 while IHOP closed 30+ in 2018.
Not long after these closures were announced, Dine Brands suffered another critical blow with Applebee’s second largest franchisee, RMH Franchise Corporation (160+ units prior to recent closings), filing for Chapter 11 bankruptcy. To summarize, RMH grew from zero to 160+ units in just three years by aggressively borrowing money and selling off real estate holdings to fund their expansion. The debt owed is wide and vast with over $68 million due to senior creditors, over $51 million to the top 30 unsecured creditors, and more than $14 million owed to Applebee’s International, according to reports released by Dine Brands.
RMH claimed Applebee’s corporate was responsible for their struggles due to required corporate mandates which cut into their bottom line. These initiatives, compounded on top of RMH’s store traffic declining for nine straight quarters and shrinking sales across the system, led to RMH’s inability to pay their franchise fees. Three weeks after the initial bankruptcy, Dine Brands Global filed a lawsuit claiming that restaurants operated by RMH should be turned over to Dine Brands, as those locations shouldn’t qualify as assets protected under Chapter 11. Their reason being that RMH neglected to pay their franchisee payments and therefore did not have a claim to the assets. In late August, the litigation resulted in a small victory for RMH, in which the Delaware state business court judge ruled in favor of RMH, allowing them to continue to operate their restaurants while they seek relief from debts. The two corporations will continue to battle it out in future court proceedings, as Applebee’s spokeswoman stated, “We will continue to take necessary measures to address anything that may negatively impact our brand and business.”
RMH was not the only major franchisee to drastically shake up the Applebee’s system last year, in fact, one of the original five Applebee’s franchisees exited the system. In Q4 of 2018, Applebee’s International & Louisiana Apple, LLC acquired selective operations from the Apple Gold Group, one of the original five Applebee’s franchisees operating approximately 100+ units throughout Oklahoma, Arkansas, Kentucky, North Carolina, and South Carolina. Applebee’s International assumed the sites in the Carolinas, with Louisiana Apple, LLC taking over the remaining states.
Iconic Casual Dining brands Chili’s and Denny’s also made dramatic shifts in their system in 2018 and early 2019. Denny’s is moving towards an “asset light” model and sold high volumes of corporate-owned diners to franchisees. When the transactions are finished, the percentage of franchised Denny’s will boost from 90 percent to between 95 and 97 percent. Immediately following, Denny’s corporate plans to further push franchisee expansion through new development opportunities, with 35 to 45 new locations set to develop in 2019, according to CoStar.
Chili’s stands as a medium between the franchisee and corporate models. With under five major franchisees, the vast majority of the Chili’s restaurants in the system are corporately operated by Brinker International Restaurants. Brinker had their struggles as well, with company-owned comparable restaurant sales decreasing 0.4 percent in the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017. In contrast, Chili’s U.S. franchise comparable restaurant sales fell 3.2 percent in the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017. Unlike Applebee’s, IHOP, and Denny’s, Brinker International Inc. owned high volumes of their real estate and still chose to conduct a series of corporate sale leasebacks to raise capital to combat their declining sales. The transactions seem to have been a success as Brinker International Inc. reported $458 million in proceeds from sale leaseback transactions. A majority of these sites were acquired by institutional trusts, with Four Corners Property Trust purchasing 143 sites and SunTrust Equity Funding acquiring 50 sites. Numerous additional sites were and are currently being marketed, and being sold to private companies and brokerage firm clients—opening the Chili’s market for years to come.
Technologies & New Concepts
Aside from sale leasebacks, what are Casual Dining brands doing to boost their sales amidst such a competitive consumer environment? The most critical adaptation brands have made so far is taking steps to expand their off-premise sales. Applebee’s was at the forefront of this initiative, as they launched “Carside to Go” about 15 years ago, which allows customers to order over the phone, and pick up from the comfort of their car. Today, this is primarily done through to-go orders and partnering with mobile delivery apps such as DoorDash, GrubHub, and UberEats. For example, IHOP has partnered with DoorDash in an attempt to boost their off-premise sales, and as a result, to-go comparable sales increased by 35 percent and to-go traffic increased by 26 percent in 2018, according to data by Nation’s Restaurant News. CoStar reports that the number of mobile orders placed at U.S. restaurants rose 50 percent in 2017 over the prior year, and Business Insider also predicted that the order-ahead segment would account for 10.7 percent of all quick-service restaurant sales by 2020. Not only does this result in more sales through reaching a more significant amount of customers, but research has also shown that customers who order by mobile, tablet, or phone tend to order ten percent more food.
This increased demand for off-premise sales has led to a new type of restaurant that has been coined “Ghost Restaurants” or “Virtual Restaurants.” These Ghost Restaurants often consist of just a kitchen with no room for in-dining seating. Green Summit Group out of New York was one of the pioneers to operate these so-called virtual kitchens that major restaurant brands are now adopting. The company offers delivery for Chinese cuisine, Italian cuisine, salads/sandwich/juice/burgers/grilled cheese, which is all ordered exclusively through Seamless and GrubHub delivery apps. Their founder notes that “a restaurant like Chipotle or Pret A Manager has to dedicate 75 percent of their space to seating, while 90 percent of their customers grab and go.”
Consequently, Casual Dining concepts are adopting the delivery services and fast-casual restaurants such as Chipotle are adopting the model entirely. This model provides an advantage for restaurant owners as they can cut labor costs and rent real estate for presumably cheaper rent – being that the restaurants don’t need to be in areas with heavy foot traffic. While Casual Dining restaurants still rely heavily on this, it will be interesting to see how the increased emphasis on off-premise sales drive the retail footprint of these concepts as we move forward.
Other concepts that Causal Dining brands are delivering to the market to attract Millennials:

• Instagram-worthy food
• Healthier food items
• Catering to all lifestyle diets (Vegetarian, Paleo, Vegan, Gluten-Free, etc…)
• Perfecting mobile apps
• Utilizing artificial intelligence
• New bar concepts
• Increasing the quality of food
• Faster payment methods
• Redesigning restaurant interior
•  Introducing communal seating

Effects on Real Estate 
The extreme paradigm shift away from the standard Casual Dining business model influenced the real estate market for these assets. Primarily, these effects could be seen in the transaction velocity, cap rate inflation, influx of sale leasebacks, and shifts in the franchisee system. Overall, the most pivotal takeaway is the cap rate inflation in the concepts. The negative connotation linked to the sector and concepts amongst investors increased the supply of properties on the market as the demand for the product types decreased. This counteraction causes investors to increase their cap rates accordingly to create yield that would be worth the risk of the buyer. In conjunction with these events, the Federal Reserve raised interest rates multiple times throughout 2018, further exacerbating the cap rate inflation due to investors needing to meet a certain spread between the rate in which they were borrowing and the rate of return they were receiving.
The news about franchisee struggles also enhanced investor hesitation to invest in these properties. Investors shifted their emphasis towards properties which reported store sales and had strong guarantees, either corporate or franchises with high unit volumes. Investors also had their guarantee’s changed when franchisees were bought out or went through bankruptcy – dramatically shifting the equity in their asset. Owners look to leverage out of these assets, either in fear of losing more equity through loss of guarantee strength or capitalizing on the new strength of guarantee.
The Coming Change
The Casual Dining space seems to be coming out of an era of struggles as concepts have begun to adapt and change their business models. Given the data provided in this article, it is reasonable to predict throughout this year there will be a heavier emphasis on real estate fundamentals, the strength of a guarantor, rent-to-sales ratio, and quarter by quarter reports of overall tenant strength. Transaction volume is still healthy for these concepts, as some investors continue to hedge their bets on a rebound – taking the high cap rates with long term leases while they can. Over the next 12 to 24 months, it will be vital to understanding how the emphasis on off-premise sales has affected the overall sales of concepts. If they report positive feedback and stores begin to show a positive year-over-year sales growth, investors predictably will be more willing to invest moving forward. Technology and new generations have always driven innovation and growth amongst a wide variety of economic sectors. We see these affects ripple through a substantial amount of product types in the single tenant net lease sector. There is always a period of adjustment, and the market takes time to adapt and settle. This year will be pivotal for the future of Casual Dining, as this is the year the industry will have the ability to see the effects these technological adaptions will have on the market.