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Rent prices continue to rise in the United States as the housing crisis reaches a new high. HuffPost reported that, as of 2016, nearly half of renters are spending 30% of their income on housing and are “cost-burdened” by it. In some states, minimum-wage workers would need three jobs to pay rent on a one-bedroom.
Commercial retailers are also struggling to keep up with the rising costs. A recent article by The Wall Street Journal reported that even retail chains aren’t safe from sky-high rent and are struggling to cover costs in high-volume shopping cities such as Manhattan, Los Angeles, and Dallas.
Even upscale retailer Barneys has taken a major hit, with the rent on the Madison Avenue flagship location being raised to $27.9 million from $16.2 million annually earlier this year. The iconic New York store was forced to file for bankruptcy soon after, the extreme price increase only aggravating recent cuts Barneys had taken from online shopping according to CNBC. Landlords claim the pricing hikes are a result of the increase of store openings that followed the 2008 recession, which caused the rental market to skyrocket.
It might not be immediately apparent, but the housing crisis has had a big impact on restaurateurs’ ability to hire and retain employees. In order for you to protect business, it’s important to focus on hiring the best staff and changing your operations strategy so you can attract customers to a less-expensive brick and mortar location.
The number one operational obstacle that restaurateurs are facing in 2019 is staffing, hiring, and retaining employees. In a round-up of 2019 restaurant industry statistics, Toast reported that, while there are 15.3 million employees in the industry, 9 out of 10 restaurants operate with fewer than 50 staff members. The amount of Bachelor’s degrees awarded annually has also risen over the past 10 years, limiting the amount of people willing to take low-paying and entry-level restaurant jobs.
Industry turnover is also at an all-time high of 75% this year, likely in part to the minimum wage increases that have forced restaurant operators to schedule their employees for fewer hours. As the minimum wage rises, your overhead costs and ability to retain an attractive brick and mortar location likely will as well. At $2,000 to hire and train a new staff member and up to $15,000 in costs for a new manager, it is understandable why the restaurant industry is so concerned about the high turnover rates and rising rent.
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How Rising Rent May Affect Your Restaurant Operations and Staff Retention
When the housing crisis reached an all-time high in San Francisco last year, it dramatically changed how restaurants in the Bay Area recruited and hired talent. Even though the minimum wage had increased to $15 per hour, The Guardian reported that the median price of a rental in San Francisco had reached $4,550 per month in 2018 and it has only continued to rise since then. This substantial discrepancy between housing costs and household income has led to difficulties in recruiting talent for restaurants as wait staff, chefs, and line cooks alike are relocating to areas with more affordable rent.
Two of the most well-known restaurants in California, Napa Valley’s Terra and Berkeley seafood house Spenger’s, closed their doors because it was nearly impossible to find talent, reports The Guardian.
In order to survive, many restaurants in the Bay Area are evolving by changing how they serve food and hire staff. A crop of “fine casual” restaurants have popped up, featuring scaled-down menus that need fewer chefs and line cooks. Other establishments are reducing the need for wait staff by having customers pick up their orders themselves.
The cost of rent isn’t just outpacing restaurants in California — nationwide, restaurant operators are similarly having a difficult time recruiting and retaining staff.
A study conducted by the Bureau of Labor Statistics reported that the restaurant industry makes up the bulk of minimum-wage workers as of 2016 — 1.1 million workers nationwide according to Business Insider. While the tipping system significantly increases take-home pay for wait staff, the restaurant industry has the most to lose from the 8% increase in the minimum wage.
“According to the National Restaurant Association, restaurant and foodservice are projected to top $15 million in 2019, with recruiting and retaining employees amongst the top challenges faced by many operators,” said Ed Lee, co-founder of Wahoo’s Fish Taco via email. Lee also handles the operations for more than 60 restaurants nationwide.
“We are fortunate to have such great and loyal employees, but we understand that they must move outside of areas like Los Angeles, where the cost of living is lower,” Lee continued.
How Rising Rent Prices Are Affecting Restaurant Franchises
Even high-grossing chains like Wahoo’s are struggling to stay afloat over rising rent prices nationwide. The chain fought to keep its popular location in Manhattan Beach, California open this year, but the restaurant ultimately closed due to the unsustainable increase to their operational overhead costs.
“Fast-casual restaurants, like Boston Market and Wahoo’s Fish Taco, are getting hit hard due to escalating rents,” Lee said. “One of the reasons this is happening is that many investors buy the property based on what they can command in rent, then scale it back to make a return on their investment. New owners often raise the rent when the current tenant’s lease expires to match the purchase price of the property, so tenants must adjust to working with different landlords.”
Fast-casual restaurants with moderate prices are suffering the most from rising rent. And as the cost of living continues to rise, families that would have traditionally enjoyed these establishments are less likely to eat out regularly, Lee shared.
How Rising Rent Prices Are Affecting Independent Restaurants
Matthew Reischer, Owner & Proprietor of flushing.com, a website that covers the Flushing, NY food scene, had some insight on how rising rent prices are affecting Queens and other outer NYC boroughs that are home to lots of mom-and-pop establishments.
“Rising rent in downtown Flushing has had a two-fold effect on the restaurant industry here,” Resicher said. “Business owners that have had a long-standing presence in Flushing and have owned the real estate from which they operated have sold their properties to developers as the commanded price per square foot of real estate has soared.”
“Restaurant businesses that have not owned the land from which they operate have been less fortunate in terms of their ability to respond to rising rent,” he continued.
Kane’s Diner – which had been in business for over 50 years – recently closed their doors when the owners decided to sell the land to developers for windfall profits. The owners received a whopping $15,000,000 on the sale.
Operators who don’t own the land their restaurant sits on have been less fortunate, according to Reischer. Popular soup dumpling restaurant Nan Xiang recently closed in response to rent increases in Queens. Consumers have consequently begun to worry about the health of the Flushing food scene, as Nan Xiang consistently had lines out the door.
Unfortunately for these independent businesses in Flushing, the trend has been to move their operation to a shared-space like a food hall or a food court, such as the local New World Mall, to cut costs and offset the impact of rising rent.
Luca Laurentia and their wife, Deborah, were looking at spaces to house their dream queer bar. Then, COVID-19 hit.
What You Can Do to Protect Your Restaurant From Rising Rent
“Having an affordable place to do business is so important,” Lee said. “For restaurants to evolve, it’s important to find landlords that are your partners, or develop a good relationship with an existing one. The best landlords understand the entire process and your vision and will want to invest in the relationship with you.”
Some large chains like Wahoo’s have been successful in navigating the nationwide rent increases by telling their franchisees to invest in relationships with their landlord, but this could also apply to independent establishments.
“I give them all the tools they need to negotiate rent and help them understand their profitability margins,” Lee continued. “Finding the right location is just as important as being able to communicate effectively with your landlord.”
According to Reischer, rent increases are a cyclical real estate phenomenon that will ultimately benefit restaurateurs. In the meantime, he advises that it’s wise to lock in a long-term lease agreement with expressly written protective rent increase provisions.
If you must set up shop in a less desirable location because it’s what you can afford, lean on the old “champagne taste on a beer budget” approach by investing the money you’re saving on rent into the restaurant’s ambiance and decor.
“Several successful restaurant businesses here in Flushing have learned to compete on more than high-quality food but have also elevated the consumer experience in terms of aesthetic experience,” Reischer said.
“This often means expending significant development costs on design and architectural layout for a conceived restaurant space,” he continued. “Many restaurants here in Flushing that have had less than ideal locations, with presumably lower rents, have succeeded by creating high-end customer dining experiences that successfully attract customer demand.”
It’s understandable that ever-changing rental market would raise concerns over the future of your business. Despite rising rent, there are concrete steps that you can take to protect your restaurant and be successful in hiring and retaining staff. By establishing a positive working relationship with your landlord, investing in the training and career advancement of your staff members, and creating a memorable experience that brings your guests back again and again, it’s possible to navigate the ever-changing rental tides.