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

Original article by Alex Nicoll, Business Insider, November 14, 2020

  • 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.

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.

“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.