How Coronavirus has Shifted the Specific Demands for Restaurant Leasing Space

As COVID-19 alters the function of every industry in the United States, restaurants are not immune. There are estimates that one in three eateries will permanently close in 2020. Although our market fundamentals, such as demographic growth trends and operator balance sheets, are stronger than in many other places, there are key features that have become crucial to a restaurant in terms of their physical space- most notably parking and patios.

Parking

Restaurants have always been more aggressive than other retailers, in all markets. They often pay higher rent because they place a higher value on visibility and accessibility than other retailers. With this in mind, parking is an essential asset. The emergence of the fast-casual food market decreased requirements for generous parking ratios, giving the impression that parking had more value 3-5 years ago than now. However, restaurants across the country are beginning to demand dedicated parking spots in their lease agreements as more and more customers use curbside pickup. 85-90% of my own deals include negotiated parking spaces in the letter of intent and lease.

Patios

This year, patios have become a necessity for restaurants reopening post-quarantine. Outdoor dining was the first seating to reopen all across the country, providing a much-needed boost to restaurants who were pivoting their operations to delivery and carryout and yet wanted to provide an eating area. Furthermore, restaurants have discovered that patio seating serves as a billboard, or a beacon, indicating a restaurant is fully functional and popular. Customers are naturally inclined toward locations where they see other people, and patio dining has become the solution to supporting the needs of both customers and restaurants. In Tennessee, there are about 8-9 months of comfortable outdoor dining- however, with the increase of covered patios, this could extend year-round.

In the past, patios have been an amenity to restaurants when leasing a commercial space, and a patio has not always been a part of their site selection criteria. This could very well change, as patios have become the backbone of stability for so many restaurants.

One or the other

It is also necessary to consider how parking and patios have begun to coincide. As restaurants try to serve as many customers as possible while also practicing social distancing, restaurateurs have to be innovative in terms of creating an outdoor space. Many restaurants that have a small patio or no patio at all, have begun to cut into their parking in order to create more space for seating. I recently did a deal in Knoxville with a space for rent that had a small patio, and the tenant ended up negotiating two parking spaces to expand the patio and increase their outdoor seating capacity.

The patio trend that is beneficial for increasing customer capacity could be perceived as harmful by other tenants and even impacts the restaurants’ own proximate parking situation. For a single tenant to occupy the prime patio real estate as well as the most convenient parking areas is not always feasible. Can a restaurant negotiate one or both elements? For how long?

In terms of the lease

Before COVID-19, we were in a landlord market for 3-4 years, where tenants had to take what they could get. COVID has preemptively shifted the market in the other direction. Tenants who are well-funded and prepared to sign the lease have the negotiating power now. Landlords recognize their position and seek to make their properties more appealing and amenity-laden for these prospective tenants. As restaurants continue to demand parking, it is likely that shopping centers will begin to market to-go parking spaces as a major selling point to potential restaurant tenants.

What remains to be seen is how landlords, who are adept at monetizing every part of their investment, will handle occupancy in outdoor space. It is not outside the realm of possibility that landlords will see the demand for outside space as the impetus to begin charging for it. The question in this case is not whether a restaurant can negotiate their patio and parking, but rather, how much are they willing to pay for it? And the question for the future is how patios and parking will be perceived once COVID no longer affects restaurant operations.