As the COVID-19 pandemicshut down casual dining restaurants across thecountry, not everyone was inthe same position to weather the storm. 

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

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

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In the report, The Boulder Groupalso identifies Ruby Tuesday, Red Robin and Golden Corral asfailing to keep up with changing consumer preferences.

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

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On the other hand, Blanksteinsays larger public companies are better cushioned to handleproblems. "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."

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

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

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

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Those restaurant brands thatweather COVID-19 could be in an even better position once peopledecide to go out again.

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"The bigger concepts in casualdining appear stronger after this because, unfortunately, some oftheir competitors won't be around," Blankstein says. "There will bea point where either there's a vaccine, or there's a level ofcomfort level, and people will go back to these restaurants. Sowith fewer competitors, the stronger concepts will certainly dowell." 

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Ultimately, Blankstein, like manypeople, thinks the primary question is how long the COVID-relateddeclines last. He says investors will be focused on Q1 results fromBrinker and Darden.

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As investors wait, net leasetransactions in the casual dining sector have been put onhold.

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"Casual dining tenants will needto prove to net lease investors a sales trajectory of pre-COVIDlevels in order for transaction velocity to begin again," JohnFeeney, senior vice president, The Boulder Groupadds.  

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

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Leslie Shaver

Les Shaver has been covering commercial and residential real estate for almost 20 years. His work has appeared in Multifamily Executive, Builder, units, Arlington Magazine in addition to GlobeSt.com and Real Estate Forum.