Retail, Industrial, & Investment Property Advisor

Back in March 2020, I received a lot of questions as it related to restaurant space and the expectations as we moved into restricted operating and Shelter in Place orders. Many told me that we would see a wave of closures, many told me they expected a huge crash in rental rates. Many thought we would see a tenant friendly market with more concessions in the form of free rent, rent reductions, or higher tenant improvement allowances. But did any of this come to fruition?

We are now over 18 months out from the initial Bay Area Shelter in Place (SIP) orders and we have yet to see the wave in the East Bay and suburban markets such as Livermore, Danville, Co, Dublin, Concord and Lafayette. Isolated closures have occurred, but on the whole, downtowns remain busy and to-go and doordash type services have kept most restaurants in a healthy sales position.

Restaurant closures have happened, no doubt, the areas most affected being the urban core, downtown San Francisco and even Oakland; the areas that relied on commuter foot traffic and office occupancy. It has been the areas that have a lot of new construction product that have yet to find stability as our population base has shifted out of urban cores and into the east bay areas.

This trend has led to a segmented market for second generation spaces. Restaurant space is available is the not so desirable areas, which are the areas that traditionally have a high barrier of entry, and there is virtually no second generation spaces in the now sought after suburban areas, or areas that service larger bedroom communities.

How is the East Bay second generation restaurant market?

Rent have remained stable through 2021 and in some places have increases around the East Bay markets as we see inventory become non-existent.

Vacancy Rates? Vacancy has decreased, leaving very little supply.

What about Concession (i.e. free rent, TI’s, discounted rent)? Don’t plan on anything exciting. If you can find second generation space, rent abatement has been limited to construction period and Tenant Improvement Allowances are directly tied to the strength of the tenant. Because of the Tenant friendly eviction moratoriums, Landlord’s have gotten more stringent on credit checks, liquidity and credit worthiness.

As a restaurateur, can you still find valuable commercial real estate? Yes!

Second generation space is still coming available but at a steady rate that is actually more reminiscent of the market back in 2014. The best spaces are leased “off-market” through owners who work with brokers who reach into their portfolio of qualified restaurateurs.

If you are only considering second generation, you will need to move fast and have your paperwork in order, that includes 2 years’ of tax returns, bank statements, and current P&L and balance sheet. Be prepared with an offer that is reasonable, asking for huge concessions will likely not get you a second look, especially given second generation spaces are seeing three, four and more offers.

The best value? New construction.

Why? Landlord’s with new construction product may have lower occupancy rates, this adversely affects loans and/or investor relationships.

There is simply MORE new construction space sitting on the market and the over supply has led to a decrease in rental rates or higher amount of concessions given.

While you may experience more risk in construction pricing and timing, you will find that tenant improvement allowances are at some of the highest I have seen since 2009. New construction is often designed with many restaurant ready infrastructure items in place, such as grease interceptors, venting runs, up to date life safety and sprinkler systems, and abundant sewer/water credits.

Still have questions? Looking for second restaurant space? Contact us to discuss your #cre needs.