There is no question that Texas is a phenomenal place to open a restaurant. Our exponential growth coupled with a strong demand for eating out and seeking a great experience is a recipe for restaurant success.
With a rising economy and the aggressive expansion of many retailers and restaurants in our market, land prices have also shot up, leading to an increase in base rental rates and real estate taxes. I have heard horror stories of franchise operators whose first year triple net expenses started at $8.50 and doubled after the property was reassessed in year two, mostly due to the large increase in real estate taxes. On a 3,000-square-foot space, that is more than a $2,000 a month increase in gross rental payments. If you are a restaurant that does $1.5M in sales, at a $40 base rent, you’re occupancy just went from 9.7 percent to 11.4 percent. That is a scary thing.
Base rent in hot markets like Uptown have also shot up in the past few years. We are seeing rents in the $60-$70 range, not including triple net expenses. If you assume a $15/NNN expense in these areas, as a restaurant, you would need to do over $1,000 per-square-foot to hit an 8 percent occupancy, which is at the top end of what most restaurateurs want to achieve to hit desired profit levels. Some restaurants feel they can pay this rent assuming they will achieve top store volumes, way above average unit numbers, when they open. We are seeing many who cannot, leading to closures and large investments being written off by landlords.
I fight this battle often when representing clients. We make a concerted effort to stay disciplined when negotiating rents. We take into account the average unit volume of our concept and total occupancy based on that number, and come up with a ceiling that is in our comfort level. On multiple occasions, another user has come in and offered to pay a much higher rent than what we are willing to pay, and in turn, we lose the space. Many times, we see these users struggle, and sometimes even see them close their doors within 18-24 months.
It is hard for many landlords to not fall into the trap of leasing to the highest bidder versus leasing to the right bidder. The right bidder is the concept that has depth of experience, a proven operations and development team to execute growth, and a track record of success. Not to mention a group that won’t get over their skis to win a deal. The right bidder will be around for the long haul, making the marriage between tenant and landlord a healthy and fruitful one. The highest bidder will sometimes work, but to me, the risk doesn’t seem to be worth the reward.
Michael Walters is president of the restaurant and entertainment group at Falcon Realty Advisors.
