•Appetite for pandemic resilient retail resulted in free-standing / drive-through buildings capturing a larger share of SoCal retail investment volumes in 2020 compared to the year prior.

•Drive-through retail, such as fast food, coffee, and pharmacies, were active in the market throughout 2020, with over 147,000 square feet of newly signed leases in the region.

•Many prominent restaurant chains are planning to take advantage of the change in consumer behavior with the addition of drive-through lanes and express pick-up options for online ordering.

America’s sprawling retail sector was rocked in 2020 as social distancing measures were put in place to curb the spread of the COVID-19 pandemic. Stores across a wide range of specialties were imperiled to a degree far greater than even during the last financial downturn. Yet many retail businesses have been able to weather the turbulence in 2020 by rapidly adapting to changing consumer preferences. 

Retail e-commerce sales in the U.S. were up 23% in Q4 2020 from the beginning of the year, as consumers flocked to digital storefronts for essential goods. Full-service (i.e., sit-down) restaurants experienced the greatest brunt of the pandemic as social distancing guidelines greatly limited in-person dining and seating capacity. Limited-service establishments were able to stay operational with minimal impact to normal operations, thanks in large part to the quick-serve business model and drive-through lanes. Despite a decline in Q2 in the early stages of the pandemic, sales at limited-service restaurants ended the year with revenue 5% above Q1 2020 levels.

Facing increased uncertainty caused by the pandemic, investor sentiment pivoted away from retail assets, resulting in a year-over-year drop of $1.9 billion in retail investment volumes in Southern California, according to data from Real Capital Analytics (RCA). But appetite for pandemic-resilient retail remained with a focus on assets such as free-standing and drive-through capable buildings. This pushed the overall SoCal investment volume share of free-standing drive-through buildings from 5.9% in 2019 to 7.1% in 2020, according to data from CoStar.

Pharmacy tenants in particular generated intense interest from investors, as pharmacy drive-through tenants may prove invaluable as the COVID-19 pandemic continues and the vaccine is rolled out. A recent example includes the sale of a freestanding CVS in La Mirada that sold for $5.9 million early this year.

While leasing activity slowed considerably throughout the Southern California region in 2020, drive-through and other non-sit-down establishments continued to be active throughout the year. A little over 86,000 square feet was leased by pharmacies and another 33,000 by fast food and drive-through coffee establishments since the beginning of 2020 —further highlighting the resiliency of these retailers in a period of substantial headwinds.

Sit-down or full-service restaurants experienced a boom over the last decade as consumer tastes shifted towards favoring experience over convenience. But, the COVID-19 pandemic has caused an unexpected paradigm shift in the restaurant market with many restaurants re-evaluating the direction they will take in the near- and far-term. According to Restaurant Dive, many large chains are betting big that the recent change in consumer behavior is here to stay and are embracing drive-throughs as a way to better reach customers. Prominent examples include Shake Shack remodeling restaurants to include drive-through lanes (two normal lanes and one dedicated to “app pickup delivery”). Other fast-casual and fast-food providers are exploring alternative approaches including Chipotle building more of its slimmed down online ordering “Chipotlane” concept and Taco Bell’s “Go Mobile” priority lanes for online orders.