Let's Go Out For Dinner

What does it mean when restaurants close? What does it mean when restaurants close for real estate investors?

On today’s show we’re going to take a deeper look at the restaurant industry. This year, 76 restaurants closed in Dallas, never to return. It’s common for some restaurants to fail even in a strong economy. But this year was different.

Several estimates from earlier this year suggest that 10% of restaurants closed permanently in Q2 of this year.

OpenTable is the company that makes it easy for you to book a restaurant table online. So not only are they convenient, they’re a great source of real industry data. They maintain data for each city in which they operate, each state, each country and even globally.

So far this year, the number of seated diners in 2020 is down 58.4% on a global basis. Seated diners are down 60.39% so far this year in the USA, and 60.98% in Canada. Diners ate 49.38% fewer seated meals in the UK this year. Some of the business was offset by take-out business for which we don’t have an accurate global statistic. Needless to say, there are few businesses that can survive a 60% decline in business. If people aren’t reserving tables, then servers are not needed. Dishwashers are not needed. Bartenders are not needed. In California, table reservations are down 65.6%. In Illinois, table reservations are down 70%, and in New York  state they’re down a whopping 75%. The data for NYC is down an astonishing 83% for the year.

It goes without saying that the PPP assistance that came at the end of March, consisting of 10 weeks of payroll is not sufficient to cover a drop in revenue of 83%. Most of these businesses will have fixed costs that are simply too high for the small amount of government assistance to cover.

The restaurant needs to negotiate with the landlord. The landlord in turn needs to negotiate with their creditors.

For many businesses, deferring the rent isn’t enough to save the business. If all the money is ultimately owed to the landlord, it might take a restaurant 10 years to make up that back rent out of excess cash flow from the business when dining returns to normal. The owner might simply choose to throw in the towel and determine that they don’t want to spend the next decade working for their landlord and essentially making no money. It might be easier to shut down and start again with something new when the time is right.

So when all these properties are vacant, a new restaurant opening has a lot of negotiating leverage to demand rent concessions. The landlord faces the difficult choice of lowering their price to the point of tolerable pain or experiencing prolonged vacancy which incurs even greater financial pain. When a new restaurant faces so much choice in good locations, complete with a modern kitchen already in place, they can negotiate exceptional lease terms.

Restaurant statistics over the past week which includes Christmas Day showed a global average of 61% decline in tables reservations for the last week of December compared with the same period in 2019. The US Average was 62.25% down and Canada is 74.5% down compared with the same period last year.

In my opinion, we’re not going to see a recovery in the restaurant industry until the Spring. Until that time, I don’t see many people making significant investments in the traditional seated dining food service industry. The big question is how many businesses will be left standing in 3 months time.