6 ms·

Restaurants are fucked but the underlying costs associated with real estate are insane. Where I live, treasured restaurants close at a regular cadence due to re

Restaurants are fucked but the underlying costs associated with real estate are insane. Where I live, treasured restaurants close at a regular cadence due to rent hikes. Nobody can afford to run a restaurant at the prices being charged here. The end result is a cocktail that is $25 or a pint thats $10. High real estate prices are essentially forcing every commercial space to become a chain restaurant unless they can be just a super busy bar in a controlled neighborhood.

nradov 6y ago
The bizarre thing is that even before the pandemic I've seen popular Bay Area restaurants close down due to huge rent increases and then the spaces are still vacant years later. I don't understand what commercial landlords are thinking?
- ryanchants 6y ago
  This happens all the time in Chicago too
  - OnlyOneCannolo 6y ago
    And small towns too. What matters is growth. If landlords see growth and the opportunity for charging more rent, they'll take it.
- sieabahlpark 6y ago
  Opportunity cost, don't want to get stuck with low rent when you may be about to get a high value renter
- ckluis 6y ago
  This makes sense in aggregate. If you have 100 properties and raise the rent 10% on all of them and only close 5 locations... you're better off on average and actually just added additional rentable units to your inventory.
- cosmie 6y ago
  > I don't understand what commercial landlords are thinking? Financial engineering/optimization. I'm not well versed in it myself, but from my understanding: Commercial landlords can harvest a paper loss from a vacant unit. If you were renting a unit out at $100 per square foot per month, being able to take a $100 sq/ft/month write off from a vacancy may be more advantageous than dropping your rate to $50 sq/ft/month and getting it occupied. Particularly useful if you have a large enough portfolio to withstand the loss in cash flow. Leasing a unit out at a lower rate can also have other implications on financing (and I believe valuations) for commercial real estate, by essentially re-establishing the cash flow potential of the unit less than what it was (and still is on paper, until you re-lease it at a lower rate).
  - nradov 6y ago
    That's not how corporate income tax works. A landlord can't take a write off for reduced rental revenue. You may have a valid point on financing.
  - URSpider94 6y ago
    Everybody keeps repeating that landlords can write off rent not received as a tax deduction. You can’t, and if you think about it for a minute, you’ll see it doesn’t make any sense. Imagine a landlord with 10 properties that rent for $100 per month. That’s $1,000 per month rental income, or $12,000 per year. Assume 10% tax rate, the landlord clears $11,000 after tax. Imagine now that half of them are vacant. The landlord is now bringing in $500 per month, or $6000 per year. Is it your expectation that the landlord can somehow deduct the other $6k in rent not paid and pay $0 per year in taxes??? No, the landlord would now pay $600 a year in taxes on that $6k in rental income. Naturally the landlord doesn’t pay taxes on money they didn’t receive, but it’s always better to have 90% of the rent after tax, than 0% of it. It is always always more profitable to receive rent than not. Now, as others have mentioned, it may be worthwhile to lose a few months of rent in return for signing a higher-dollar lease over a 10 year term.
    - chii 6y ago
      if the properties weren't leveraged, then yes. But if you leveraged to buy the property, then you deduct the interest payment from the rental income. In the case of a vacant property, the interest cost will get deducted from another source (other rental income perhaps). Then, come tax time, you net out the rental income. If they do it exactly right, it could net out to zero. And so pay no taxes since they did not make any money. On paper this sounds bad. But because the expectation that property grows in value, they gain capital growth. This isn't taxed until sale time, but capital gains tax is very favourably taxed in most juristictions. Not to mention depreciation over time (a paper loss tbh) can deduct taxation. After a few more years, they sell the property, using the old (high) rental income value as the valuation figure, pocketing the capital growth while paying little in taxes from the rental (which goes into the cost of debt). This is why rents would remain high - you need high rents to value the property as high value.
- ChefboyOG 6y ago
  Lease length also factors into this a bit. In NYC, for example, a lot of restaurant leases are 10 years long with an option to renew for another 5 at a new rate at the end. Each year, the rent increases by a percentage (3ish is common). For a 30% increase, locked in for at least 10 years (assuming the restaurant survives), landlords are willing to let a property sit vacant for a while.
  - kevindong 6y ago
    > For a 30% increase, locked in for at least 10 years (assuming the restaurant survives), landlords are willing to let a property sit vacant for a while. The thing that puzzles me is how willing landlords are to let properties stay vacant. I live in NYC and all of the newer high rise apartment buildings in my neighborhood have retail spaces at the ground floor and usually a few floors above the ground floor also for retail/commercial use. As far as I can tell, almost every building has utterly failed to get any tenants in the ~5 years since the buildings have been built.
- kayfox 6y ago
  One of the things I have noticed is that a lot of the City of San Francisco has prohibitions on new liquor licenses. In many cases this makes wholly new businesses of some types, like nightclubs or bars, impossible or seriously squeezes the margins on new restaurants.
- Melting_Harps 6y ago
  > The bizarre thing is that even before the pandemic I've seen popular Bay Area restaurants close down due to huge rent increases and then the spaces are still vacant years later. I don't understand what commercial landlords are thinking? If its anything like what I saw in Boulder, most are held by large companies (TEBO) who can write off the losses come tax year because they have other more profitable locations/sites. The restaurant I came out of retirement on in 2018 has been vacant since Summer of 2018, just to give context that building was $13k/month before operational costs, which were immense due to it be an incredibly old building. I personally had to patch up the pipesdue to massive leaks as our dishwasher wasn't getting enough pressure and my station was getting all the run off I had run to FOH get some wine cork to plug the holes and used a bunch of duct tape until the plumber could get there for the next week of service. I think I overheard the Sous and Execs saying where I last worked that rent was 20k/month for the flagship, which on a busy night we could clear in a single days (day/night) service. The further this has gone on, Colorado only just lifted its stay at home order today, the more I think I've hung up my whites and knives professionally for good this time. By contrast, this is what is happening in Hong Kong, as they have captured the loyalty of their patrons and are months ahead of most country in terms of Covid19 recovery [1]: 1: https://www.reuters.com/article/us-hongkong-protests-mayday/business-booms-for-yellow-firms-backing-hong-kong-protest-movement-idUSKBN22D577 https://www.reuters.com/article/us-hongkong-protests-mayday/...
  - 52-6F-62 6y ago
    I think your comment can be summed up in: they [read: large holding companies] just don't care because it doesn't affect them. It's pretty much the exact same situation in Toronto. Trying $40k/mo in Midtown in rent alone. It's stupid.
  - djrogers 6y ago
    > most are held by large companies (TEBO) who can write off the losses come tax year because they have other more profitable locations/sites. That’s not how taxes and “write-offs” work. You deduct your expenses from your income, and pay tax on a percentage of what’s left. Having more income is always better than having more expenses.
- postingawayonhn 6y ago
  > I don't understand what commercial landlords are thinking? The value of a commercial property is (generally, if it has development potential that may be the main factor in valuation) usually multiple of the rental income that it can generate. If landlords accept lower rents then that lowers the value of their property.
AnimalMuppet 6y ago
> High real estate prices are essentially forcing every commercial space to become a chain restaurant... How? Is rent lower for chain restaurants? Do they charge more than non-chain for the same food? And they still have the franchise fees on top of the same costs as the non-chain restaurants. How are chain restaurants surviving and others not? I'd expect what nradov describes: That the space stays empty.
- thinkingkong 6y ago
  They have way better efficiency on goods and marketing. Your local mcdonalds isn’t advertising on TV. They pay franchise fees but its not a 1:1 cost to benefit. Depending on the size of the chain, they can also negotiate discounts by buying at predictable and high volumes.
  - greedo 6y ago
    Your local McDonalds sure is paying for TV advertising, in two ways. One is through franchise fees for national advertising, and the second is through co-op advertising in a region where franchisee's pool their advertising dollars. The only reason fast-food franchises are better commercial tenants is because they're usually better capitalized than bespoke restaurants. (McDonalds franchises also don't worry about rent since the parent corporation owns all the land).
    - sokoloff 6y ago
      How do they “not worry about rent”? The local franchise pays rent to the parent company.
      - culturestate 6y ago
        I think their point is that most McDonald's franchisees in the U.S. don't need to be concerned about sudden, drastic rent increases because they aren't beholden to a third-party commercial landlord - McDonald's is their landlord, and thus is unlikely to boot them out just to lease the space at a higher rate to e.g. Burger King.
duxup 6y ago
Yeah I wonder about the real estate situation. There is a retail development near me that sat largely empty for years. They kept it up and clean, but word was the prices were sky high. It still has a huge number of vacancies ... we're talking 5+ years after it was built. Meanwhile other retail places had shops closing, word was the rent kept climbing. I almost want to suggest that the local city come up with a concept that somehow would encourage actual occupancy. Granted that could be complex but it seems a real waste to have these spaces empty / taking up space with high rents where maybe some business could try to run if rents were lower... It is a weird dynamic. It's like every spot is just waiting for a Chipotle or Noodles & Company or some small fitness fad / chain and if not that ... nothing.
- ip26 6y ago
  Maybe they haven't got it exactly right, but this shoe seems to fit rather well: https://www.strongtowns.org/journal/2017/11/27/the-paradox-of-persistent-vacancies-and-high-prices https://www.strongtowns.org/journal/2017/11/27/the-paradox-o... In summary, lowering rents to market price lowers the value of the building and makes the project insolvent.
  - TheOtherHobbes 6y ago
    You can't "make something insolvent". A project is either solvent or it isn't. You can make a mistake about estimating solvency, but that's the fault of your poor estimation skills and your inability to read the situation accurately, not the situation itself. If a project isn't objectively solvent and banks are still lending on it, then the problem is higher up the food chain - a lending "market" based on moral hazard which encourages poor decisions that blow up later. This is one of those situations where the people on the ground - shopkeepers, small restaurant entrepreneurs, and their customers - are being punished for policy errors in the financial and real estate industries.
    - ip26 6y ago
      A project is either solvent or it isn't If you read the link, the point is the project is able to pretend it is still solvent when it isn't anymore.
puranjay 6y ago
The real estate sector hasn't made sense to me in years. No matter what happens, prices either stay intact or go up. Nothing seems to move the prices down.
- runxel 6y ago
  Greed. It's just that.
  - wendyshu 6y ago
    Is greed unique to the real estate market?
postingawayonhn 6y ago
And why do we have high real estate prices? Because of cheap money (low interest rates). Good thing central banks around the world have been cutting rates. /s

nradov 6y ago

The bizarre thing is that even before the pandemic I've seen popular Bay Area restaurants close down due to huge rent increases and then the spaces are still vacant years later. I don't understand what commercial landlords are thinking?

ryanchants 6y ago
This happens all the time in Chicago too
- OnlyOneCannolo 6y ago
  And small towns too. What matters is growth. If landlords see growth and the opportunity for charging more rent, they'll take it.
sieabahlpark 6y ago
Opportunity cost, don't want to get stuck with low rent when you may be about to get a high value renter
ckluis 6y ago
This makes sense in aggregate. If you have 100 properties and raise the rent 10% on all of them and only close 5 locations... you're better off on average and actually just added additional rentable units to your inventory.
cosmie 6y ago
> I don't understand what commercial landlords are thinking? Financial engineering/optimization. I'm not well versed in it myself, but from my understanding: Commercial landlords can harvest a paper loss from a vacant unit. If you were renting a unit out at $100 per square foot per month, being able to take a $100 sq/ft/month write off from a vacancy may be more advantageous than dropping your rate to $50 sq/ft/month and getting it occupied. Particularly useful if you have a large enough portfolio to withstand the loss in cash flow. Leasing a unit out at a lower rate can also have other implications on financing (and I believe valuations) for commercial real estate, by essentially re-establishing the cash flow potential of the unit less than what it was (and still is on paper, until you re-lease it at a lower rate).
- nradov 6y ago
  That's not how corporate income tax works. A landlord can't take a write off for reduced rental revenue. You may have a valid point on financing.
- URSpider94 6y ago
  Everybody keeps repeating that landlords can write off rent not received as a tax deduction. You can’t, and if you think about it for a minute, you’ll see it doesn’t make any sense. Imagine a landlord with 10 properties that rent for $100 per month. That’s $1,000 per month rental income, or $12,000 per year. Assume 10% tax rate, the landlord clears $11,000 after tax. Imagine now that half of them are vacant. The landlord is now bringing in $500 per month, or $6000 per year. Is it your expectation that the landlord can somehow deduct the other $6k in rent not paid and pay $0 per year in taxes??? No, the landlord would now pay $600 a year in taxes on that $6k in rental income. Naturally the landlord doesn’t pay taxes on money they didn’t receive, but it’s always better to have 90% of the rent after tax, than 0% of it. It is always always more profitable to receive rent than not. Now, as others have mentioned, it may be worthwhile to lose a few months of rent in return for signing a higher-dollar lease over a 10 year term.
  - chii 6y ago
    if the properties weren't leveraged, then yes. But if you leveraged to buy the property, then you deduct the interest payment from the rental income. In the case of a vacant property, the interest cost will get deducted from another source (other rental income perhaps). Then, come tax time, you net out the rental income. If they do it exactly right, it could net out to zero. And so pay no taxes since they did not make any money. On paper this sounds bad. But because the expectation that property grows in value, they gain capital growth. This isn't taxed until sale time, but capital gains tax is very favourably taxed in most juristictions. Not to mention depreciation over time (a paper loss tbh) can deduct taxation. After a few more years, they sell the property, using the old (high) rental income value as the valuation figure, pocketing the capital growth while paying little in taxes from the rental (which goes into the cost of debt). This is why rents would remain high - you need high rents to value the property as high value.
ChefboyOG 6y ago
Lease length also factors into this a bit. In NYC, for example, a lot of restaurant leases are 10 years long with an option to renew for another 5 at a new rate at the end. Each year, the rent increases by a percentage (3ish is common). For a 30% increase, locked in for at least 10 years (assuming the restaurant survives), landlords are willing to let a property sit vacant for a while.
- kevindong 6y ago
  > For a 30% increase, locked in for at least 10 years (assuming the restaurant survives), landlords are willing to let a property sit vacant for a while. The thing that puzzles me is how willing landlords are to let properties stay vacant. I live in NYC and all of the newer high rise apartment buildings in my neighborhood have retail spaces at the ground floor and usually a few floors above the ground floor also for retail/commercial use. As far as I can tell, almost every building has utterly failed to get any tenants in the ~5 years since the buildings have been built.
kayfox 6y ago
One of the things I have noticed is that a lot of the City of San Francisco has prohibitions on new liquor licenses. In many cases this makes wholly new businesses of some types, like nightclubs or bars, impossible or seriously squeezes the margins on new restaurants.
Melting_Harps 6y ago
> The bizarre thing is that even before the pandemic I've seen popular Bay Area restaurants close down due to huge rent increases and then the spaces are still vacant years later. I don't understand what commercial landlords are thinking? If its anything like what I saw in Boulder, most are held by large companies (TEBO) who can write off the losses come tax year because they have other more profitable locations/sites. The restaurant I came out of retirement on in 2018 has been vacant since Summer of 2018, just to give context that building was $13k/month before operational costs, which were immense due to it be an incredibly old building. I personally had to patch up the pipesdue to massive leaks as our dishwasher wasn't getting enough pressure and my station was getting all the run off I had run to FOH get some wine cork to plug the holes and used a bunch of duct tape until the plumber could get there for the next week of service. I think I overheard the Sous and Execs saying where I last worked that rent was 20k/month for the flagship, which on a busy night we could clear in a single days (day/night) service. The further this has gone on, Colorado only just lifted its stay at home order today, the more I think I've hung up my whites and knives professionally for good this time. By contrast, this is what is happening in Hong Kong, as they have captured the loyalty of their patrons and are months ahead of most country in terms of Covid19 recovery [1]: 1: https://www.reuters.com/article/us-hongkong-protests-mayday/business-booms-for-yellow-firms-backing-hong-kong-protest-movement-idUSKBN22D577 https://www.reuters.com/article/us-hongkong-protests-mayday/...
- 52-6F-62 6y ago
  I think your comment can be summed up in: they [read: large holding companies] just don't care because it doesn't affect them. It's pretty much the exact same situation in Toronto. Trying $40k/mo in Midtown in rent alone. It's stupid.
- djrogers 6y ago
  > most are held by large companies (TEBO) who can write off the losses come tax year because they have other more profitable locations/sites. That’s not how taxes and “write-offs” work. You deduct your expenses from your income, and pay tax on a percentage of what’s left. Having more income is always better than having more expenses.
postingawayonhn 6y ago
> I don't understand what commercial landlords are thinking? The value of a commercial property is (generally, if it has development potential that may be the main factor in valuation) usually multiple of the rental income that it can generate. If landlords accept lower rents then that lowers the value of their property.

AnimalMuppet 6y ago

> High real estate prices are essentially forcing every commercial space to become a chain restaurant... How? Is rent lower for chain restaurants? Do they charge more than non-chain for the same food? And they still have the franchise fees on top of the same costs as the non-chain restaurants. How are chain restaurants surviving and others not? I'd expect what nradov describes: That the space stays empty.

thinkingkong 6y ago
They have way better efficiency on goods and marketing. Your local mcdonalds isn’t advertising on TV. They pay franchise fees but its not a 1:1 cost to benefit. Depending on the size of the chain, they can also negotiate discounts by buying at predictable and high volumes.
- greedo 6y ago
  Your local McDonalds sure is paying for TV advertising, in two ways. One is through franchise fees for national advertising, and the second is through co-op advertising in a region where franchisee's pool their advertising dollars. The only reason fast-food franchises are better commercial tenants is because they're usually better capitalized than bespoke restaurants. (McDonalds franchises also don't worry about rent since the parent corporation owns all the land).
  - sokoloff 6y ago
    How do they “not worry about rent”? The local franchise pays rent to the parent company.
    - culturestate 6y ago
      I think their point is that most McDonald's franchisees in the U.S. don't need to be concerned about sudden, drastic rent increases because they aren't beholden to a third-party commercial landlord - McDonald's is their landlord, and thus is unlikely to boot them out just to lease the space at a higher rate to e.g. Burger King.

duxup 6y ago

Yeah I wonder about the real estate situation. There is a retail development near me that sat largely empty for years. They kept it up and clean, but word was the prices were sky high. It still has a huge number of vacancies ... we're talking 5+ years after it was built. Meanwhile other retail places had shops closing, word was the rent kept climbing. I almost want to suggest that the local city come up with a concept that somehow would encourage actual occupancy. Granted that could be complex but it seems a real waste to have these spaces empty / taking up space with high rents where maybe some business could try to run if rents were lower... It is a weird dynamic. It's like every spot is just waiting for a Chipotle or Noodles & Company or some small fitness fad / chain and if not that ... nothing.

ip26 6y ago
Maybe they haven't got it exactly right, but this shoe seems to fit rather well: https://www.strongtowns.org/journal/2017/11/27/the-paradox-of-persistent-vacancies-and-high-prices https://www.strongtowns.org/journal/2017/11/27/the-paradox-o... In summary, lowering rents to market price lowers the value of the building and makes the project insolvent.
- TheOtherHobbes 6y ago
  You can't "make something insolvent". A project is either solvent or it isn't. You can make a mistake about estimating solvency, but that's the fault of your poor estimation skills and your inability to read the situation accurately, not the situation itself. If a project isn't objectively solvent and banks are still lending on it, then the problem is higher up the food chain - a lending "market" based on moral hazard which encourages poor decisions that blow up later. This is one of those situations where the people on the ground - shopkeepers, small restaurant entrepreneurs, and their customers - are being punished for policy errors in the financial and real estate industries.
  - ip26 6y ago
    A project is either solvent or it isn't If you read the link, the point is the project is able to pretend it is still solvent when it isn't anymore.

puranjay 6y ago

The real estate sector hasn't made sense to me in years. No matter what happens, prices either stay intact or go up. Nothing seems to move the prices down.

runxel 6y ago
Greed. It's just that.
- wendyshu 6y ago
  Is greed unique to the real estate market?

postingawayonhn 6y ago

And why do we have high real estate prices? Because of cheap money (low interest rates). Good thing central banks around the world have been cutting rates. /s