Concessions For D.C. Restaurants On The Rise As Developers Compete For Top Chefs
Developers in D.C. increasingly see restaurants as a vital amenity for mixed-use projects, and with so many developments under construction across the city, the competition to lure the best restaurant users has forced them to get aggressive.
Brokers working on restaurant deals in D.C. say the level of concessions landlords are giving has risen to never-before-seen levels, and in some cases, restaurateurs are offered twice as much as they would have been in the past to sign onto a project.
This creates a risk that restaurateurs could open too many locations for the market to support, but brokers say experienced users understand how to find projects with the best chances of success.
"Restaurants and entertainment venues have become the new anchor for a lot of projects," Papadopoulos Properties principal Tom Papadopoulos said. "As a result, landlords are opening up their checkbook a little bit more to get the right tenant in there."
When structuring a deal to bring in a new restaurant, landlords in the past would typically offer tenant improvement allowances in the range of $75/SF to $100/SF, Neighborhood Retail Group CEO Bethany Kazaba said, but that is changing.
"I am now finding, for the same restaurant specs, brokers are now sending proposals with $195/SF-plus in tenant improvement allowances for a few of the tenants we're representing," Kazaba said. "I never would have thought we'd see that in the market."
The average tenant improvement package for restaurants in D.C. today is around $120/SF, according to Dochter & Alexander Retail Advisors, up from $84/SF in 2006. Dochter & Alexander principal Dave Dochter said he has seen some deals surpass $200/SF and even approach $300/SF in special circumstances.
Dochter said tenant improvement packages offered to restaurants vary widely depending on the neighborhood and project type and are not as widespread as they are in D.C.'s office market, where concessions are the highest in the U.S.
High restaurant concessions are much more common in large, mixed-use developments where the landlord sees restaurants as a necessary amenity and can afford to offer better deals, he said. Celebrity chefs and other well-known restaurateurs are also more likely to get better deals because they create more of a draw. Developers also need to offer more concessions when they are building in areas without established dining scenes where restaurateurs are taking more of a risk, Dochter said. The spreading out of D.C.'s restaurant scene in recent years has swung the market more in the tenants' favor, he said.
"Traditionally, there weren't as many markets in D.C. and the surrounding region," Dochter said. "Now there are more markets, so there are more opportunities. It depends on which areas restaurateurs are trying to penetrate, but they have more options than they once did and that puts pressure on landlords."
In addition to landlords becoming more conscious about the quality of their retail tenants, Dochter said restaurateurs are putting more focus on doing high-quality interior build-outs, and that requires more money.
"Restaurateurs are investing more into these spaces because the expectation is greater, so they're looking for landlords to help support that investment," Dochter said.
Miller Walker Retail principal Bill Miller also sees concessions rising from the $100/SF range to as much as $200/SF, but he said this is still a fraction of the cost of some build-outs. Typical restaurants spend $400/SF to $600/SF on creating their interiors, while larger companies like Joe's Stone Crab and Clyde's can spend as much as $1K/SF.
Smart restaurateurs undersand that saving a fraction of their build-out costs is not going to help a restaurant succeed long term if it does not have an appealing concept and location, Miller said.
"Tenant improvements sound sexy, but if you don’t do sales it doesn’t matter at all," Miller said. "If you're a really sharp operator, you know $100/SF in TI doesn't matter as much as a great location ... No amount of TI is going to cover a site that doesn't do the sales, you're still going to be going out of business."
Kazaba said she has worked with restaurateurs who have turned down deals with $200/SF of tenant improvements because they didn't like their chances of succeeding in the space.
"Just because they're getting that offer, it doesn't mean we're saying yes to the deal," Kazaba said. "When it's not a good restaurant space to begin with and you have a landlord giving significant TI, the answer isn't always 'yes, let's move forward,' because it is about location and concept."
But not all restaurateurs are smart, Miller said, and some restaurant groups can be enticed by the cost savings into opening more locations than they can handle.
"A number of restaurant groups have gotten overly ambitious," Miller said. "Guys who are less experienced might be like a moth to a flame and say, 'I'm getting such a good deal, I might as well do three,' but they don't realize the manpower and complexity is going to put them in a tight position ... If you open too many, you shoot yourself in the foot."
Miller also said he is seeing mistakes on the part of developers who are building too much retail into projects in areas without enough demand. He said brokers are often brought onto projects after designs are finalized and it is too late to tell a developer that they should shrink their retail footprint.
"The most expensive mistake to make is not the TI, it's drinking too much Kool-Aid and putting too much retail into places that can't support it," Miller said.