How Uber-founder Travis Kalanick's real estate buying frenzy could turn ghost kitchens into a new speciality asset class

  • Uber founder and ex-CEO Travis Kalanick's ghost kitchen business CloudKitchens has spent over $130 million acquiring properties to run delivery-only kitchens out of over the past two years, a Wall Street Journal investigation found.
  • Business Insider spoke to experts in the space to understand why CloudKitchens might be acquiring real estate, instead of leasing like most others in the buzzy space. 
  • The experts cited favorable long-term financials and the ability to keep every part of their business proprietary as reasons why they may be taking on the big up-front cost of buying. 
  • The purchases indicate that CloudKitchens is working to turn the novel business model of delivery-only restaurants into a new specialty asset class, like cold storage, and is planning to become the biggest name in the sector, insiders say. 
  • Visit Business Insider's homepage for more stories.

In an age of shuttered restaurant storefronts and an unprecedented shift away from in-person retail, ghost kitchens, or delivery-only restaurants, are seeing increased investment and demand. 

The spaces, which usually bring multiple restaurant brands into one building, can be placed in old retail or industrial buildings. Typically, the operators lease the space, in order to avoid the high initial costs of purchasing real estate. 

One of the most high-profile name in the business, CloudKitchens, run by former Uber CEO and founder Travis Kalanick, is taking a different tact. Last month, the Wall Street Journal reported CloudKitchens, through its parent company City Storage Systems had purchased 40 properties over the last two years for a total of $130 million.

Cloud Kitchens, which according to the WSJ's reports is funded by a $400 million equity investment from Saudi Arabia's sovereign-wealth fund and debt financing from Goldman Sachs, has also been very secretive. The Journal reported that the company had architects sign non-disclosure agreements and that even brokers weren't told the name of the company who was purchasing the properties they were working on. The company declined to comment on its plans. 

Business Insider spoke to five ghost kitchen industry insiders and a coworking company about how Kalanick's purchases indicate that the company is thinking beyond just operating restaurants, and towards the creation of a new, alternative asset class. 

The company's willingness to buy is an indication of the challenges ghost kitchen operators face while working with traditional landlords, the ambition of Cloud Kitchens' vision for buzzy delivery-only restaurants, and the favorable financials in the long term.

The challenges of leasing and the profitability of owning

Landlords, famously risk-averse, can be challenging partners for an operating company with a vision for a new future. Their goal, as always, is to lease out space to a tenant that can pay it back. 

Ghost kitchens, which mix restaurant work with industrial-style efficiency of space, are still quite a novel idea. They're also expensive to get started, with massive buildout costs. Typically, a landlord fronts those costs as tenant improvements, amortizing them across the entire cost of the lease, but ghost kitchen entrepreneurs hunting for space face challenges in finding landlords willing to provide this much upfront funding.

One company REEF Technology, which raised $1 billion from high profile investors like Oaktree, SoftBank, and the UAE's sovereign wealth fund, avoids this challenge by building out ghost kitchens, and other light logistics business uses, in trailers in parking lots, instead of retail or industrial buildings. 

Read more: America's parking lots are sitting empty, and REEF Technology is ready to cash in by turning them into ghost kitchens and shipping hubs

"What you're trying to accomplish as a landlord and what the people that finance large tenant improvement dollars are looking for are large long-term leases with steady space users that have credit," Bill Bennett, CEO and founder of Novel Coworking, told Business Insider. "These ghost kitchens are the opposite of that."

Bennett, whose coworking company purchases real estate instead of leasing it, told Business Insider that the ghost kitchen model is like WeWork for restaurants. In both industries, over the long term, it is cheaper to buy than it is to rent. 

"If a company pays $100,000 a year to lease space at a ghost kitchen in a major metro, it's going to be more expensive for them in the long-term," James Cook, director of America's retail research at JLL, told Business Insider. "In the short term it's more expensive to buy. It's cheaper in the long term, but they have to have a lot more money to do it."  

CloudKitchens has been able to make these purchases through Kalanick's own personal fortune, the Saudi sovereign wealth fund, and debt financing from Goldman Sachs. A deed of trust from Alameda County, obtained by Matt Newberg, founder of food technology media company HNGRY, and shared with Business Insider, showed that Goldman Sachs gave the company at least $200 million in December 2019. Goldman Sachs declined to comment.

How owning real estate could help if the delivery boom ends

CloudKitchens are also building equity with their monthly real estate costs, instead of paying a landlord. The industrial space they've purchased, like a $6.6 million industrial property in Queens that the firm bought in March according to the Wall Street Journal, may continue to accrue value as the asset class's star continues to rise in the age of e-commerce.

The equity that CloudKitchens is building isn't going to make the company money in the short term but could protect it in the long run. While food delivery is booming now, successful vaccines could bring diners back to in-person restaurants, and away from delivery.

A ghost kitchen company that acquires real estate could be challenged by its debt-payment obligations during a sudden downturn, but would also have some equity to backstop financial challenges.  

"The risk is higher, either owning a building or signing a long-term lease, and you're selling short-term memberships and short-term leases," Cook told Business Insider. "What we saw with coworking was a big boom in the availability of coworking, and then a bust in demand, and now they're left holding the bag."

In coworking, this dynamic has caused many operators to drastically downsize their holdings and convert from leases to management partnerships, where they act as the operator of a landlord's space. Some, like flex-space Breather, have even explored selling their business. 

Guarding the recipe to its secret sauce 

Owning properties has another big benefit: protecting proprietary information from other operators and landlords. Food delivery is a famously challenging, and often money-losing business, with early delivery-only casualties like Maple, which had trouble making profits on individual meals, indicating just how hard it is. 

Actually owning space is just another way that CloudKitchens is able to protect its intellectual property; the company already makes people it works with sign NDAs, keeps brokers in the dark, and doesn't allow employees to list their employment on LinkedIn. If CloudKitchens believes it has found a way to make food delivery profitable, it has a financial impetus to protect that information from other potential competitors. 

"If you feel you have built a better mousetrap in the way you build out your virtual kitchens and the way that you create your traffic patterns and your algorithms, it very well may be that you feel you can accomplish exactly what you want to accomplish only if you own your real estate," Phil Colicchio, an executive managing director of Cushman and Wakefield who focuses on specialty food and beverage, told Business Insider. 

Read more: Ghost kitchens are pitching themselves as the future of restaurants. These are the 15 companies in the space that you need to know.

The economics of a ghost kitchen relies on the speed at which food can be cooked and handed off to a delivery person, which means that the flow of the traffic in the building, and in the parking lot outside of it, is paramount. For the business model that CloudKitchens and competitors like Kitchen United use, of leasing out space to other providers, the most proprietary information is the physical set up of their space. 

By leasing space, an operator has to partner directly with a landlord, who will get an inside look at the company's business. This could influence a company to choose to purchase instead. 

"I don't necessarily want to teach you how to build it, because I have proprietary information that I have invested a lot of money in," Colicchio said. 

Founder of ghost kitchen company Butler Hospitality Tim Gjonbalic, whose company rents out space in hotel kitchens themselves, said that he's skeptical of the model's ability to actually become efficient enough for the costly investments in kitchen equipment to pay off.  Sarve Estehardi, vice president of real estate at Butler Hospitality, said that Butler's model doesn't require much upfront money because they don't need to rebuild the kitchens they rent. 

Hotels outsource their room service and other food needs to Butler, which operates food service for multiple close by hotels. Its model, contained to one segment of foodservice, is quite different from the transformational ambitions of CloudKitchens.

"It seems like they're trying to build the engine behind the cloud kitchen," Gjonbalic told Business Insider.

The creation of a new asset class

By owning the real estate and building that engine, CloudKitchens appears to be setting itself up to become the premier landlord of a new specialty asset class, the ghost kitchen. 

Newberg, of HNGRY, told Business Insider that the company's portfolio, which would already generate outsized returns when fully leased, could then be securitized and net the company even more money. 

"You can put those all in a portfolio and generate huge cash on cash returns by selling them at a 5% cap rate to a traditional investor or go public via a REIT," Newberg told Business Insider, referring to the metric used by real-estate investors to measure the annual return on properties. 

Read more: Booming demand for lab space is a rare bright spot for real-estate developers. But a steep learning curve means some 'stupid money' investors could get burned.

The CloudKitchens strategy of being both the owner and the operator protects them against other landlords who may try to get into the business themselves after working with a ghost kitchen operator.

"If you have specialty real estate, you have people that specialize in that niche," Bennett of Novel Coworking said. "Broadly landlords don't understand how to build, re-lease, price, or understand the credit of specialty real estate."

In other sectors, such as cold storage, life science, or student housing, specialty landlords have built up that expertise. With CloudKitchens' rapid expansion, large funding base, and focus on protecting their proprietary information, they're making themselves into the easy choice for banks looking to finance ghost kitchen deals. 

"If you're a bank and looking at financing a ghost kitchen, do you want Travis who has done 20 of these, or are you going to lend to some landlord who is doing this for the first time?" Bennett asked. 

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