Subway sub-franchisee Larry Feldman tries to negotiate with landlords to keep rent at about 8 percent of sales.

David Farkas of Chain Leader reports the recession has turned the tables on landlords, who are now offering restaurant chains attractive rents and more.
Pizza Inn, an aging chain in a crowded category, says the chain is nonetheless attracting more tenant improvement dollars than ever, says Vice President of Franchising Madison Jobe.
This past year, mall landlords gave Häagen-Dazs build-out extensions for the first time, saving the ice-cream chain tens of thousands of dollars.
Kevin Kruse, vice president of franchise development for Einstein Noah Restaurant Group, claims he’s hasn’t seen “this many high quality sites in a very, very long time.” 

Had more landlords been willing to work with Chili’s Grill & Bar in the 1980s, the casual-dining chain might have opened a lot more restaurants. But developers sometimes balked at Chili’s loudly striped awnings, a crucial brand element.

“We killed many deals if they wanted us to have their awning,” recalls Clark Knippers, then vice president of real estate and development for Chili’s parent company Brinker International.

Until recently, landlords have had no problem asking for—and often getting—their awningsor whatever else they wanted in leasehold agreements. Competition for good sites was fierce among fast-growing restaurants and retailers, which typically acceded to landlords’ demands.

Not anymore. “Supply and demand has flipped; now it’s a tenants’ market,” says Knippers, founder and president of Dallas-based Foremark, a consultancy specializing in restaurant real estate.

Space Available

Blame the poor economy, which is tanking businesses and freeing up loads of commercial space at attractive prices. Spring ReCount data from market research firm NPD Group show the U.S. total restaurant count slipped 0.6 percent in 2008, to 570,980. Experts believe that percentage is sure to climb when new data are out later this month. “I definitely think there is reason to believe so given persistently weak industry sales trends,” offers restaurant analyst Mark Kalinowski of Janney Montgomery Scott.

Excess capacity means lower rents, already down 10 percent on average nationally, according to Jones Lang LaSalle. They will tumble another 5 to 7 percent this year, especially in secondary markets, notes a report from the Chicago-based real-estate services firm. “Rent declines in the most construction-heavy markets like Atlanta, Charlotte and Miami will approach double digits in the first half of [2010],” the report adds. The firm doesn’t expect rents to begin rising until well into 2011.

And a fall survey of property owners by National Real Estate Investor, a trade publication, showed that 52 percent expected effective rents to decrease for the next 12 months compared to 38 percent who projected declines three months earlier.

The upside for restaurant chains, especially growth-oriented chains, is deals galore. Lease terms (including mid-lease) have changed dramatically over the last 12 months.

“We are getting real-estate deals we’ve never gotten before,” declares Larry Feldman, CEO of Subway Development Corp. of Washington, sub-franchisor of more than 1,000 sandwich shops in the mid-Atlantic region. “Landlords are splitting space and cutting rents.”

In one case, a landlord is charging Feldman half the rent he would have paid two years ago in a rehabbed food court in Washington, D.C. In another, a Georgetown, Md., developer divided a shuttered Blockbuster, offering Feldman’s franchisee 3,500 square feet—a deal Feldman claims never would have happened two years ago. “We walk into a landlord, and now we’re on top,” he says.

Rent Relief

Perhaps the most remarked-upon change in lease structures has been landlords’ willingness to grant rent relief mid-lease, a practice all but unheard of until recently.

“I have never seen anything like this,” says Madison Jobe, vice president of development for Dallas-based, 315-unit Pizza Inn, referring to rent restructuring. “I have never experienced anything like what we are going through now, nor have any colleagues I’ve talked to.”

“Rent relief is part of the reason occupancy is where it is today,” Taubman Centers CEO Robert Taubman told investors in the company’s third-quarter 2009 conference call. Occupancy had slipped just 1.4 percent in the prior 12 months at the 25 malls the Bloomfield Hills, Mich.-based company operates. Tenant sales per square foot, however, tumbled nearly 12 percent, to $497 per square foot.

Taubman was mum on how many tenants have received abatement. “We would prefer not to be specific about the absolute number of rent relief cases,” he said.

Rents won’t rise (or even stabilize) until more consumers renew their love affair with meals away from home. That’s unlikely until the second half of the year, when NPD Group predicts traffic will turn slightly positive. It likely won’t spark new building. The International Franchise Association forecasts new-unit growth of just 2 percent among franchised businesses overall, well below the 5 percent average annual increase from 2001 to 2008.

As a result, many landlords will remain on the hunt for tenants as well as working to keep those they now have. “The dynamics have turned around so much that my e-mail is going crazy with landlords asking, ‘What it will take to get you to stay in our center,’” says Sam Osborne, an area developer for Destin, Fla.-based Tropical Smoothie Café who has opened 20 locations in Central Florida.

For instance, Osborne recently helped renegotiate a lease, saving a franchisee $1,000 a month, or about $20,000 on the remainder of the lease. He says he told the landlord the franchisee wanted to stay but was exploring options. Osborne then asked the landlord “to work with us.”

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