Restaurants Sick of COVID-19 – Could Landlords Provide Copay?

To nearly 200,000 restaurants nationwide, there is no “temporary” shutdown in response to COVID-19.  This group of restaurants which represents roughly 20% of all U.S. restaurants will never open again.  While the state of Georgia has been granted the rights to reopen restaurants, many in the Atlanta area are still choosing to keep dining rooms closed – focusing on takeout and delivery – or making the tough decision, like many others, to close permanently. This is resulting in an imminent wave of second-generation restaurant space needing to be absorbed and putting a hold on restaurant development.  

Restaurants not reopening range from family-style Chinese restaurants to posh eateries, local bars to Wolfgang Puck empires.  Nationwide chains such as Steak ‘n Shake, TGI Fridays, Fleming’s Prime Steakhouse, and P.F. Chang’s have closed numerous locations for good. 

In a recent Retail Reboot Webinar, Tom McCarty of barbecue restaurant chain Jim ‘N Nick’s, says they are currently putting all developments on hold and focusing on getting its existing restaurants back up and running profitably before looking into other opportunities.

Luckily Jim ‘N Nick’s business model made them well-equipped to operate during the crisis with drive-throughs (a must-have for any new development) and food delivery options like DoorDash.  Not all restaurants are prepared with a drive-through or take-out service if that isn’t their primary mode of delivery – think of the unexpected bulk cost in bags, boxes, plastic cutlery, packaged condiments, training, and logistics. 

But even with these options, McCarty says they are in survival mode and have no timetable to reopen any of its 30 dining rooms.  Like many others, with only a 50% capacity allowance, Jim ‘N Nick’s says they simply cannot make money.  Even when lawful physical limitations lift, the biggest variable still remains: the consumer psyche.

The opening of a restaurant’s dining room does not automatically equal a full house.  Will consumers immediately jump back in line and wait 3 hours for a table?  Will they stand elbow to elbow at the bar to get a cocktail.  What about buffets and hibachi restaurants – would you and your spouse share a table with six strangers?  

Landlord “Copay?”

In the coming months and perhaps years, until there is a COVID-19 vaccine or other solution, many restaurants have stated they may not be able to survive paying fixed rents under traditional long-term leases. Some restaurateurs are looking for their rents to be adjusted as they are financially squeezed, struggling because of capacity limitations and COVID-19-related PPE and procedures.  More than 8 million restaurant workers were laid off or furloughed and the industry lost $80 billion in revenue, expected to hit $240 billion by the end of the year according to a National Restaurant Association study.

Landlords have options to assist tenants – they don’t have the option not to get paid.  Rent relief and restructuring may both viable options that maintain a cash flow and prevent vacancies – 50% of rent tomorrow is better than 0% during an uncertain length of vacancy.

Specialty retail brokers say options such as short-term leases and paying landlords based on revenue sharing (“percentage rent”) instead of having to fork over a set monthly rent could be the lifeline restaurants need to weather the current conditions, and a weather a potential second wave of infections.   In some cases, the typical landlord-tenant relationship will need to evolve into a partnership, a joint venture with developers willing to invest in tenant improvements to give eateries a lift and landlords a payday.

Difficult Decisions ahead for Landlords:

The key questions  a Landlord will have to ask is, “How valuable is that restaurant to the Center?” A restaurant that draws customers may be like an anchor worth saving.   But if not, “Is it better leased out to another non-restaurant?”  More fundamentally, “even if we give the concessions to the Tenant, can they make it?”

Other key ideas are already being implemented.  Repurposing parking spaces into dining spaces, or expanding the dining room outside, can put a restaurant back up to full capacity.  Atlanta’s Mexican-style restaurant chain Pure Taqueria created a festive parking-lot dining “room” complete with strung lights, live music, a walk-up bar tent, and a hungry crowd happy with a one-hour wait.   For many, “pick up lanes” and drive-throughs may be needed. 

Pure Taqueria’s walk-up bar. Photo Credit: Instagram

In the long-term, many restaurants will be able to work through this.     In the short term, landlords will have to think hard about answering the questions above, and then actively engaging with restaurants.   Regardless, the tenant/landlord relationship during this time will change.  Who knows, they may even like each other.

Shane Investment Property Group uses research gathered from the National Restaurant Association, other articles and press releases. This article should not be assumed as investment advice.