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January 25, 2018 Chuck Sudo, Bisnow
When John Manion opened La Sirena Clandestina on Fulton Market in 2012, the one thing he was certain about in the lease was the rent was perfect for a chef opening his first restaurant. “I was only a cook before. I’ve learned all of this on the fly,” Manion said. Six years ago, chefs like Manion looking to strike out on their own could choose from an array of small restaurant storefronts in the area.
Manion took over an existing lease on the La Sirena space at a time when the Fulton-Randolph Market District was home to a handful of notable restaurants, and rents in the area topped out in the $20/SF range. Today, rents in the area are nearly three times that, and now that Fulton-Randolph has emerged as Chicago’s hottest restaurant district, it is dominated by a handful of larger restaurant groups. The rents are one reason smaller restaurants are struggling to stay in business, and why even proven restaurateurs are seeking space outside of the neighborhood.
An Explosion Of Rent Growth
Asking rents for Fulton-Randolph restaurant space last year averaged between $40/SF and $50/SF, according to research from Quantum Real Estate Advisors. Some landlords are asking for — and receiving — $100/SF rents. With those rates, most of the new restaurants entering the market have been high-profile openings from established restaurant groups like Boka Restaurant Group (Girl & the Goat, Momotaro, Swift & Sons), Hogsalt Hospitality (Au Cheval, Maude’s Liquor Bar), One-Off Hospitality (Blackbird, Avec, The Publican), Heisler Hospitality (Lone Wolf, Bad Hunter) and Rick Bayless’ Lena Brava and Cruz Blanca Brewery & Taqueria.
In addition to increased asking rents, startup costs in the restaurant industry are high, rising property values have restaurants on the hook for more property taxes, and restaurants are paying higher wages and benefits while contending with a shrinking labor pool for job openings.
This confluence of factors is forcing new and old restaurants out of business. Perez Mexican Restaurant, one of the oldest restaurants in Fulton-Randolph, closed its doors in September after 33 years on Randolph Street. Del Cero shuttered its doors after 15 years in business.
For newer restaurants, permitting and build-out costs are putting operators deep in the red before doors open. Construction of The Lunatic, The Lover & The Poet, a three-story wine bar, took two years. The restaurant closed last month, after only nine months in business. WonFun/2Fun, a Chinese restaurant, lasted only 13 months before shuttering last month.
Colliers Executive Vice President Peter Block said rents need to be supportable based on restaurant sales. If a rent on a space is $500K annually, for example, a restaurant needs to make 10 times that in revenue to support that rent. The closures happening in Fulton-Randolph are more about being able to support the rent than about restaurants failing. As rents rise, landlords need to find business that can support their asking rents, and that is decreasingly possible with mom-and-pop shops.
Quantum Real Estate Advisors President Chad Firsel said the triple net structure of restaurant leases has restaurants paying more in property taxes, maintenance and repairs to their businesses today, compared to five years ago.
Even successful and established restaurateurs like Manion are feeling the pinch and facing tough decisions down the road. Fulton Market was still mostly meatpackers before 2016. With the meatpackers selling their buildings and leaving the neighborhood, Manion said last year was tough at La Sirena. The restaurant lost the ability to use its outdoor patio all summer between construction projects along Fulton Market and the city making infrastructure improvements.
With asking rents as high as they are now, Manion said there is a good chance La Sirena’s lease will not be renegotiated when it expires in 2020. That possibility informed Manion’s decision not to invest heavily in infrastructure changes within the business.
Too Many Restaurants, Not Enough Lifestyle
The asking rents are the main — but not only — driver in a growing number of smaller, vacant storefronts and making it harder for the neighborhood to attract a variety of quick-service restaurants, Firsel said. Fulton-Randolph is heavy with sit-down restaurants, from fine dining to casual, when more grab-and-go restaurants are needed.
“There aren’t a lot of Protein Bars and Pret a Porters in the market,” Firsel said.
Firsel said Fulton-Randolph lacks the daytime population to support a concentration of restaurants in the area, even as more offices are being built, and there is little in the way of entertainment outside of restaurants. Firsel said this mix of restaurants and entertainment is why tourists stay downtown when they visit Chicago; Fulton-Randolph is still developing as a lifestyle destination.
“The only pedestrian-based consumers in Fulton Market right now are residential,” Firsel said.
Firsel believes quick restaurant concepts able to pay the high asks landlords are seeking could be poised for long-term success, and the influx of workers arriving in the area with the opening of McDonald’s headquarters in the spring will help overall restaurant business.
Manion agrees that McDonald’s arrival will help the daytime population in Fulton-Randolph, but he believes the market is better for restaurants south of Randolph. Manion opened El Che on Washington Boulevard, three blocks south of La Sirena Clandestina, in 2016 and he said the location feels like a completely different neighborhood. There is a more mature mix of residential and commercial properties, providing stability not seen in the rapidly gentrifying Fulton Market.
“We’re going to be a neighborhood place for a long time at El Che,” Manion said.
Developers See Yields As Restaurant Partners
Some restaurants are partnering with developers and landlords in their businesses to make the numbers work and still enter hot neighborhoods. Sterling Bay is a partner in Boka Group’s Swift & Sons, and is also a partner in Federales with Hogsalt Hospitality. Manion partnered with his landlords to open El Che.
Block said if a developer is involved in a restaurant, it is primarily because it is a good investment. Partnering with a restaurant group on a space and supporting a rental rate with a long-term strategy helps the developer achieve the highest values and yield. And they are selective with the groups they will partner with, and that favors the larger hospitality groups. “They won’t prop up the tenant if they don’t believe in the business,” Block said.