Insight into the CRE Coffee Shop Market

Overview

For years, the coffee shop market has been dominated by three major brands: Starbucks, Dunkin’, and Tim Hortons. However, significant shifts in the landscape have emerged post-pandemic, particularly with the rise of drive-thru coffee shops. Factors such as safety, convenience, cost-efficiency, and changing consumer habits have driven this trend. As restrictions eased, consumers increasingly opted for drive-thru services, favoring local, independent shops over large chains.

Emerging brands like Dutch Bros, Scooter’s Coffee, and Biggby Coffee have seen a substantial increase in sales, reflecting a broader shift in consumer behavior that continues to shape the market.

Marketing Dynamics

When interest rates reached historic lows in 2022, cap rates for these niche properties dropped accordingly and have remained exceptionally low. However, in recent years, cap rates have risen, leading to a decline in the market value of these assets. The table below captures the average cap rates for five coffee tenants, specifically in single-tenant, stand-alone properties recorded in CoStar, demonstrating this upward trend.

Development Trends

Despite coffee consumption reaching a 20-year high, there are concerns about overdevelopment in the coffee shop sector. Smaller establishments are capitalizing on the economic challenges faced by larger chains, such as Starbucks and Dunkin’, which have struggled to maintain their market positions. Brands like Dutch Bros and 7 Brew are expanding rapidly, supported by public funding and significant investment, respectively.

These independent shops have been quicker to adapt to the drive-thru model, allowing for aggressive expansion at a lower cost. Furthermore, these independent coffee shops have not had to adapt to a primarily drive-thru model, unlike larger chains that have been transitioning slowly as they secure funding or wait until lease maturity. This rapid expansion of smaller drive-thru coffee shops has resulted in increased popularity and demand, incentivizing competition. While initially advantageous, it has begun to slow due to the sheer volume of new stores entering the market each day. The dynamics in this segment reflect a significant shift in consumer preferences and market strategies, warranting close observation.

Strategic Considerations for Property Owners

For property owners, it is crucial to reassess objectives. If the focus is on generating annual cash flow and an owner is comfortable with holding the property until the lease matures (despite the probability of a lower resale price) immediate action may not be necessary. However, for long-term wealth and security, a comprehensive property evaluation is essential.

Key factors to Assess:

• Market conditions
• Lease agreements
• Franchise dynamics
• Rental rates

Understanding these elements can help identify property-specific risks and assess overall security. With interest rates beginning to decline, timely action is vital, as changes in cap rates may take time to reflect in the market. Delaying action could result in shorter lease terms and increased competition from other properties entering the market.