Why Restaurants Close: Landlords

Moderator Note: Some posts at the start of this thread were split off from another thread and merged into this thread, which was actually started after those posts were made. Hence, some of the posts here may now appear out of order. In the opening post, "their" refers to Raw in Highland Park, which recently closed. The OP cited this piece in his original post Did Another Highland Park Restaurant Close?.

Thanks,

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for the Moderators

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tem wrote:It's possible their legal issues were finally coming to roost.

Downtown HP is getting kinda depressing with lots of closings. Last month when Benjamin closed, I happened to say that it seemed "odd" that the chef/owner's wife "liked" the status update on their facebook page about the closing, thinking that they would be at least a bit sad about it.

Benjamin Brittsan then told me to F off and mind my own business and how his wife was happy that he wasn't trying to 'please people who didn't appreciate him'. Oy. Nice business sense, people.

I think it was discussed at length in the Moderno/Royce thread but I wonder why Highwood can support so many restaurants whereas there have been 5 failed better/fine dining restaurants (M, Moderno, Royce, Benjamin, In The Raw) in HP in the last year and all they can do is go after a new Panera.

Maybe a combo of "impossible customers and the chef/restaurateurs who hate them"? Sounds like a recipe for disaster

tem wrote:I think it was discussed at length in the Moderno/Royce thread but I wonder why Highwood can support so many restaurants whereas there have been 5 failed better/fine dining restaurants (M, Moderno, Royce, Benjamin, In The Raw) in HP in the last year and all they can do is go after a new Panera.

I'm not sure I agree with this premise. Gabriel's closed in July 2012. Carlos closed as well, and morphed into the less formal Nieto's. Bertucci's closed earlier this year, too. Froggy's remains but last time I was there the place was half-full on a Saturday evening. I don't think Highwood is supporting finer dining any better than Highland Park is.

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ronnie_suburban wrote:

tem wrote:I think it was discussed at length in the Moderno/Royce thread but I wonder why Highwood can support so many restaurants whereas there have been 5 failed better/fine dining restaurants (M, Moderno, Royce, Benjamin, In The Raw) in HP in the last year and all they can do is go after a new Panera.

I'm not sure I agree with this premise. Gabriel's closed in July 2012. Carlos closed as well, and morphed into the less formal Nieto's. Bertucci's closed earlier this year, too. Froggy's remains but last time I was there the place was half-full on a Saturday evening. I don't think Highwood is supporting finer dining any better than Highland Park is.

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well, Bertucci's, Gabriel's and Carlos had long (very long in Bertucci's case) runs and Froggy's is 30+ years and still going. I'd say that's better than HP's recent track record. My point, I guess, was the restaurant environment in general. HP has has got Abigails (v good), Bella Via (meh), Ravinia Grill (blech) and more casual places like Norton's but they don't seem to be able to support as many places as Highwood, where I'm sure rents and taxes are lower as well as the potential for better foot traffic.

tem wrote:

ronnie_suburban wrote:

tem wrote:I think it was discussed at length in the Moderno/Royce thread but I wonder why Highwood can support so many restaurants whereas there have been 5 failed better/fine dining restaurants (M, Moderno, Royce, Benjamin, In The Raw) in HP in the last year and all they can do is go after a new Panera.

I'm not sure I agree with this premise. Gabriel's closed in July 2012. Carlos closed as well, and morphed into the less formal Nieto's. Bertucci's closed earlier this year, too. Froggy's remains but last time I was there the place was half-full on a Saturday evening. I don't think Highwood is supporting finer dining any better than Highland Park is.

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well, Bertucci's, Gabriel's and Carlos had long (very long in Bertucci's case) runs and Froggy's is 30+ years and still going. I'd say that's better than HP's recent track record. My point, I guess, was the restaurant environment in general. HP has has got Abigails (v good), Bella Via (meh), Ravinia Grill (blech) and more casual places like Norton's but they don't seem to be able to support as many places as Highwood, where I'm sure rents and taxes are lower as well as the potential for better foot traffic.

Makes sense, and I especially agree with your concise assessments of those 3 places. But the closings are all relatively recent, which is why I lump them all together. I also think that if Rosebud had stayed in its space, it'd still be going strong. It seemed the HP'ers never took to the concepts that followed it. So, I'd chalk that up to something more specific than a general trend.

Do you really think Highwood has better potential for foot traffic than Highland Park? I'm not saying you're wrong but in my experience, there are always a lot of people out on the streets in downtown HP. But that doesn't take into account the fact that HP's businesses are spread out over a lot more area, which probably has some negative bearing on foot traffic.

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Sage Grill ('07-'11) was the Highwood spot that most resembled Benjamin imho.

Cathy2 wrote:I think there is more going on under the surface than simply an issue of rents.

I think this must be so whenever rents are blamed (as they also were a while ago in Andersonville). I don't doubt they are part of the equation, but a landlord charging more rent than any business can afford is irrational, since then he'll be collecting no rent. If a landlord raises the rent beyond the ability of a current tenant to pay, it can only be in the expectation that some other tenant will do a robust business sufficient to make the higher rent affordable.

I don't see the issue as "blaming" the landlord. Facts are facts, if the taxes and other costs, as well as upkeep on a building come to a certain amount then the owner needs even more than that just to stay afloat. If that number is more than a restaurant can bear then they can't do business. No one is to blame, those are just the numbers. I don't think it can be dismissed that part of the issue is that some areas have more tax burden than others. The rent an owner needs to charge in HP will be very different than the rent an owner needs to charge in Eau Claire and taxes are a significant part of that equation.
That may very well contribute to the fact that the lunch counters you see in Wisconsin are rare in Chicagoland.

zoid wrote:I don't see the issue as "blaming" the landlord. Facts are facts, if the taxes and other costs, as well as upkeep on a building come to a certain amount then the owner needs even more than that just to stay afloat. If that number is more than a restaurant can bear then they can't do business. No one is to blame, those are just the numbers. I don't think it can be dismissed that part of the issue is that some areas have more tax burden than others. The rent an owner needs to charge in HP will be very different than the rent an owner needs to charge in Eau Claire and taxes are a significant part of that equation.
That may very well contribute to the fact that the lunch counters you see in Wisconsin are rare in Chicagoland.

Agreed. If a place remains vacant for any length of time, it's fair to assume that the asking price on the rent is at least one significant reason why.

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ronnie_suburban wrote:Agreed. If a place remains vacant for any length of time, it's fair to assume that the asking price on the rent is at least one significant reason why.

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My comment about the rents in HP wasn't idle speculation, it was based on current conversation with area business owners. The tax base, licenses and fees, and building upkeep all create a set of fixed costs. Remember how long the space where Uncle Dans is was vacant after Gap moved out? Prime real estate, empty.

In this discussion, restaurants typically operate on lower margins than, say, boutique retail or services. It may be that a restaurant is simply no longer easily sustained without having relatively mass appeal...aka dumbing it down. I had a tolerable but not good lunch in HP today at a place where I am sure little of our food was prepared in house, but it was packed. And lunch for two adults and two kids with no alcohol came to $46. It's not a matter of people not being willing to pay, but the menu has to be broad enough to keep the place packed and paying those prices in order to pay the rent.

edb60035 wrote:My comment about the rents in HP wasn't idle speculation, it was based on current conversation with area business owners. The tax base, licenses and fees, and building upkeep all create a set of fixed costs. Remember how long the space where Uncle Dans is was vacant after Gap moved out? Prime real estate, empty.

I get all this. The thing that, just as a lay person, I've never understood, is: How does it serve a landlord to be collecting no rent when he could be collecting some rent?

Respecting Ron's wishes, I've created this new topic, because I suspect some people here may actually have the answer to a question that has always puzzled me.

Restaurants all over this city and metro area have closed because the landlord raised the rent beyond their ability to pay. The landlord may do this for all sorts of reasons, his own tax burden and overhead being chief among them. Secondarily, he may believe that the market will bear a higher rent. However, it is not uncommon to see these spaces remain vacant for months or even years once the tenant has left the building.

And that brings me to my question. Granting that a landlord may not be able to charge enough rent to make a profit, how does it serve a landlord's interests to be collecting no rent instead of some rent? Why would a landlord evict a paying tenant when there is no tenant on the horizon who can pay more?

This has nothing to do with restaurants, specifically, and everything to do with landlords and what they believe, rightly or wrongly, they can get for a space. As a former co-owner of a retail space for a very brief time, if your lease comes due and the landlord believes that either a) the property/market will bear a higher amount or b) you aren't a desirable tenant, or c) you are a very successful tenant and, therefore can "afford" (in their opinion at least) to pay more because you won't want to leave, or any combination of the three, it is within their right as the owner to demand whatever amount they want. That doesn't mean they'll get it. Hence, the empty space. Nothing very mysterious about it.

boudreaulicious wrote:This has nothing to do with restaurants, specifically, and everything to do with landlords and what they believe, rightly or wrongly, they can get for a space. As a former co-owner of a retail space for a very brief time, if your lease comes due and the landlord believes that either a) the property/market will bear a higher amount or b) you aren't a desirable tenant, or c) you are a very successful tenant and, therefore can "afford" (in their opinion at least) to pay more because you won't want to leave, or any combination of the three, it is within their right as the owner to demand whatever amount they want. That doesn't mean they'll get it. Hence, the empty space. Nothing very mysterious about it.

Obviously, there's a lot more to it than this ultra small scale example illustrates. So many property owners have multiple holdings and have zero pressure on them to make sure that every individual property in their portfolio is profitable on its own. On top of that, exchange rates, ammortization schedules, the need for offset losses and a host of other factors go into these decisions. I wouldn't say it's a mystery but it's clear that there's a matrix of factors that property owners consider when they test the price sensitivity of a property.

Tenants who can afford their rent and always pay it on time aren't always offered renewals and tenants who pay late and demand a lot of maintenance are often renewed. The financial considerations that go into these decisions are frequently obscured by the proprietary nature of the property owners' financial details and not always readily apparent. It's pretty clear that even when 2 property owners make the same decision about jettisoning a tenant with an expiring lease, it isn't always for the same reason.

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well, alrighty then...

And that brings me to my question. Granting that a landlord may not be able to charge enough rent to make a profit, how does it serve a landlord's interests to be collecting no rent instead of some rent? Why would a landlord evict a paying tenant when there is no tenant on the horizon who can pay more?

Seems that there are actually two questions here:

First - "How does it serve a landlord's interests to be collecting no rent instead of some rent?" - Restaurant leases are typically long terms. 5-20 years. A restaurateur is not going to sign a one year lease. Restaurant owners are looking to be open for a long time. So they lock in a rate (or a sliding scale) for what they consider the life of the business. No one wants to spend 100k to millions for buildout and then be at the mercy of a landlord after one year to renegotiate. The landlord wants their best return on investment for 5 to 20 years. That's where that calculation comes in. Can I do better in a year then I can do now with what I am charging for rent? With many people thinking the market is on the up-swing I could see many landlords thinking that way.

Second - "Why would a landlord evict a paying tenant when there is no tenant on the horizon who can pay more." - A landlord would never do this. The problem would come in negotiating the terms. The restaurant wants five more years, the landlord wants to extend one more year to see what's on the horizon. Also, when deciding to shut a restaurant it's very easy to blame it on the landlord and not financial hardship.

There are a lot of real estate leases which were signed in the 2003-2005 time frame that are coming up for renewals. Many of the LESSEES are looking are looking for flat leases or rent concessions as they believe that their old deals were not such great deals and were signed under different economic conditions.

On the other hand, there are a number of LESSORS who are wanting rent increases as the economy is "improving."

I have seen a number of businesses relocate within the general vicinity as they are getting a lot better deals from their new landlords.

I just did a real quick check. Space in downtown Hinsdale is going for about $27.50/sq ft.

For a 2,000 sq. ft. space (not an outrageous amount of space after you figure in the kitchen, bathrooms, coolers, dish washing stations, bar area, etc.) that's $55K a month.

Just let that sink in for a second...

55
thousand
dollars
every
month

You're going to have a nice small cozy place? Fine, at 1000 sq. ft. you're still on the hook for $27K every month.
To quote Goodfellas "Business is bad? F YOU! Pay me! You had a fire? F YOU! Pay me! The place got hit by lightning? F YOU PAY ME!"

It's a wonder anyone can do business at all.

ronnie_suburban wrote:So many property owners have multiple holdings and have zero pressure on them to make sure that every individual property in their portfolio is profitable on its own. On top of that, exchange rates, ammortization schedules, the need for offset losses and a host of other factors go into these decisions. I wouldn't say it's a mystery but it's clear that there's a matrix of factors that property owners consider when they test the price sensitivity of a property.

That is the case in downtown Highland Park. A majority of the downtown business district is controlled by a small handful of landlords - all of which hold numerous properties in their portfolio, both in Highland Park and other suburbs. They can afford to let a property sit vacant until the right tenant comes along.

zoid wrote:I just did a real quick check. Space in downtown Hinsdale is going for about $27.50/sq ft.

For a 2,000 sq. ft. space (not an outrageous amount of space after you figure in the kitchen, bathrooms, coolers, dish washing stations, bar area, etc.) that's $55K a month.

Just let that sink in for a second...

55
thousand
dollars
every
month

You're going to have a nice small cozy place? Fine, at 1000 sq. ft. you're still on the hook for $27K every month.
To quote Goodfellas "Business is bad? F YOU! Pay me! You had a fire? F YOU! Pay me! The place got hit by lightning? F YOU PAY ME!"

It's a wonder anyone can do business at all.

My understanding is that a price/sq. ft. as described above is for an entire year not a single month. In the example above, the rent would actually be $4,583/month.

I live in Bucktown, which you may know has morphed from having mostly small independent businesses to having a lot of chain stores.

At least in this area, we seem to have quite a few landlords who only want national chains. One supposedly told a thriving small business that wanted to renew their lease "well, you could go out of business tomorrow so I don't want you, I want a national business." This assumes that if a chain closes that one store they aren't necessarily going out of business and would still pay for the duration of the lease, or some large penalty, whereas a single store business that fails is unlikely to be able to pay their lease out. That business closed and now there's a national chain there. And that storefront did sit empty for a while, as have others that are still empty.

Other landlords have "renegotiated" leases for triple their current cost. That much of an increase can make a business that is working fine completely unsustainable. I know of two spots where that happened and now there are national chains going in those spaces. We are going to have 4 (four!) sports gear stores within around 100 feet of each other.

I am given to understand that in some cases a landlord can write off empty space for tax purposes. This could make sitting out a year or more to be less of a financial problem.

This is reply to all as I was curious this discussion really didn't go anywhere, so I decided to start the account here. Some of the opinions here are that the restaurants fail because of the high occupancy costs (partially landlord's fault). Well, with low occupancy costs restaurants may stay in the biz longer while still have declining / low sales, but they essentially turn into zombies. At this point I have a serious question, and it was my true reason to post.

What type of food / price range / service / lead time combination would really make money in Highland Park? I find Deerfield and couple more suburbs nearby very similar to HP case. Thank you for reading

stevez wrote:

zoid wrote:I just did a real quick check. Space in downtown Hinsdale is going for about $27.50/sq ft.

For a 2,000 sq. ft. space (not an outrageous amount of space after you figure in the kitchen, bathrooms, coolers, dish washing stations, bar area, etc.) that's $55K a month.

Just let that sink in for a second...

55
thousand
dollars
every
month

You're going to have a nice small cozy place? Fine, at 1000 sq. ft. you're still on the hook for $27K every month.
To quote Goodfellas "Business is bad? F YOU! Pay me! You had a fire? F YOU! Pay me! The place got hit by lightning? F YOU PAY ME!"

It's a wonder anyone can do business at all.

My understanding is that a price/sq. ft. as described above is for an entire year not a single month. In the example above, the rent would actually be $4,583/month.

@zoid. This was a bit confusing. Yes, the rent is $55,000.... annual rent it is.

$27.50 x 2000 = $55,000

$55,000 / 12 months = $4,583 per month. Taxes/insurance/other costs could be extra (or not)

Now, can you deliver on the top line, please

Lenny007 wrote:What type of food / price range / service / lead time combination would really make money in Highland Park? I find Deerfield and couple more suburbs nearby very similar to HP case. Thank you for reading

Having lived in the northern suburbs for much of my life, I think the answer to this is that folks up north tend to want straightforward, unadventurous food. They seem particularly focused on healthful choices and aren't really into authentic ethnic dining experiences. Salads, broiled fish, lean meats and steamed vegetables (maybe lightly sauteed on a splurge night) seem to be the most popular choices. Sushi (well, maki, anyway) is a favorite. For a lot of folks up north, Chipotle is an exotic choice. Oh, and they like a bargain, too.

They don't drink a lot either, so a place up north can't realistically expect more than 20% of their total sales to be alcohol, as opposed to in the city, where liquor sales can typically account for upwards of 50% of a place's revenue. This makes opening a successful place in the northern suburbs particularly challenging.

Needless to say, this is purely anecdotal and is really just my personal perception of how things are in the area. Of course, there are exceptions. However, if you look around and see what's really endured over the years, a lot of places fit this description fairly well.

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@Ronny
"folks up north tend to want straightforward, unadventurous food. They seem particularly focused on healthful choices and aren't really into authentic ethnic dining experiences. Salads, broiled fish, lean meats and steamed vegetables (maybe lightly sauteed on a splurge night) seem to be the most popular choices"

I think, above was the food for the needy older crowd that likes places like City park Grill, somewhat Washington Gardens too.
I would also throw in the Chinese places and takeouts.

"Sushi (well, maki, anyway) is a favorite. For a lot of folks up north, Chipotle is an exotic choice. Oh, and they like a bargain, too."

Sushi and Chipotle are obviously consumed by the younger crowd. Funny, you mentioned Chipotle. Do you know they have the best margins in the industry and they are inexpensive too. While the other 10+ local Mex joints aren't booming at all.


"They don't drink a lot either, so a place up north can't realistically expect more than 20% of their total sales to be alcohol, as opposed to in the city, where liquor sales can typically account for upwards of 50% of a place's revenue. This makes opening a successful place in the northern suburbs particularly challenging".

Suburbs like HP, DF, LF etc etc have quite different demographics as compared to the city, so I consider it quite normal, I think you even could be on the high side with 20%.

So, basically you are saying this is the dump and there should be no reason to even bother considering something here... but on the positive note if something new and exciting really works in this unexciting place then it would likely work everywhere, no?

"a lot of places fit this description fairly well"

How about the future? Not sure they will do well in the future.

I wonder if Cathy can add something. Is this the same Cathy who's dad is Carl?

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Lenny007 wrote:Suburbs like HP, DF, LF etc etc have quite different demographics as compared to the city, so I consider it quite normal, I think you even could be on the high side with 20%.

My limited experience with this says you're right. I think it's 20% at the high end of things.

Lenny007 wrote:So, basically you are saying this is the dump and there should be no reason to even bother considering something here... but on the positive note if something new and exciting really works in this unexciting place then it would likely work everywhere, no?

No, not at all. I'm saying that I think it'd be a bit naive of an operator or investor to come into the area believing that they have the ability to significantly change what the audience wants. In my mind, that'd be a risky investment. And if it works up north, that hardly means it'd be a rousing success elsewhere. I'm also saying if you're really into diverse, adventurous eating -- and you want to have it close to home -- the northern suburbs are not the best place to be.

Lenny007 wrote:How about the future? Not sure they will do well in the future.

Who knows. Your guess is as good as mine.

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Lenny007 wrote:I think, above was the food for the needy older crowd that likes places like City park Grill, somewhat Washington Gardens too.

"Needy"?

The long-term lease comment is interesting. I assume all these places that close after a year or so end up with broken leases and thus more cost, whereby the landlord can afford to leave the place vacant for a while?

Lenny007 wrote:@Ronny
"folks up north tend to want straightforward, unadventurous food. They seem particularly focused on healthful choices and aren't really into authentic ethnic dining experiences. Salads, broiled fish, lean meats and steamed vegetables (maybe lightly sauteed on a splurge night) seem to be the most popular choices"

I might be in a minority here - but I live in HP and I would love to see more "authentic ethnic dining" in the area. Fortunately, my wife and I travel frequently into Chicago and do take advantage of the many ethnic offerings. We often ask ourselves if whatever particular restaurant we are dining at would do well in HP. The general consensus is no.

If I want "salads, broiled fish, lean meats and steamed vegetables" I can go to Max's. It's been around for years for a reason. They knew the market and clientele and developed a successful restaurant around it.

Just wanted to say that a couple of the answers have really made me understand more than I did why properties end up vacant. (Not that I'm surprised; I wouldn't have asked the question in the first place if I wasn't sure there were folks here who have the background to shed light on it.)

In particular, the answers having to do with "restaurants need long-term leases, landlords would often rather not," "landlords prefer tenants who can keep paying rent even after a location fails," and "landlords have a whole portfolio of properties, not just one or two" have been enlightening.

@ Dave


"I live in HP and I would love to see more "authentic ethnic dining" in the area"

In your opinion, what type of ethnic dining (and perhaps "lunching") would be successful here(HP and nearby)) in the long term?

"We often ask ourselves if whatever particular restaurant we are dining at would do well in HP. The general consensus is no"

Would you care to provide the cuisine, the service type and the price level fro those that won't do well here?. Thanks