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Devastated US Restaurants Look to Landlords for Rescue

As restaurants struggle to provide safe distance seating and proper sanitization, they are also facing the inability to pay rent. Some have decided it is easier to stay closed. Should Landlords be more flexible?

Photo Courtesy of Twisted Citrus.

Some U.S. restaurants are going to great lengths to try to protect patrons during the pandemic.

In Ohio, tables are partitioned by clear shower curtains. In Maryland, a restaurant rolled out tables that look like large inner tubes so customers maintain 6-foot social distancing. In Virginia, a restaurant is using mannequins to fill empty seats.

Until patrons return, restaurant owners and landlords must figure out how to make ends meet. Some are considering lease changes making them joint-venture partners, or allowing payments to change with income, or just not opening until they can reasonably expect customers will come.

Photo Courtesy of Business Insider.

More than 8 million restaurant workers were laid off or furloughed, losing roughly $80 billion in revenue in March and April, according to the National Restaurant Association.

For the commercial real estate industry, permanent restaurant closings will leave landlords with vacant space that experts said won’t be easy to fill.

Some restaurateurs are looking for their rents to be adjusted as they are financially squeezed, struggling because they must operate dining rooms at smaller capacities to observe social distancing and invest in costly COVID-19-related safety measures.

The National Restaurant Association reported in April that 15% of the nation's restaurants had closed permanently or were at risk of closing. Based on CoStar's data, that would equate to more than 200 million square feet of empty retail space.

About 7 of 10 U.S. restaurants are independent, not affiliated with a franchise brand, and as such are the most vulnerable, according to food and beverage industry data.

Even the likelihood of publicly traded restaurants defaulting on their debt has jumped. In mid-May, the chance of default was 24%, compared with 5% in the early months of 2020.

Landlords will end up with vacancies when restaurants can’t hold out, and it may be hard to find tenants for that space initially, several executives said.

Several large real estate investment trusts are giving strapped restaurant tenants one to three months of rent forgiveness.

In partnership scenarios, landlords can build out a restaurant space for its occupant, or fund the restaurateur’s working capital costs. Landlords can then craft a deal in which they will be repaid for their investment, perhaps taking a percent of revenue.

But that was before COVID-19. While rents traditionally were some 8% of a restaurant's sales, now rent has ballooned to as much as 20% of sales with eateries operating at a fraction of their usual capacity.

2020 CoStar News.

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