Getting restaurant tenants on the menu (even in vibrant, foodie San Francisco) can be a challenge

High real estate and labor costs, housing affordability and worker shortages mean commercial landlords have to give a little if they want to attract the right food amenities to their buildings.

February 10, 2020

San Francisco has one of the most vibrant restaurant scenes in the country, perhaps even the world.

According to the San Francisco Travel Association, one of the top four reasons visitors come to San Francisco is to take advantage of the city’s great restaurants. There are over four thousand restaurants in the city, more than 150 of which are considered “fine dining”. San Francisco has more Three Star Michelin-rated restaurants than London, Barcelona or Rome and more Michelin starred eateries per square mile than Tokyo, New York or Brussels.

So, why is it getting so hard to run a restaurant in San Francisco these days? More than 500 closed their doors in 2018, a 42 percent increase over 2017.

One of the major culprits is overhead, where labor costs dominate. San Francisco has one of the highest minimum wage requirements in the country at $15 an hour. That’s one reason why payroll costs have leaped 52 percent since 2012, according to the Golden Gate Restaurant Association, a local trade group. Then there’s the cost of healthcare which has grown by more than a third over the same time period. And, in an economy where local unemployment is hovering around 3%, hiring and retaining employees, many of whom face long, expensive commutes from outside the city, is another major hurdle.

A la carte permit fees

But these are major headaches for restaurateurs only once they have successfully opened the doors. Before that happens, the city’s permitting process is a significant hurdle to be overcome. Want to have tables and chairs outdoors in good weather?  There’s a permit – and a fee – for that. Candlelit dinner? There’s a permit, and a fee for that too. Planning to use more wastewater than the prior occupant? There’s a permit and a hefty fee for that.

It can often take 12 months or more to open a restaurant in San Francisco and can cost as much as $750,000. This means, in most cases, restaurateurs are paying rent on space long before the revenue producing restaurant operation opens.

And, as we all know, that space isn’t cheap either – or easy to find. Overall retail vacancy in and around San Francisco is steady at around three percent, making the right space hard to find. The cost to rent ground floor space in the city’s commercial buildings and gourmet corridors has skyrocketed, largely due to the city’s own brakes on development as well as the growth of a vibrant tech-based economy and an extended period of economic expansion.

But it’s not all doom and gloom

Here's where landlords can help. While concessions might not be as necessary in a tight market, they might be advisable, especially if you covet a restaurant amenity in your building. It’s increasingly necessary for landlords and restaurateurs to work together to make new eateries a reality.

Take Mastro’s, a recent addition to the Union Square fine dining scene, for example. With some of the highest retail rents in the city, it’s a challenge for any restaurant to make it in Union Square but it’s an undeniably great location. Mastro’s has successful eateries in high-end locations around the country, including Beverly Hills, Manhattan, Chicago’s Magnificent Mile and many others.

Working closely and collaboratively with the landlord, JLL was able to negotiate additional tenant improvement allowances that enabled Mastro’s to sign a lease for stunning three level restaurant complete with a unique rooftop space at 399 Geary. The restaurant opens this week and it’s a testament to the commitment and vision of the owners that they’ve been able to open right as the city swings into the holiday period when eaters will be in strong supply.

There are other solutions to the high cost of running a restaurant. One rapidly developing trend is the use of technology, which enables self-serve stations for drink dispensing, for example. But, such innovations may not work in high end eateries. With cities continuing to raise permit fees, and real estate ever more expensive, the only way restaurants are going to be able to survive moving forward is if there is true partnership between restaurateurs and their landlords.

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