Rising Costs and Availability Have Restaurant Operators Fighting for Real Estate

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With quality real estate at a premium and prices on the rise in all major city centres, finding a good location to set up shop remains a top concern for restaurant operators. According to information from Vancouver-based Colliers International, good real estate in downtown Vancouver averages $40 to $75 per sq. ft., while property in Toronto’s downtown core currently demands, on average, $75 per sq. ft.

But price is not the only real-estate roadblock. Ed Khediguian, senior vice-president at the Montreal office of CWB Franchise Finance, says the challenge comes from a combination of price and availability. “It depends on the type of restaurant concept and the locations they’re looking for,” he says. “The prime, triple-A sites across most major markets are dominated by a very [small]number of landlords, so they drive a hard bargain relative to cost. Availability of those prime spots is also an issue.”

Khediguian adds that although the larger, major concepts are fighting for the same real estate in the prime locations, opportunities still exist for concepts with smaller footprints who can capitalize on the lower prices and greater obtainability of B- and C-grade locations.

The real-estate landscape, says Khediguian is driven largely by the economy, meaning cities such as Toronto and Vancouver (downtown cores) are in high demand, while Calgary and Edmonton are soft. “Montreal is relatively stable, but the core locations are much fewer and very concentrated, so there’s a big gap between the core and non-core locations.”

Another part of the real-estate challenge is that competition of every stripe is snapping up the real estate as it becomes available. “Take Queen St. E. in Toronto as an example,” says Jay Gould, president of Toronto-based South St. Burger. “A hard-goods realtor closes down and a restaurant takes its place — to the point where now from University, west, there’s almost nothing but restaurants [resulting in] competition for space and for consumer dollar — it’s competition right in your face.”

He also points to the challenge large shopping centres across the country are facing when it comes to keeping fashion retailers as having an impact on the restaurant segment’s competitive landscape. “Somebody big goes out and a Joey’s comes in, so the real-estate problems are multi-faceted. We’re not just competing for space…there’s too many damn restaurants.”

As online shopping picks up and retailers close their doors, Gould predicts only the strongest regional shopping centres will survive. And when space comes available, they have many restaurant operators looking for space. “The temptation,” he says, “is to give it to them — even though, in the end, from an overall product mix perspective, it may be hurting the draw.”

And, he adds, when operators finally do find a space, “it’s not just the rental that the landlord is looking for, but the taxes and common-area costs (for shopping centres) are over the top. I used to have a fry shop in the food court at the Eaton Centre and we were somewhere north of $60,000 in real-estate taxes annually for a location that is three levels below grade and 400 sq. ft.”

Although Gould says occupancy costs at the location were approaching $300,000, the mall was delivering the traffic. “To be fair, the food courts trade on a larger space, using common seats and the shopping centre’s bathrooms, so we’re paying for the table space, the clean-up of that space and insurance on that space. It was akin to having a 1,500-sq.-ft. restaurant of our own. But still, 10 years ago, that space in the Eaton Centre might have been $100,000 to $120,000.”

While large chains have better buying power to secure triple-A locations, smaller restaurants and independents often have to settle for what’s left. “The landlords are looking for covenants they can count on,” says Khediguian. “They are more likely to lease to an established brand than someone with a new concept.” The Opportunity While restaurant operators generally want less than nine per cent of gross sales attributed to rent, the reality is that landlords want to achieve the highest possible rent. Historically, conventional retailers have paid more than restaurants for space, but now, some landlords with larger developments are beginning to treat good restaurants as an amenity and are more willing to make concessions.

“It’s a balance,” says Khediguian. “There’s a combination of covenant strength/quality of the brand and how well it fits in to the overall retail experience, so these very large landlords that control these triple-A sites are balancing the two. They appreciate a good balance sheet, but it’s also driven by what they’re going to put into the space.” He says that attitude has had a real impact. “Larger landlords are starting to be more dynamic in terms of what they want to offer from an amenities and retail-experience standpoint when it comes to food-and-beverage. They’re not necessarily out to squeeze the restaurant operator. [The trend] might evolve as landlords follow suit and look at amenity impact on their sites.”

Khediguian doesn’t see the limited supply of triple-A spaces increasing and says concepts will have to adapt and “go into infill markets that are less triple-A and make up for it through branding and size.”

At South St. Burger, for example, Gould says the company is fine-tuning its real-estate criteria. “We’re trying to find [locations] where there’s a reasonable real estate/acquisition cost but also still in the right part of town,” he says. “Downtown Toronto isn’t necessarily the place to be; we’re looking at more suburban plazas and centres where the cost of living isn’t quite so high.”

He says ideal opportunities involve taking over the competition when acquiring new space. “We could kill two birds with one stone if we could pick up two or three new units and take out a competitor, but chances are the reason we’re looking at taking out the competitor is that its real estate isn’t good enough. If they aren’t doing well [in that location], we might not either, so that doesn’t always work as well as it sounds on paper.”

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