California’s Fast-Food Legacy & Retail Real Estate Boom: An In-Depth Market Analysis for 2024

QSR Overview

What do the classic BigMac, Orange Chicken, and CrunchWrap Supreme all have in common? They originated in California. Surprisingly, the health-focused state was the birthplace of most fast-food restaurants, particularly Los Angeles. The greater LA area is home to In-N-Out, Taco Bell, Panda Express, Hot Dog on a Stick, Wienerschnitzel, and more. Further afield, San Bernardino birthed McDonald’s, Jack-in-the-Box started in San Diego, and Del Taco in Yermo.

California is a prime destination for lucrative net lease investments due to its expansive size, robust demographics, substantial consumer spending, and thriving economy valued at $3.1 trillion. The state boasts over 37,000 quick service restaurants (QSRs), providing employment opportunities for a substantial workforce of 384,890 individuals.

Retail real estate in California is performing exceptionally well, with availability rates at record lows and retailers competing for quality space in centers that continue to draw traffic post-pandemic. Some chains have reported record-setting years and have committed to opening restaurant locations in new markets. For instance, Carl’s Jr recently entered the Florida market with its first location in South Florida. Jack-in-the-Box completed a record setting year in 2023, signing 123 new restaurant commitments across multiple new markets, and Del Taco signed 138 new commitments.

Recently, Del Taco dethroned Chick-fil-A as American’s best fast-food chain for 2024, with KFC placing second, and Chick-fil-A third, according to 10 Best Readers’ Choice Awards. 

Despite these successes, the QSR industry’s growth in California has faced challenges. Known for convenience and quick order fulfillment, drive-thrus have been a pivotal distribution method, especially in 2020 when indoor dining was limited. However, cities like Santa Clarita imposed a 45-day moratorium on drive-thru development due to traffic and pedestrian concerns. Similar debates are ongoing in Pasadena and Sacramento, where residents and councils debate the impact of drive-thrus on neighborhood walkability.

In addition to development challenges, California’s QSRs face potential wage hikes, with efforts to increase the pay floor for fast-food workers in July 2024. Earlier in 2024, a 3.5% hike raised the fast-food minimum wage to $20 per hour, established under AB 257, the Fast Recovery Act. As wages increase and economic uncertainties persist, chains are adjusting by hiking prices and introducing promotions to retain customers. Industry leaders predict these shifts may lead to closures among less competitive restaurants while top performers strive to maintain market share.

This report highlights three key markets— Sacramento, Los Angeles, and San Diego—reviewing retail performance and top QSR statistics.

Retail Market Performance – Sacramento

The Sacramento retail market has demonstrated robust performance over the past year, bolstered by steady demand despite challenges in space availability. Positive net absorption of 300,000 square feet reflects sustained interest from discount retailers, grocers, and experiential businesses buoyed by a population influx from the Bay Area.

However, co-tenancy restrictions and a preference for suburban locations by retailers have constrained leasing options, particularly for outparcel space and big-box space. The market’s overall availability rate has contracted to 6.6%, nearing historical lows, with suburban areas like Elk Grove and Roseville seeing rates drop to 6.3%, driven by demographic shifts and income levels.

Meanwhile, average asking rents have remained stable at $23.00/SF annually, influenced by limited construction activity and high availability compared to national averages.

Construction in Sacramento has been minimal over the past five years, with just 290,000 square feet currently underway, mainly build-to-suit projects. Despite these efforts, construction remains concentrated in suburban submarkets, reflecting retailers’ strategic preference for affluent areas. This limited supply outlook has implications for rent growth, expected to remain modest throughout 2024 as available spaces dwindle. Sales volume in the past year reached $558 million from 270 transactions, this is down significantly from previous highs but marked by strategic acquisitions, particularly in grocer-anchored centers, demonstrating investor confidence in targeted retail segments despite the broader market challenges.

Retail Market Performance – Los Angeles

While Los Angeles retail rents remain among the highest nationally, the market has experienced a 0.2% decrease in rent over the past year. Despite challenges in the current market economy, neighborhood centers show promise, with rent growth outpacing the market average at 0.7%. These centers are benefitting from post-pandemic shopping behavior shifts, particularly in suburban submarkets like Mid-Cities and Antelope Valley.

The construction pipeline remains relatively low, with only 1.4 million square feet under construction, representing a small fraction of the metro’s existing retail inventory. This square footage is represented largely in two projects: Los Angeles Premium Outlets in Carson and the redevelopment of West Harbor in San Pedro’s Ports O’Call Village.

The largest recent major shopping center delivery was the retail portion of the Hollywood Park mixed-use development, adding around 300,000 SF of retail space in Inglewood. In the past decade, inventory growth has been modest due to the amount of square feet demolished during this time—Developers built 15.1 million square feet but demolished 10.9 million square feet. The vacancy rate stands at 5.5%.

Transaction activity in the Los Angeles retail market has cooled as investors adapt to higher interest rates, with sales volume reaching $2.8B in the past 12 months. Despite this, STNL properties continue to attract high prices in suburban markets. Some upscale submarkets like Beverly hills and century city have seen lower price appreciation. Market prices have grown annually by 3.2% over the past five years, with submarkets like the San Fernando Valley and Antelope Valley experiencing the strongest demand due to their concentration of neighborhood centers.

Retail Market Performance – San Diego

San Diego’s retail market is experiencing one of its strongest periods in recent years, marked by a notable decrease in availability rates, reaching a near 15-year low at the end of Q2 2024. This trend has been consistent across various retail subtypes, underscoring robust leasing activity despite challenges. Small-box spaces, particularly those under 3,000 square feet, continue to drive leasing volumes. Notably, high-demand areas have seen availability rates under 2%, particularly for service-related and food-and-beverage businesses, which together accounted for nearly 45% of leasing volume over the past year. This reflects a strong demand for smaller spaces, mirroring the availability rates in single-tenant buildings.

In terms of construction, San Diego’s retail pipeline shows approximately 540,000 square feet under development, representing 0.4% of existing inventory. However, new inventory is unlikely to meet the demand for well-located brick-and-mortar spaces, as redevelopment efforts increasingly target mixed-use or residential projects due to rent levels not justifying retail costs. Notable redevelopment includes former retail sites like Sears in Chula Vista and Dixieline Lumer in Kearny Mesa, highlighting a shift towards adaptive reuse and mixed-use developments to optimize site potential.

Regarding rents, San Deigo has seen a 3.6% year-over-year increase, slightly below the mid-2023 peak growth of 5.1%. This growth continues to outpace the long-term average, driven by a tight retail environment with minimal supply-side pressure. Landlords maintain strong pricing power despite rising operating and labor costs, offering limited concessions such as one or two months of free rent and minimal built-out allowance, particularly for second-generation spaces. Looking ahead, rent growth is expected to remain robust, exceeding historical benchmarks in the coming quarters despite economic uncertainties and elevated interest rates.