It is no secret that the restaurant business changed during the pandemic. In the beginning, mandated business closures halted indoor dining and then social distancing kept restaurants from filling and turning tables—the traditional revenue generating model for the industry. Instead, restaurants adapted to take-out orders and delivery services, changing the economics of the business, and it will likely mean changes to lease structures as well.
In the past, restaurants have served two purposes. They have delivered meals to customers, but there is also a community dining aspect to it that is somewhat interrupted during the pandemic," Jason Grinnell, a partner at Thompson Coburn LLP, tells GlobeSt.com. "A lot of restaurants were forced to adapt and embrace the food delivery partnerships. They had to embrace that sort of piece just to try to stay open and keep their customer base happy."
Now, instead of turning tables, restaurants are focused on producing meals. "They have to maximize the number of meals that they are producing," says Grinnell. "That has really changed the economics for how restaurants operate."
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Ghost kitchens have played a key role. These facilities have supported cooking for take-out without the high cost of the restaurant atmosphere. "From a delivery standpoint, you can produce the meals in the kitchen without paying for any of the front of house staff, like the waiters, and without paying for the real estate or any of the dishes," explains Grinnell.
As restrictions have lifted across the country, indoor dining has resumed, but there has been some hesitancy to return to the pre-pandemic restaurant setting. Grinnell says that Los Angeles specifically has seen some pushback to eating indoors. This could mean a longer-term change for restaurants than many initially expected.
It will also mean a change in the way that restaurants use and even think about their real estate costs. "It has caused restaurants to rethink their footprint and their fundamental business model," says Grinnell. "In some instances, tenants will agree to a percentage rent, meaning that they pay a base rent and additional rent when their sales hit certain thresholds. For restaurant leases, not a lot are structured with that concept, but it wouldn't surprise me if tenants started to look to that model to reduce their upfront real estate costs."
As for landlords, the willingness to adopt the percentage rent model is a major question mark. As we are only just now exiting the pandemic, it is too soon to tell how landlords plan to adjust.
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Kelsi Maree Borland
