NAIOP San Francisco Bay Area Chapter: Latest News

Recap of the Webinar: A View From the Retailer

June 16, 2020 Filed under: Chapter

NAIOP SFBA’s hosted an exceptional weekly Zoom-I webinar on May 28^th.The program, A View From a Retailer, featured a candid discussion about the massive challenges retail tenants are facing as a result of the COVID-19 crisis and how they are working with landlords to find creative solutions. Laura Sagues Barr, Senior Vice President, CBRE, moderated a panel which consisted of some the best retailer minds in the Bay Area including:

James Nicholas, Co-Founder & Managing Partner, Big Night Restaurant Group

Dana Bloom, CEO, Proper Food

Adam Shane, Chief Development Officer, Barry’s Bootcamp

Key points from the discussion included:

What are you spending most of your time on?

Nicholas

Having conversations with landlords about how to stay solvent / share the burden
Some of their landlords giving full abatements / want full rent on 1^st of each month
Key to their solvency is landlords period
For 2020 and through 2021 exploring how to share in something rather than nothing
For full service restaurants 50% occupancy is death sentence
They are well below 10% net margin business

Bloom

Working with landlords / all have been pretty great
Taking a lot of pain and asking landlords to take their fair share
Were sold on the properties based the daytime populations within 1/8 of a mile
Daytime population changed significantly / paying rent for traffic that’s not there
By no fault of their own, our landlords are unable to provide what they sold to us
All stores closed operating interim business model with home delivery (very small percentage of pre-COVID revenue) focused on weathering the storm this year
Views next two years as investment years – doesn’t expect profitability to return until 2022

Shane

Talking with landlords about fundamental partnership
Conversations need to be about intent / literally unable to operate as intended
For 50+ locations having 50 different conversations with 50 with different landlords
Working on proformas and budgets / sharing with landlords to create full transparency in an effort to create a true partnership
Seeing lack of movement in terms of actual rent abatements as discussions have been more about deferrals
Might take 18 months to get back to where our business is was in Feb 2020. Highlighting the true unknown of COVID
Hard for landlords to commit to not getting 100% of rent for at least 12 or maybe 18 months

What types of partnerships have you been exploring?

Bloom

Delivering meals for corporate customers to hospitals and homeless shelters
Doing home delivery to neighborhoods using their own vans rather than use delivery services
Looking at providing food service for corporate customers bring individually packaged food into offices
Looking at being able to serve workday meals for home delivery

Shane

Pivoted quickly with online classes to keep clients engaged
A large portion of clients are using it
Our core focus is brick and mortar but digital gives us an incredible opportunity to add a new platform for our community

What are you doing to go digital?

Shane

Pivoted quickly with online classes to keep clients engaged
15% of clients are using it
Growth opportunity / silver lining
They will always be brick and mortar based digital will be small ancillary

What are some of your other concerns?

Shane

Understanding rules for outdoor classes or any opportunities to bring people together prior to reopening
Security - it was getting dangerous in SF before / crisis and more vacant retail storefronts around the city may cause these issues to accelerate

Bloom

Security – closed some locations partly due to multiple thefts related to the homelessness issue, which became a health and safety concern for our employees

Nicholas

Security for buildings and staff / have had several break-ins
Security for diners outside
Cancellation of corporate events like Dreamforce - cataclysmic
First choice would be to put business in hibernation and open back up in 2022

What would you like the City to know about your challenges?

Nicholas

The independently owned full service restaurant is at risk of going extinct
Raising the minimum wage again seems doesn’t seem like the right move
Permit requirements and charges won’t work
Asked to pay $2400 fee for outside speakers
Burger window at Marlowe cost over $100K
COVID is making them / us finally face things like increasing service charges and prices

Bloom

Minimum wage increase / not having tipped wage credits
Raising cap for formula retail / would allow a local family business to get out into neighborhoods
Impact of cost and difficult of permits

Shane

Operating costs are significantly higher / margins lower

What do you want landlords to know?

Bloom

Restaurants typically operate without much working capital / cash comes in and you pay vendors 30 days later
Paycheck Protection Program (PPP) – has serious spending limitations
Has originally passed it was only for 8 weeks and was meant for paying employees
Only 25% can be used for rent
Forgiven only if you are back to full employment by end of Jun, clearly not going to happen
Proposed changes extends to end of year and provides small relaxation but still limits spending on rent

Shane

Rare for small hospitality businesses to have significant cash reserves that can get it through 3+ months of closure with little to no income coming in
In order for tenants like us to survive we need rent abatement so we can move forward

Otherwise every landlord and tenant may end up fighting this out in court

What kind of conversations have you been having about sales reporting?

Nicholas

What is required is total partnership and transparency
Offering complete sales reports – landlords are entitled to that information
Recommends putting tenants on the spot – ask hard questions so you get brutal total honesty

Shane

Full transparency – it’s a partnership aka a marriage
Boils down to abatement when closed, percentage rent when open
When back to 100% government allowed occupancy back to normal rent
Added COVID contingency language if we have to close again

Tell us your position on restaurant management agreements – if landlord is providing all the capital do they get a piece of the equity?

Nicholas

Takes full long-term leases ( at least 25 years)
Raises all their our own capital
Margins are already so low
Typically a restaurant is a convertible preferred structure / we pay investors back 100% of principal investment before we share any of profits whatsoever

Landlords have their own ongoing obligations and rely income – how do you respond to that?

Bloom

Step back and look at facts of pandemic with over 100k lives lost and highest unemployment in history
The impact trickles through and cannot stop with one part of the chain
Everyone has to take some share of the pain the same way our vendors are asking us for help
Conversations have to happened throughout the chain – no one is spared anywhere in the chain

Shane

It’s a real issue landlords have costs
The more empathetic tenants can be to those burdens the better chance we have as partners to work toward a solution
Everyone is on the wrong side of this

Nicholas

Recommends tenant pay the triple net expenses and getting rent abatement on them

What long term impact will this have on retail. What percentage of retailers do you think will survive?

Nicholas

Seeing figures suggesting at least 40% of full service restaurants will not reopen/ thinks it will be more
They are a well-capitalized, metrics driven group and don’t know if we will end up with all properties intact
Past crisis have shown there will be opportunities at the end of this
The Golden Gate Restaurant Assoc reported in 2011 that 11% more restaurants closed
Trends were already starting, coronavirus has punched everyone in the gut
Payroll is now 50% of their cost
Thinks bar owners will do much better – lower risk and higher margin

Bloom

Clear that it will have profound impact on restaurants and retail
There were already headwinds making it difficult for these industries now massively accelerated
Believes there will be less competition for those who survive
Hiring has been gorilla-warfare – that will change
See tons of opportunity on the other side
The only ones who will survive are well capitalized nimble operators with loyal followings and landlords willing to work with them

Shane