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ghost kitchen

CRE Investors Shouldn’t be Spooked by Ghost Kitchens

If you ordered dinner last night on GrubHub, there’s a good chance your food wasn’t cooked at the restaurant where you ordered it. Many food deliveries are now being cooked in what are called ghost kitchens (also known as dark or cloud kitchens). Ghost kitchens have been around for a few years, but the trend toward these delivery-only restaurants without storefronts accelerated significantly during the pandemic. COVID-19 lockdowns decimated the traditional dine-in restaurant industry, and many smart restaurant owners jumped on the ghost-kitchen bandwagon. Global food delivery sales had already doubled between 2014 and 2018, and they skyrocketed during the pandemic. UberEats’ revenue spiked more than 100 percent in 2020 compared to 2019, and GrubHub’s revenues also jumped 40 percent during that time.

The new technology powering ghost kitchens is more intricate and complex than you may expect. Commercial real estate and retail have been using location intelligence for a while, and the analytic insights have vastly improved over the past decade. For ghost kitchens, location analytics and intelligence are crucial, and the location of a site can easily make or break the business.

One benefit of a ghost kitchen is it can be set up in light industrial areas with lower rental and leasing costs. But the location and property must be selected with extreme care, according to ghost kitchen experts. Most kitchens only require a space of about 300 square feet, meaning that they can successfully operate in relatively inaccessible areas with low foot traffic. But, the location of the kitchen must be in the area where there’s high demand for the type of food that’s being offered and needs to be in a spot that isn’t saturated with competitors. Finding that location is easier said than done.

And herein lies the power of location analytics, which has become an industry sustaining the growing ghost kitchen business model. Analytics software companies recommend ghost kitchen operators track metrics like user acquisition, conversion, activation and retention, and human mobility data. Harnessing all this data provides powerful insights, but it’s taken the role of a restaurant business owner into a completely different realm. A ghost kitchen may look like a relatively low-cost and low-risk endeavor, but it’s definitely not simple.

More than 79,000 restaurants have closed since the pandemic began in March 2020. That large number accounts for 10 percent of all restaurants in the United States, suggesting lousy news for commercial real estate investors. But while traditional dine-in restaurants suffered, ghost kitchens stepped in to fill the void, and they’re poised to become a new niche real estate market.

“Ghost kitchens are taking over the commercial scene as they’re proving to be a strong tenant for CRE’s restaurant arena,” a Martens Company report said. “By combining the best of communication technology and responding to contemporary consumer demands for remote access to goods, ghost kitchens may be the new favorite restaurant tenant for commercial real estate.”

Location intelligence and other analytics types will strongly factor in the ghost kitchen business model, and real estate investors would be wise to keep an eye on this growing trend. Ghost kitchens could help struggling real estate sectors like malls by filling long-vacant units, and they could also use repurposed warehouse space, adding yet another tailwind for industrial properties. As long as they’re situated in locations where they can maximize profit, the sky’s the limit, and commercial real estate should have no reason to be spooked by ghost kitchens.

Taking a bite out of traditional dining

What exactly is a ghost kitchen? A simple definition is a food prep facility with no waiters, dining room, or any public presence except online. Ghost kitchens utilize physical spaces for delivery-only food prep, and it’s hard to differentiate them from traditional dine-in restaurants on apps like DoorDash. Some ghost kitchens contain space for more than one restaurant brand, and they’re often located in industrial parks on the outskirts of cities.

Ghost kitchens are attractive to new restaurant owners because there are lower overhead costs. In a delivery-optimized kitchen, rents and labor costs are lower, and the restaurant can focus on streamlining the efficiency of its menu and delivery services. Ghost kitchens can also simplify their menus and change them based on trends and the ordering data they collect, narrowing their food choices to the ones most likely to increase sales.

There are currently about 1,500 ghost kitchens in the U.S., and that number keeps increasing, according to Euromonitor data, and the ghost kitchen market could be a $1 trillion global opportunity by 2030. With the pandemic taking a bite out of indoor dining, a ghost kitchen operation enables restaurants to stay nimble and adaptable. The pandemic and stay-at-home orders may have accelerated the ghost kitchen trend, but it appears the Pandora’s Box has opened for good. About 51 percent of restaurants have already shifted to a ghost kitchen model, according to research by Technomic.

Unlike some traditional restaurants, ghost kitchens are deeply embedded in the digital world. The use of location intelligence and other analytics has become significant in choosing suitable properties, acquiring more customers, identifying problems in delivery, and maximizing profit. Deliveroo, a ghost kitchen company, houses 220 kitchens on four continents, and some of them are set up in shipping containers in parking lots or warehouses within a suitable delivery radius to customers. 

The location of a ghost kitchen is crucial, as this enables kitchens to quickly bring orders to the homes or offices where they’re placed. “Ghost kitchens need to know that within the three-to-five-mile delivery range, which is what they typically look for, there will be a sufficient density of customers,” said Sally Johnstone, Senior Consultant at StratoDem Analytics.

Companies like Locale.ai are helping to power ghost kitchen analytics. The company provides data insights to kitchens to help them choose sites and reconfigure menu items. User acquisition is one metric they track, looking into locations where there’s lots of latent demand in food app installs, searches, and orders placed. For new location planning, ghost kitchens can overlay external data on maps and look at human mobility data, economic data, and important points of interest (POI) like malls and competitor locations. Identifying the purchasing power of the surrounding area can help determine which food should be offered, and identifying competitor locations can help avoid oversaturation.

Finding the best locations for ghost kitchens will be even harder as competition heats up. In many major metro areas, customers have countless options for food delivery, so ghost kitchens need to stay on their toes and check data to remain competitive. New companies are popping up quickly, and major brands like Famous Dave’s, Applebee’s, Chili’s have entered the space. Like traditional restaurants, observers say many ghost kitchens will likely fail because of poor marketing, inefficient operations, and lousy locations. The ability to quickly and inexpensively run different brands and concepts can help, but if you’re a sandwich shop in an area with 10 other places like yours, you may not be able to keep up with demand.

A scary-good opportunity for underutilized space

The ghost kitchen phenomenon may seem scary to commercial real estate investors for various reasons. Just about any commercial space with enough room and some staff parking can work. Earlier this year, Wendy’s announced it would team up with REEF, a ghost-kitchen startup, to launch more than 650 ghost kitchens in the U.S., U.K., and Canada by 2025. REEF sets up its ghost kitchens primarily in urban parking lots, which could seem like a devastating blow to traditional commercial real estate, but it doesn’t have to be.

Some ghost kitchen services, like Kitchen United, are creating a whole new demand for other types of properties like retail mall space. Kitchen United has recently entered into new leases with a mall in California, and it plans to operate its kitchens in the mall sector. In addition, mall giants Simon Property Group, Accor, and SBE Entertainment Group have partnered with C3, a virtual kitchen company, to open up about 200 ghost kitchen locations in malls. The demand for ghost kitchens may not save struggling mall properties, but it shows that if CRE investors think outside the box, the loss of traditional restaurant space doesn’t have to be all bad news.

A CBRE report noted that ghost kitchens are “leading to the reuse of underutilized real estate in shopping centers, sometimes carved out of repositioned anchor or big-box spaces, so long as the ghost kitchen is within quick-delivery range of a major consumer trade base.” Whether or not the ghost kitchen phenomenon is here to stay is still up for debate. Restaurants are already a low-margin business, and aggregators like DoorDash can take up to 30% of delivery incomes. As vaccination rates increase and the pandemic slows down, food-delivery sales may also stabilize as people become eager to return to dining in person.

While ghost kitchens may not have to pay top dollar for real estate, they must be super conscious that their space is within the optimal delivery range of a good customer base. The use of location analytics is critical for ghost kitchens, and finding the right software to get insights on customer demand, human mobility data, and app installations is a huge factor in determining where ghost kitchens should be located. A name like ghost kitchen might strike an ominous tone with CRE investors, but they shouldn’t be spooked. Traditional dine-in restaurant real estate space may suffer, but ghost kitchens open up demand for underutilized spaces like light industrial and possibly even space inside struggling malls. In the end, ghost kitchens may become a lucrative new property niche for CRE investors. As long as their location is good enough to maximize profit, so-called ghost or dark kitchens can be successful business ventures for restaurant owners and property investors.

Staff Writer
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