Downturn squeezes restaurants; high rents pose challenges

Larry Narasaki has hit the predictable slow patch at Nick-N-Willy’s World Famous Take-N-Bake Pizza, which got off to a good start about 18 months ago in an in-line retail center at State and Bloom streets, Boise.

But at least he pays lower rent than many competitors pay.

Narasaki initially looked at more expensive space in high-profile, anchored, retail centers.
“I went for space that was relatively inexpensive, that I could afford if it’s slow and the business doesn’t really do that well,” he said.

Another Nick-N-Willy’s shop closed recently in an east Boise shopping center that is anchored by a high-traffic retailer and charges higher rent – although restaurants succeed or fail for many reasons, Narasaki said.
The downside of a less expensive location is that it generates fewer walk-in customers. Narasaki said he plans to head out in the neighborhood, doorknob fliers in hand, to promote his business.
The rent-to-revenue ratio is out of whack in some restaurants that Bill Laska markets for sale. He owns the Laska Co. business brokerage in Boise and has sold some 150 restaurants in his career.
High rents and lot prices pose another challenge for operators in the competitive, and at times complex, restaurant market.
Restaurant owners, to stay profitable, traditionally aimed to pay rent equal to 6 percent of revenues, or to generate revenue that’s at least 15 times the cost of rent – assuming they had correct ratios for the costs of goods and labor, Laska said.
“Because real estate values have come up so high and lease rates are so high for retail space, the amount of sales necessary to (achieve) 6 percent is unrealistic,” he said.
“I’m seeing newer startups with sales not high enough to support the rent,” Laska said.
Now that the 6 percent guideline is becoming outdated, it’s vital – as rents stay strong and competition continues – for aspiring operators to realistically forecast revenues, he said.
To people who plan to open or buy franchises, he recommends doing substantial research locally instead of relying solely on company-wide projections.
Narasaki said he used revenue projections from the Nick-N-Willy’s chain, but adjusted them downward to suit a market that remains relatively small.
He’s from the San Francisco Bay Area, but worked in the Boise area for several years as a mechanic for a major auto dealer before opening the pizza shop.
Restaurants still sell when rent-to-revenue and other ratios aren’t in line, but they are worth more when the ratios are respectable, Laska said. “There are always good and bad points to any business.”
Restaurant buyers often believe they have a “better idea” and can increase sales – one way to drop the rent-to-sales ratio, he said.
Retail property broker Bob Mitchell of Thornton Oliver Keller in Boise said restaurant expansion in the Treasure Valley remains fairly brisk. Restaurant operators can get financing, though the credit conditions have tightened for people seeking to buy or develop shopping centers, he said.
Major restaurant operators know how much rent they can afford to pay and in turn how much revenue they need to generate to turn a profit, he said.
Mitchell hasn’t seen a decrease in restaurant deals because rents – which have softened recently - are too high, he said. But restaurants “are slower to expand and are negotiating harder for the deals they are taking,” for competitive and general business reasons.
Rents of $30 or even $40 per square foot per year can be found, although that’s most typical of an occupant such as a Tully’s or Starbucks coffee shop that has a drive-through lane, he said. Rents in the middle to high $20s for restaurants and low to middle $20s for traditional retail space are available in newer retail centers around the Treasure Valley, he said.
“There are still good deals to be had because there are still good locations, restaurant concepts that are not present yet, and restaurants that are going to meet the population (growth) demand,” Mitchell said.
Zions Bank is scrutinizing restaurant lending opportunities, said Sharon Dollinger, vice president of the bank’s Women’s Financial Group. She does a substantial amount of U.S. Small Business Administration lending to men and women.
“With the economy, retail and restaurants are definitely feeling the downturn,” she said.
From a financing standpoint, traditional challenges for restaurants include high renovation, food and labor costs, and a dearth of assets to put up as collateral, Dollinger said. Equipment that is costly to buy initially often nets a comparatively small price in a liquidation, she said.
Bankers want to see a thorough business plan that takes into account not only strong competition in the restaurant industry but also traditional patterns such as the initial wave of customers, the subsequent slowdown, and seasonal ups and downs, she said.
“There are not many restaurants that I’m aware of that are successful and that aren’t very visible,” she said. “The double-edged sword is to pay for the location and hope you’re successful, or find something that is less expensive and bring in clients some other way.”
“Competition is fierce,” Dollinger said.
***
To contact the author, write brad.carlson@idahobusiness.net