More pain ahead for landlords as restaurant bankruptcies poised to balloon in coming months

A chef walks in the direction of the doorway of a California Pizza Kitchen Inc. restaurant in New York.

Andrew Harrer | Bloomberg | Getty Images

Restaurants have to this point limped alongside by way of the worst of the coronavirus pandemic. But key pillars of help for their companies will quickly evaporate, spelling catastrophe for the eateries — and their landlords. 

The pandemic has, basically from its inception, upended the restaurant trade, sending gross sales plunging in the early days of lockdowns. The National Restaurant Association estimates it misplaced $165 billion in gross sales between March and July, and Yelp information confirmed 15,770 everlasting restaurant closures, as of July 22. 

Restaurant gross sales cautiously rebounded in the summer time months, pushed by out of doors eating and cooking fatigue. But the approaching chilly climate might halt and even reverse progress. Industry specialists do not count on a full restoration till a coronavirus vaccine is obtainable. 

“If it’s a bad Covid winter, it’s going to be a horrible winter for restaurants,” mentioned Tom Mullaney, head of restructuring companies at industrial actual property companies agency JLL. 

Industry analysts and restructuring specialists say one other wave of restaurant bankruptcies is looming. Government funds are working out and the cooler months throughout a lot of the U.S. are getting nearer, making out of doors eating a much less viable possibility for the many companies which were reliant on balmy summer time temperatures to stoke gross sales. 

As they wait in limbo, some restaurant landlords have struck short-term offers with their tenants, dramatically slashing base lease and asking for a share of gross sales as an alternative. If not, they threat shedding lease till a brand new tenant strikes in. And, more and more, these new tenants are arduous to come by. Not many restaurant chains, aside from some fast-casual chains like Chipotle Mexican Grill, have formidable progress plans at present. 

Four Corners Property Trust, an actual property funding belief with 733 owned properties in the U.S., has various restaurant tenants that embrace Taco Bell, Darden Restaurants’ Longhorn Steakhouse and Olive Garden, and Restaurant Brands International’s Burger King. It mentioned on a current earnings name that it deferred about 3% of second-quarter lease funds till later in the yr. 

A double whammy for landlords

Commercial actual property landlords have already been grappling with various tenants skipping lease funds, breaking leases or wanting to restructure offers for extra favorable lease phrases. After all, eating places aren’t the one companies hurting throughout the Covid-19 disaster. The retail trade can be dramatically downsizing, dealing a double whammy to the actual property homeowners who’re attempting to determine how to fill 1000’s of shuttered retailers and now darkish eateries. 

Many, together with the largest U.S. mall proprietor, Simon Property Group, have been attempting to work with tenants, putting offers for lease abatements or deferrals, to attempt to assist firms maintain the lights on whereas paying staff. But there’s solely a lot assist to go round, as these landlords have their very own payments to pay and lenders to take care of. 

“Pre-pandemic, you were already over-saturated with restaurants,” mentioned Michael Jerbich, president of B. Riley Real Estate, a division inside B. Riley Financial. “You were facing declining foot traffic — competition from Trader Joe’s, Whole Foods and Kroger. … Then the pandemic comes, and you have the perfect storm.” 

Restaurants and grocery shops have lengthy been engaged in a tug of battle for shoppers’ stomachs. But pandemic stockpiling closely shifted that proportion in supermarkets’ favor. 

“Chains are going to close their underperforming locations,” Jerbich mentioned. “The bigger companies with the stronger balance sheets will be the ones to survive.” 

A Pizza Hut restaurant is seen in Plano, Texas, the United States, on July 2, 2020.

Dan Tian | Xinhua News Agency | Getty Images

It’s the impartial eating places and small chains which can be probably the most in danger for everlasting closures throughout the pandemic. But giant nationwide chains are already seeing the affect of the disaster on their footprints, too. 

Last week, NPC International, the most important U.S. franchisee of Yum Brands’ Pizza Hut, mentioned that it might completely shutter up to 300 of its pizzerias, nearly all of which can be its bigger dine-in places, after it filed for Chapter 11 chapter in early July. Pizza Hut mentioned the closures will have an effect on underperforming eating places and can assist transition its restaurant footprint into smaller places higher suited for carryout and supply. 

‘It’s getting actually tense’

McDonald’s plans to shut about 200 places by the top of the yr, about half of that are inside Walmart shops and generate decrease gross sales. And Starbucks will shutter up to 400 of its North American company-owned cafes over the following 18 months as it pushes into new places and modernizes its retailer codecs. 

Most of those deserted places will both want to get replaced by one other restaurant chain, or demolished, in accordance to actual property specialists. The distinctive outfitting — with industrial kitchens and in some instances drive-thru lanes — makes them troublesome to change with the rest. 

“The only logical user short of tearing it down is another restaurant chain,” JLL’s Mullaney mentioned. 

“I have seen in the past two or three weeks, a real increase in the emotions of landlords,” he added. “It’s getting really tense.” 

And a number of that stress is stemming from eating places wanting to file for chapter to extra simply break leases, he mentioned. It’s a tactic already being utilized by many retailers, of which 44 have filed for chapter to this point this yr, in accordance to a monitoring by S&P Global Market Intelligence. In courtroom, firms legally are in a position to reject leases en masse, and infrequently will rent corporations to assist them promote leases to give you money to repay collectors. 

Roughly three weeks in the past, California Pizza Kitchen, a mall staple, filed for Chapter 11 chapter safety and has mentioned it plans to reject dozens of leases for unprofitable places. 

Robert Rattet, a chapter lawyer at Davidoff Hutcher & Citron, mentioned that some chapter judges have waived or lowered lease for the time being due to the pandemic and stay-at-home orders. For instance, a Chicago chapter courtroom lately decreased lease to 25% for a restaurant firm that had filed for Chapter 11, he mentioned. 

Meantime, Grant Benson, vice chairman of world franchising and enterprise improvement at Dunkin’ Brands, mentioned that franchisees’ conversations with their landlords throughout the pandemic had “a mixed bag of results.” The espresso chain’s franchisees personal or lease about 90% of its eating places’ actual property, and about half received short- or medium-term concessions, like deferrals or abatements. 

Some of the extra challenged Dunkin’ places could have to shutter their doorways ceaselessly. The firm introduced in late July it plans to shut 800 U.S. eating places this yr. Altogether, they signify 8% of its U.S. footprint however solely 2% of its gross sales, and greater than half of these places are contained in the gasoline station and comfort retailer chain Speedway. 

“If someone’s really struggling, they’re not likely to struggle for a couple of years then pack it in. You’re probably going to see it sooner,” Benson mentioned. 

An alternative in {the marketplace}

For eating places in a robust monetary place, nonetheless, landlords’ desperation for paying tenants at their properties might ending up being a boon. 

More favorable lease phrases and higher places will probably be hitting the market, as actual property homeowners should settle for the brand new — considerably everlasting — actuality that the pandemic has sparked. Real property specialists say it’s going to turn into extra widespread for eating places and retailers to pay lease primarily based on a share of gross sales, for instance, which has sometimes been one thing landlords have tried to keep away from in the previous. 

“I think the mall owners, the property owners, are looking more at their models,” mentioned Scott Stuart, CEO of the Turnaround Management Association. “It’s like a scavenger hunt. What’s left to pick through?” 

Companies like Starbucks, Chipotle and Dunkin’ are all wanting to add extra drive-thru lanes, which in the previous have confronted some opposition from landlords. 

“We’re already seeing franchisees say, ‘OK, I’ve been able to get through the challenges of the last five months. The drive-thru has been a major component of that, and now I’m going to start taking advantage of those situations that, unfortunately for others, there’s opportunity in the marketplace,'” Benson mentioned. 

CORRECTION: This story was revised, as it beforehand incorrectly acknowledged that U.S. mall proprietor Simon sued the restaurant  chain Cheesecake Factory. 

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