As the COVID-19 pandemic shut down casual dining restaurants across the country, not everyone was in the same position to weather the storm.

"Some brands suffered" before the pandemic, says Randy Blankstein, president of the Boulder Group. "This is especially true for certain tenants, including Applebee's."

Applebee's experienced a 25-basis point increase in cap rates in the first quarter of 2020, according to The Boulder Group's Net Lease Casual Dining Report

In the report, The Boulder Group also identifies Ruby Tuesday, Red Robin and Golden Corral as failing to keep up with changing consumer preferences.

"I think the weaker concepts, whether it's Golden Corral or Applebee's, are just having trouble adapting to newer tastes and preferences," Blankstein says. "They weren't doing this [before COVID]. And I think the Coronavirus just makes it even tougher for a concept that was trying to turn itself around. I'm not sure a lot of investors are going to give some of these chains time to revitalize themselves."

On the other hand, Blankstein says larger public companies are better cushioned to handle problems. "I see Darden and Brinker as survivors of this," he says. "They're larger and public, and they have strong brands nationally. So I think those are going to be okay."

Darden owns Olive Garden, LongHorn Steakhouse and The Capital Grille, among other restaurants. Brinker International owns Chili's Grill & Bar and Maggiano's Little Italy.

"Those are the concepts that people feel good about," Blankstein says.

At the end of the pandemic, Blankstein expects to see the stronger brands survive. "They are going to do well, as we come back, to get folks into a casual dining restaurant," he says.

Those restaurant brands that weather COVID-19 could be in an even better position once people decide to go out again.

"The bigger concepts in casual dining appear stronger after this because, unfortunately, some of their competitors won't be around," Blankstein says. "There will be a point where either there's a vaccine, or there's a level of comfort level, and people will go back to these restaurants. So with fewer competitors, the stronger concepts will certainly do well."

Ultimately, Blankstein, like many people, thinks the primary question is how long the COVID-related declines last. He says investors will be focused on Q1 results from Brinker and Darden.

As investors wait, net lease transactions in the casual dining sector have been put on hold.

"Casual dining tenants will need to prove to net lease investors a sales trajectory of pre-COVID levels in order for transaction velocity to begin again," John Feeney, senior vice president, The Boulder Group adds.

In Q1, cap rates in the casual dining sector increased by 27 basis points year over year while the overall net lease retail universe contracted by 12 basis points. "The casual dining sector is currently priced at a discount to the overall net lease retail market due to some weaknesses within the casual dining space," says Jimmy Goodman, partner at the Boulder Group.

Instant Insights /

Many Casual Restaurant Brands Were Struggling Before COVID-19

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