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Delivery-Only Restaurants Create a New Appetite for Real Estate

'Ghost Kitchens' Bring Development into the Sharing Economy

Credit: Getty Images
Credit: Getty Images

Years ago if you wanted a hot corned beef sandwich from the iconic Canter's Deli, you'd have to head over to its longtime home at 419 Fairfax Avenue in Los Angeles.

Not anymore.

Thanks to the convergence of shared commercial kitchens and on-demand food delivery services, anyone living or working in about a four-mile radius of the downtown L.A. area can now have a Canter's order delivered right to their door.

According to Morgan Stanley, the online food delivery market in the U.S. is expected to top $24 billion by 2020. Canter's is taking advantage of a new commercial real estate sector that is evolving as developers around the world invest in renovating old warehouse and manufacturing facilities to create "ghost kitchens," spaces that facilitate low-overhead operations that don't require seating, servers, or other public-facing personnel.

Commissary Kitchens Evolve
Kitchens-as-a-service is a new twist on commercial commissary kitchens that have long served caterers and food truck operators from lower cost locations, usually away from highly-populated centers. However, the name of the game for modern delivery-only restaurants in the sharing economy is to be in the epicenter of dense urban hubs.

These delivery-only kitchens take the basic commissary kitchen concept and reorient it as a real estate problem, says Kevin Campos, co-head of retail and consumer at Los Angeles-based venture capital firm Fifth Wall.

“Because quicker delivery times drive demand, the ghost kitchens that will succeed need to be as close as feasibly possible to their customers," says Campos. “For existing restaurants, partnering with large on-demand fleets [is] a much more efficient value proposition than each restaurant keeping a delivery team employed."

In fact, adding an e-commerce delivery capability increases a restaurant's revenue by 20%, on average, says Campos. By offering affordable food prep space, a delivery service pick-up hub, and shared facilities such as storage and refrigeration, commercial kitchens are making the business more cost-effective for restaurant startups, as well as for existing restaurants interested in expanding their market reach.

“If you're doing 1,600 orders a week out of your three-or-four-mile area, imagine what you could do if you go 10 miles away and open a remote location," says Marc Canter, owner of Canter's Deli.

Canter says he invested about $35,000 in a satellite kitchen in downtown Los Angeles, and it took about a year to recoup the investment. The challenge was educating the market. Downtown customers, says Canter, needed to understand that they were going to get a hot sandwich prepared near them, not wait for delivery from a restaurant seven miles away.

In addition to disrupting the traditional restaurant model, companies that own commercial real estate in high density locations are well-positioned to benefit from the growth of kitchens-as-a-service.

“Across real estate verticals beyond the obvious light industrial, we believe that the unused or remnant space in office buildings, shopping centers, and multi-family buildings—where office workers, customers, and tenants spend their days—present a huge opportunity," says Campos.

A New Real Estate Segment
While the new commissary kitchen model seems like a good bet, early market entrants have stumbled. Now, ventures such as Kitchen United, which has venture backing from Google Ventures and others, and CloudKitchens, controlled by former Uber CEO Travis Kalanick, are hoping their models prove more successful than earlier efforts by now defunct companies like Munchery and Pilotworks, for example.

Pilotworks, one of the pioneers in the cloud kitchen space, ran out working capital and closed abruptly at the end of 2018. Before it closed, however, it had commercial kitchens in Brooklyn, N.Y., Chicago, Dallas, Newark, N.J., and Portland, Ore. Its former headquarters occupied 20,000 square-feet in a former Pfizer factory in Brooklyn.

Although the operating models for the new breed of commissary kitchens differ depending on the company, they are all geared toward supporting delivery-only restaurants in densely populated urban centers.

Kitchen United, which already operates facilities in Pasadena, Calif., and Chicago, is planning to open at least 10 new kitchen centers this year. Among its new markets are Los Angeles, San Francisco, and Atlanta. The company's first location was its 12,000-square-foot facility in Pasadena.

To date, Kitchen United's model has been to lease large buildings—often former big-box retail spaces—with plenty of parking and street access. It provides restaurants with everything from space and equipment to ordering technology and shared staff to handle order pick-ups.

CloudKitchens is staking out new real estate, too. City Storage Systems, its parent company, purchased the former Coca's Furniture Building in downtown San Jose, Calif., late last year for $7.3 million. The acquisition of the historic 43,210-square-foot building gives the company a stronghold in one of the hottest commercial real estate markets in the United States. Kalanick bought a controlling interest in City Storage Systems last year for $150 million.
In L.A., CloudKitchens is operating out of a former warehouse at 1842 W. Washington Boulevard. Among the other delivery-only businesses located there are Canter's and Alt/Grub/Faction, a virtual food court concept that lets consumers order from multiple menus in one delivery order. The brainchild of chef Eric Greenspan, Alt/Grub/Faction offers everything from fried chicken and burgers to burritos and breakfast sandwiches.

All of the orders from Greenspan's delivery-only venture come out of the same kitchen, and are prepared by the same team.

“Expanding to delivery-only allows existing brands to capitalize on brand awareness by extending their delivery radius and increasing sales," says Greenspan. “The ability to manage, alter, and create in all of my concepts at one time, with one team, is extraordinarily liberating and efficient."

Looking ahead, Fifth Wall's Campos predicts that, like the restaurants and delivery apps that are succeeding in the sharing economy, ghost kitchen operators that specialize will be in the best position to grow.

“They're doing one thing and doing it exceptionally well—finding the real estate near high delivery areas and building out multi-brand ghost kitchens," Campos says. “It gives restaurateurs an opportunity to capture new demand that they couldn't serve efficiently on their own."

For real estate investors, kitchens-as-a-service promise to add value to distressed or under-utilized commercial buildings. For restaurateurs who embrace the concept, there is a new growth opportunity on the menu—one they can deliver without having to make a huge capital investment to get started.

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