What is in this article?:
- Restaurants wrestle with rising rents
- Negotiating a lease
Post-recession recovery means higher costs for big bottom-line item
Restaurant rents, which had eased significantly during the Great Recession, have been rising in the past year and a half, and are beginning to put pressure on the industry’s bottom line.
While many parts of the nation are seeing retail rent pressures, one of the more celebrated cases was the June announcement by New York City-based Union Square Hospitality Group that the storied Union Square Cafe would likely move after nearly 30 years in the same location because of lease increases.
“Things have changed in New York, which is great news, except perhaps for our restaurant’s lease,” wrote Danny Meyer, chief executive of USHG, in explaining his decision in an op-ed in The New York Times. “Union Square Cafe’s second 15-year lease will expire at the end of December 2015, and unless we’re able to complete a Hail Mary pass with our landlord before that point, we will have to move.”
Meyer, whose personal assistant said Thursday he was spending time with his family and would have nothing to add beyond the Times piece, said the Union Square Cafe story had neither victims nor villains.
“But as a city, we’ve got a problem,” Meyer said. “Because the market suggests they can, landlords are using this moment to demand the significantly higher rents they’ve been waiting for since first betting on their neighborhoods. In our case, the advertised rent is triple what we are now paying.”
And Union Square Cafe is not alone. Restaurant operators are generally seeing lease terms escalate to pricier levels as the economy improves.
Don Fox, chief executive of 793-unit Firehouse Subs, based in Jacksonville, Fla., said, “Certainly coming out of the recession, and all the pain that caused among lessees and lessors, there were many workouts to keep spaces from going vacant. A positive that emerged was a better understanding between landlords and their tenants in regard to the business models.”
Landlords considered rent relief and tenants became transparent with those landlords, Fox said. “Once the dust settled on the recession, that was positive,” he said. “Landlords had a better understanding of their tenants, and we didn’t have much rent escalation.”
But as restaurants are growing again, they face a more limited supply of locations that are driving rent up, said Fox, whose own company plans to add more than 60 locations between now and the end of year.
Research firms are seeing the commercial real estate market tighten as well. Los Angeles-based real estate and investment firm CBRE Group Inc. issued a retail market report July 7 that found second-quarter retail availability rates dropped 20 basis points, to 11.7 percent. That puts retail availability rates 150 basis points below the recession peak of 13.2 percent, the company said.
Significant (more than 60 basis points) declines in second-quarter availability from the first quarter were noted in Tampa, Fla.; Philadelphia; and Raleigh and Charlotte, N.C. Rising availability was seen in Cleveland, Ohio, St. Louis and Salt Lake City, CBRE said. The firm also foresees availability rates declining to 11 percent in neighborhood and community shopping centers.
On a year-over-year basis, CBRE found retail real estate markets tightening markets in Houston and Fort Worth, Texas; Tampa, Fla.; and Atlanta.
“Since the Great Recession, the coastal U.S. cities — both on the West and East Coasts and parts of Florida — have seen a resurgence in rents,” Jim Haslem, real estate consultant with the Roseville, Calif.-based Huntley, Mullaney, Spargo & Sullivan Inc. “In some cases, it has been quite pronounced. The higher rents are often found in the metropolitan coastal cities: San Francisco, Los Angeles, New York and Boston.”
Haslem added that brick-and-mortar retailing is under a significant pressure from the Internet, especially for some big-box retailers like bookstores and electronics brands.
“In the restaurant world, we’re seeing the effects of those pressures,” Haslem added. “The Internet has created applications and products that are intruding into the normal operations of a restaurant. And restaurants are impacted by the rents of their neighbors. If you are in a shopping mall with low vacancies, you’ll pay higher rents. Distressed malls would be more negotiable.”
Haslem said that as brick-and-mortar retailers downsize, it produces a structural change for restaurant tenants.
“Restaurants are in the same ecosystem,” he said. “The stratification between the top sites and the less than top sites may have a wider disparity these days.”
Also, as the economy normalizes, there is less bargaining power for the restaurant operator seeking the top sites, Haslem said.