Franchise Expansion in 2024: Navigating the Rising Cost of Real Estate and How to Make Smart Location Choices
As we head into 2025, one of the biggest challenges facing franchise expansion is the rising cost of commercial real estate. From urban centers to suburban shopping areas, franchise owners are finding that rent hikes and limited inventory are making it difficult to secure prime locations. However, with careful planning, data-driven decisions, and strategic flexibility, franchisors and franchisees can navigate these hurdles and continue expanding their networks.
In this post, we’ll explore the current real estate trends, alternative location options, and smart strategies for expanding your franchise footprint in a competitive market.
1. Understanding the Real Estate Landscape: Rising Costs and Limited Availability
High demand, inflation, and supply chain disruptions are all contributing to increased real estate costs. According to the National Association of Realtors, commercial property prices have risen by 15% in the last year alone, with urban areas seeing the steepest increases. Franchisees are facing limited availability in prime locations, and bidding wars for available spaces have become more common.
Why this matters for franchise growth:
Higher Entry Costs: Increased rent and upfront costs can eat into initial profits and make expansion more financially risky.
Less Bargaining Power: High demand means landlords are less likely to negotiate favorable lease terms, making it harder to secure long-term affordability.
Greater Competition: Limited space means competing with other businesses (including other franchises) for desirable locations.
According to CBRE, 42% of businesses say real estate costs are a primary concern in their expansion plans for 2024.
2. Thinking Beyond Traditional Locations: Alternative Real Estate Options
Given the high costs and competition for traditional retail or street-front locations, many franchises are turning to alternative real estate options. These locations can reduce overhead while still allowing franchises to connect with their target customers.
Alternative location ideas:
Kiosks and Pop-Up Shops: Renting smaller spaces or hosting pop-up shops in high-traffic areas (e.g., shopping malls, airports) can be a cost-effective way to introduce your franchise to new markets.
Shared Spaces: Consider partnering with complementary businesses to share space, reducing rental costs while offering mutual benefits. For example, a fitness franchise might share space with a wellness or physical therapy provider.
Mobile Franchises: Mobile franchises, such as food trucks or mobile grooming services, allow you to reach customers in multiple locations without a traditional lease.
Example: Fast-casual restaurant chain Shake Shack experimented with kiosks in shopping malls to test new markets, generating significant foot traffic without committing to a full-size location.
3. Leveraging Data for Smart Location Choices
In today’s market, data is essential for making informed location decisions. Franchisors can use demographic, traffic, and economic data to identify areas with strong customer bases while avoiding overpriced or high-risk locations.
Data-driven strategies for selecting locations:
Demographic Analysis: Use data to identify areas with a high concentration of your target customer demographic, focusing on income levels, age ranges, and spending patterns.
Traffic Patterns: Analyze foot traffic and car traffic data to gauge potential customer volume, especially for high-cost areas.
Economic Stability: Consider local economic trends and employment rates, which can indicate whether an area is likely to support long-term franchise growth.
Businesses that use data-driven site selection are 50% more likely to see sustained revenue growth in new locations, according to Location Analytics Research.
4. Negotiating Favorable Lease Terms: Tips for Franchisees
For those looking to expand, negotiating favorable lease terms can make a big difference in affordability. However, navigating lease terms in a high-demand market requires preparation and negotiation skills.
Key tips for negotiating your lease:
Request Rent Escalation Caps: Try to secure a cap on annual rent increases to maintain predictable costs over time.
Push for Early Termination Options: This gives franchisees flexibility to exit the lease if the location underperforms.
Seek Tenant Improvement Allowances: Landlords may offer funds for renovations, which can reduce your initial investment and improve the space to fit your brand.
“Franchisees who negotiate lease terms effectively can save tens of thousands of dollars over the life of the lease,” says real estate advisor Chris Nelson.
5. Considering Flexibility in Your Expansion Model
Expanding in today’s real estate climate may require franchisors to reconsider rigid expansion models. Franchise networks that embrace flexibility—whether through smaller formats, varying location types, or mobile options—are better positioned to grow despite rising real estate costs.
Strategies for incorporating flexibility:
Flexible Store Formats: Consider offering franchisees different formats (e.g., kiosks, full-size locations, and mobile units) based on market demand and location availability.
Scaled Back Initial Build-Outs: Offer franchisees a phased build-out option, allowing them to start with essential features and expand as the location proves profitable.
Tiered Investment Options: Provide different investment tiers for franchisees, from full-sized locations to smaller concepts that require lower upfront costs.
Franchise systems that offer flexible expansion options report a 25% increase in franchisee interest, according to Franchise Expansion Research Group.
Conclusion: Navigating Real Estate Challenges
Expanding in today’s real estate climate requires creativity, flexibility, and a data-driven approach. By exploring alternative location options, leveraging demographic and traffic data, and negotiating favorable lease terms, franchisors and franchisees can successfully navigate rising real estate costs and continue to grow their networks.
CTA:
Is your franchise ready to expand strategically in a competitive real estate market? Contact Align Franchising today to explore how we can help you make data-driven, cost-effective location decisions for sustainable growth.
