Restaurants open and close every day around the world, and it’s no different in our Saskatoon commercial real estate market. There is always speculation and rumour as to why a venue has been shuttered but it can often boil down to the hard truths associated with commercial real estate.
Pay the piper
Because of the high cost of setting up a restaurant, tenants often seek longer terms for their leases. It’s not unheard of for a food user to negotiate a 10 or 15 year lease.
Most landlords will not hold the same rental rate for that length of time and will build in escalations. This is beneficial for both in that down the road the landlord knows he’ll be earning an uptick and the tenant is preparing themselves for an inevitable renewal at market rent.
If a rental rate stays the same for 10 years in any market, there is a good chance there will be serious sticker shock come renewal time. A recent article I read, which inspired my conversation about the restaurant dynamic, indicates a 3% increase annually is a realistic expectation for Manhattan.
I don’t think that’s far off given our current market in Saskatoon. That certainly adds up o
ver a long term and if the rate is set below market in the beginning a tenant could face up to double the rent eventually.
In a high profile location, a landlord can often hold the upper hand when it comes to renewals and retaining tenancies. The best tenant is the one you already have, which is advice I often preach.
However, sometimes landlords need to shuffle tenancies to accommodate bigger users. That may spell the end for a restaurant user doing well.
The landlord’s vision may not include food use on their site and at the end of day, restaurants are tenants like anyone else. There is no guarantee, unless there is an option to renew, that a landlord will allow a tenancy to stay.
It may sound crazy, but a restaurant can become too successful. In a multi-tenancy situation parking is often shared by all. If a restaurant is habitually sucking up all parking and they are a small enough percentage of the site, a landlord may choose not to renew to appease the other tenancies he or she has.
In an ideal universe, most landlords will work with their tenants to come up with a solution but when push comes to shove they may not be able to keep everyone happy.
Posted by Kelly Macsymic