If you have lived in Washington for some time you know that the weather for summer is pretty much the same: hot, often sunny, Amazon-like humidity and a chance for a violent thunderstorm every day at about 4:00PM.
Once you get over questioning why you live here and not in San Diego, you adapt and realize that it is pretty nice here—just find a pool and you’ll be fine.
Same goes for 2017 for Mothersauce and the restaurant business in DC (first up for us: Takoma Beverage Company). I think the weather will be great, but we need to watch out for the storms.
There has been a lot of talk about a local restaurant bubble as well as a national one, and the talk is not going away. To be sure, there are serious issues in our business that are creating problems for many businesses, and it may get more challenging before it gets better.
But I wouldn’t start throwing around the “B” word. I think that kind if hyperbole is great for headlines, but I think it can distract businesses from focusing on what the real issues are. I think that the underlying issues are going to lead to more of a correction than a crash, and there are several areas and specific businesses that will continue to grow strongly this year and beyond.
What are the issues?
Well, there are a lot, and they can be very geographically unique. There are a million reasons why a restaurant or several restaurants in an area can fail, but added up together they are not necessarily indicative of a massive trend.
Still, there are some issues that are universal, serious and not going away: the continuing labor shortage, high rents and segment saturation.
Labor. It is always hard to find good people, but the complaints I hear from operators across the country about staffing have never been this severe. It is an employee’s market out there which is great for the talent, but it strains businesses as they try desperately to fill their schedules. The glut of openings means that there are lots of open positions and not enough people to fill them. Service suffers consequently, and there are operators stalling their own growth to avoid this.
Part of the solution starts with better training and incentives. We need to let people know that this business can be a good career option at any level with tremendous opportunity for growth, and then we need to make sure these people are well trained and ready to succeed.
High Rents. The landlord perspective would be valuable here, but until I buy a building, I can’t offer it. What I can say definitively is that rents in the most popular area for restaurants have been very high for a long time. It is no revelation to state that the rents climb as an area gets hot, and then they decline much slower on the other side.
Rent can be a killer for a restaurant. Already tight margins only get tighter with high rent, and if there is no help from the landlord, if a potentially great long term restaurant suffers a minor setback or needs some time to grow its business, the runway might end before they make it.
But isn’t it in the landlord’s interest to have a sustainable, long term tenant? You would think so, but many landlords require a portion of the lease guaranteed, so the tenant can be stuck with the rent long after they close—and that sure is fun.
To me, the ideal scenario is to see the tenant-landlord relationship as a partnership where both can be successful. Restaurants often put a lot of money into spaces that improve their value, they can make a building and even a neighborhood more popular and valuable, and if they are doing well they can stick around paying rent for a long time. These are all things that help the landlord. Lower rents and more managed leases are the way to go. I’ll hold my breath…
Saturation. A word that we started throwing around in Clarendon 10 years ago. Yes, 10. It may have taken longer to get over and past that breaking point, but it was pretty clear it was coming. At a certain point, a market can only sustain so many places—there just aren’t enough customers to go around. The customer base gets spread thin, a couple stand outs do well, a lot of places teeter on the edge of profit, and a lot of places have to close. Then it starts to look like a wasteland of empty spaces.
Zoning requirements for ground floor retail in new developments have been awesome at creating vibrancy in neighborhoods, but at a certain point if every single new building has retail options, there is too much space. The rents don’t drop as you think they might, but tenants stream in anyway, and…boom.
There are at least a couple former restaurants spots in Clarendon that are rumored to switch use, and I think that is great. I know this contradicts the rent theory in a way in that less space available will create higher rents for restaurants, but what I think works best is to find that sweet spot—other retail uses can pay rent as well and fill empty storefronts, and the best concepts can fill the best space and be successful.
There are a lot of smart people out there thinking about this, and a lot of us are reading and listening and talking about these issues as we forecast this year and beyond.
I will continue to research and solicit input, but I think that we are not in a bubble in the sense that we are awaiting a big crash like real estate in 2008. I think a correction is already happening, be it in my neighborhood or nationwide, but I believe that we will keep growing, and that there is tremendous opportunity in our business. For that reason, I believe 2017 will be a great one for Mothersauce. We just need to keep our eye out for those storms.