The Challenge
In March, the phones at Toronto-based CHI Real Estate Group, a hospitality-business broker that helps clients buy and sell restaurants and commercial properties, stopped ringing.
“The number of incoming calls our team receives is a good indication of the market. The month of March was definitely ‘a brace-and-see-what-happens’ month,” says Ori Grad, broker and managing director at CHI. “Our team works as a trusted partner to some of our city’s finest restaurateurs with high-quality locations. A lot of what we do is discreet and off-market. The buyers generally attracted to the calibre of opportunities we offer dried up and the phone pretty much stopped ringing.”
In mid-April, he says the phone started ringing again and, by summer, his team was back to being busy, but most callers were window shopping or looking to downsize their operations.
“January and February 2020 were historically bad months for many businesses,” says Grad. “The combined impact of the minimum-wage increases and the uptick in the costs of goods affected the industry. Typically, business owners can look forward to business improvement in March, but this is when the province-wide shutdown occurred, leaving most owners in the most stressful situation of their career.
“We know picking up the phone to call us is sometimes not an easy decision to make. While there’s a tremendous outpouring of support for the restaurant industry, at the end of the day, if continuing to operate your business does not make good financial sense, there’s no shame in admitting defeat by a global pandemic.”
Bruce Fox, executive vice-president, Business Development for Vancouver-based Browns Restaurant Group, says the biggest real-state issue facing his company right now is rent. “Reduced seating means reduced revenue,” he says. “Profit margins are thin enough in good times and the pandemic formula, with higher delivery fees and reduced dine-in revenue, is a death sentence for marginal units.” Fortunately, he adds, “we have very few that fall into that category and our franchisees are sharp operators, willing to adapt.”
As restaurants were forced to close dining-rooms and pivot to takeout and delivery only, Grad says there was a significant shift in demand for locations with outdoor space. “Outdoor space turned into an extremely hot commodity. We also saw a considerable increase in demand for smaller takeout spots in busy areas, but at the time, landlords were still expecting 2019 rental rates.”
Browns’ concepts, which have always boasted small, more efficient footprints, made some immediate changes when the pandemic first hit, pivoting to COVID-19-compliant seating “We added plenty of (high-quality) Plexiglas barriers and have increased spacing,” says Fox. “We now remove seats that are not in use rather than leaving them in and closing off tables, which just leads to unnecessary guest discussions/explanations about why they can’t sit at a vacant table.”
According to Grad, operators shifted their focus to quick-service locations under 1,500 sq. ft. instead of larger dine-in locations and locations in the suburbs became more desirable than those in downtown Toronto. “Suburban plazas with direct-entry QSR [units] became a prized location, and many independents and franchisors were chasing after them.”
The rapid rise of off-premise dining, says Vince Sgabellone, industry analyst, Canada Foodservice at NPD Group, has forced operators to think of new and faster ways to fill these orders. Dedicated digital drive-thru lanes, touchless pick-up lobbies, multiple drive-thru lanes and curb-side pickup parking are all considerations when looking at locations.
As a result all of these shifts, inventory became a challenge as there was a lack of suitable spaces under 2,000 sq. ft. that were in a good location, but not part of an existing mall/plaza. Although one would expect that there would be a lot of lease availability and lower lease rates, Grad says for the most part, there has been little restaurant inventory. “Existing operators and their landlords are receiving assistance through the various subsidies and programs. There’s still a risk that a flood of vacancies may come at some point, depending on the recovery speed and the continuation of government stimulus, but all in all, the government programs have helped to avoid a catastrophe thus far.”
The Opportunity
As the real-estate challenges brought on by COVID-19 continued to mount, CHI took the opportunity to offer consultations with its landlord and tenant clients, participated in educational offerings with Restaurants Canada and shared information via its blog. “There was going to be no easy or immediate solution,” says Grad. “The best way forward was to foster an open and transparent relationship where both parties worked together and compromised to stay resilient. It was a matter of trying to draw out the humanity and creativity required to confront such a unique and challenging situation as COVID-19.”
Grad says the situation showed landlords that tenants cannot pay the same for rent as they did in good times — especially in certain areas that have been affected the most by COVID-19, such as financial districts. “Rent and additional rents (TMI) are high in the financial core and, without people going into their offices to work, restaurants in these pockets are struggling for consumers,” says Grad.
It’s a situation that helped fuel the rise of ghost kitchens, says Grad. “We have a lot of interest in ghost kitchens — essentially, a place in a busy area that is already set up for foodservice but at discounted rental rates. These are hard to come by as downtown Toronto is expensive, even if it is an industrial building on a side street.”
CHI has also seen an increased demand from investors wanting to buy commercial buildings with restaurants. “There’s a lot of great collaboration happening in the foodservice industry with operators — sharing space, developing new projects and collaborating in support of one another — lots of creativity,” says Grad.
