June Rent Is Almost Due for Restaurants

Social Distancing Strains Sales

In March, restaurants across the country closed their doors as the coronavirus pandemic set in. Many landlords were willing to help their restaurant tenants stay afloat by offering rent deferrals in April and May. As June gets closer, some restaurants are still asking for rent relief, which has landlords worried.

Though lockdown restrictions are gradually lifting across the country, many restaurants are only able to operate at 25% to 50% capacity due to social distancing measures. This is still causing them significant financial strain. During normal times, an average restaurant’s rent is equal to about 8% of sales. Now, with sales down because of closures and social distancing, that number is about 20%.

Some larger chains including Shake Shack (SHAK) and Chipotle Mexican Grill (CMG), which were able to pay rent for April and May, are now asking landlords to postpone rent payments and renegotiate leases.

Starbucks Asks for Relief

As restaurants implement new measures to keep customers and employees safe while operating below normal capacity, many are trying to conserve capital however possible.

Starbucks (SBUX), which reopened 85% of its locations in May, is dealing with an onslaught of extra costs. The company is giving workers hazard pay—an extra $3 per hour. It is also implementing temperature checks and requiring face masks for all employees. Starbucks paid rent for most of its locations in April and May, but has asked for changes to lease terms and base rent structures at many of its locations for June.

These requests were met with resistance and worry from many landlords, who pointed out that Starbucks has an $86 billion market capitalization and ought to raise more equity in the capital markets, or more debt, instead of looking for rent relief.

Both sides of the argument are understandable. Landlords are hesitant to reduce rent because they have mortgage obligations to meet, and because they can still book income if rent is deferred, but not if it is cut. Rent forgiveness and reductions also have the potential to hurt property values, which makes it harder to sell, and borrow against properties.

What Lies Ahead for Restaurant Real Estate

Both restaurants and landlords are wondering if the traditional model of going out to eat as we know it will continue post-pandemic. Safety measures in restaurants like plexiglass barriers, more space between tables, and face masks for servers will likely be a part of restaurants for some time. On the other hand, the whole industry could shift to more food delivery.

Many customers have become reliant on meal delivery during quarantine, and they might maintain those habits. Restaurants might shift their layouts to include more kitchen space to service delivery orders, and fewer tables for dine-in customers.

Real estate could also be impacted by the rise of cloud kitchens, facilities designed specifically for cooking food for delivery orders. In some ways, these facilities operate more like warehouses or factories than traditional restaurants. Though they need to be close to residential areas for delivery ease, they do not need to be in store fronts of heavy-traffic areas like a traditional brick-and-mortar restaurant.

Though landlords and restaurants are locked in tense negotiations, they have at least one thing in common: the future of their industries could be altered forever due to COVID-19.

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