Leasing, renting or buying a restaurant space without a plan is liking walking into a Walmart without a shopping list. You go in for allergy medicine and leave with Claritin and $400 worth of patio furniture.
Where you decide to open your restaurant is incredibly impactful: it affects your labor costs, utility bills, marketing and overhead expenses.
In other words: The restaurant space you choose is probably the most important decision you’ll make.
When you factor in things like the cost of the commercial space lease, permits, renovations and building inspections, finding the right neighborhood to open a restaurant in is a critical step that can dictate your restaurant’s future profitability.
The good news? You’re in complete control and, by crunching the right numbers, it is possible to know whether or not you can afford a restaurant property based on its projected seating capacity and revenue per service. We’ve outlined five ways to find the perfect commercial space for your restaurant to set up shop in:
- Set a realistic budget (and stick to it)
- Advantages and disadvantages of leasing or buying a restaurant space
- Expanding to new locations
- Thoroughly research the neighborhood
- Find out how much square footage you need
- Calculate estimate sales targets to cover expenses
- Assess the restaurant space’s potential
Let’s get started!
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Set a realistic budget (and stick to it)
Don’t start looking up restaurant space to lease or buy without establishing a budget you’re comfortable with first. Here’s what you should keep in mind in order to determine your budget:
- Projected revenue
- Market research
- Wiggle room
- Prepare for the worst
Projected revenue
Restaurateurs typically spend 5-10% of their revenue on rent and utilities. If you expect to generate $40,000 each month at your quick service burrito restaurant in Austin, then you should spend between $2,000 and $4,000 on rent and utilities. If you think your fine dining sushi establishment in suburban Seattle will draw $100,000 in monthly revenue, you can spend between $5,000 and $10,000 a month on your restaurant space.
Market research
How do you know how much space you can afford if you haven’t opened the restaurant yet or are a first-time restaurateur? Conduct market research. Ask restaurateurs in your area with similar concepts what kind of revenue they generate.
Wiggle room
If your realtor shows you a restaurant space that’s over budget but hits all of your marks, would you be willing to stretch your budget? Can you sell enough food to enough guests at a high enough price to cover all your expenses and have money left over?
It’s imperative that you project how much in sales your restaurant needs to earn to cover rent, labor, utilities and cost of goods sold.
Prepare for the worst
If you have a few consecutive slow months, or if the economy takes a turn, could you still cover rent? Most commercial spaces lease for 3-5 years at a time. Do you have savings that you could dip into in case of difficult times? Do your research and build up your savings before looking for a space for your restaurant.
If you’ve done everything you can to right the ship and are still struggling to cover rent, consider talking to your landlord about renegotiating your lease. If your sales are suffering because of external factors like construction on your street or economic problems, your landlord might be open to renegotiation. Even at a lower price, renters would rather have steady, predictable revenue than the hassle of finding new, viable tenants.
Buying or leasing
Now that you have a better idea of what your budget looks like, it’s time to answer the bigger question: are you leasing a restaurant, or are you buying? Both choices come with their advantages and disadvantages, but one might be a better option for your particular situation. The decision between leasing and buying a restaurant space is a crucial one that can greatly impact the success and financial stability of your restaurant.
Advantages and disadvantages of leasing a restaurant space
Advantages of leasing restaurant space
Lower upfront costs
Leasing a restaurant space offers several advantages, such as lower upfront costs. By leasing a space, restaurateurs can keep their capital and allocate it towards other important aspects like equipment, staff and marketing.
Flexibility
Additionally, leasing allows for added flexibility and the opportunity to test the concept and viability of the restaurant without committing to a long-term investment. Leasing offers flexibility in terms of location and size, providing the opportunity to choose a prime location in a desirable area without the commitment of a long-term investment.
Disadvantages of leasing restaurant space
Restrictions on renovations
While there are many advantages to leasing, one major disadvantage is the lack of control over the property. Like with any lease, there may be restrictions on renovations and modifications, limiting the ability to create a unique ambiance or design.
Rents are subject to increases
Leasing also means that monthly rent payments are an ongoing expense, subject to potential increases over time. Another drawback is the lease agreement may have limitations on lease terms and renewal options, which could disrupt long-term plans for the restaurant. Imagine the landlord decides to take back the space. This could have detrimental consequences to the success or even lifespan of your business.
Advantages and disadvantages of buying a restaurant space
Advantages of leasing restaurant space
Long-term stability
Buying a restaurant space provides long-term stability and potential for equity growth and it gives restaurant owners the freedom to customize and renovate the property to suit their specific needs. Owning the space can also lead to cost savings in the long run, as mortgage payments may be more favorable than leasing rates.
Flexibility to renovate
Purchasing a property, however, requires a significant upfront investment, which can be a challenge for new or small restaurant ventures. The costs include a significant down payment, closing costs and potentially renovation expenses.
Disadvantages of buying a restaurant space
More responsibilities
When you own a place, this means you also need to take care of everything a landlord would usually take care of when you lease. This means responsibility over maintenance, repairs, taxes and any other ongoing expenses.
Lack of flexibility to move
Another drawback is that once you buy, it’s harder to move if you ever wanted to change locations. With a lease, you only need to wait out the terms of your lease and then you can move locations to a higher traffic neighborhood.
Vulnerability to market fluctuations
Finally, selling a property can be a lengthy process that can eventually lead to a loss of money. Owning a space means being vulnerable to fluctuations and potential depreciation in value.
Ultimately, the decision between leasing and buying depends on the specific circumstances and goals of the restaurant owner, considering factors such as budget, location, long-term plans and the level of control desired over the property.
Expanding to new locations
Is this your first location? Or are you adding new locations to your roster? Growing restaurants need to take additional considerations when choosing where to set up shop.
First, market research is essential. Analyzing the target market, competition and consumer preferences in the potential location is crucial for determining the viability of your new restaurant space. Understanding the local demographics, trends and dining habits will help you identify if there is sufficient demand in this new location.
The logistics of accessibility, parking availability and proximity to residential and commercial areas are also important when choosing a new space. Another important consideration is the financial aspect, including the cost of real estate, lease terms and potential return on investment. Conducting a thorough financial analysis, including projected revenues and expenses, is vital to determine the financial feasibility of the new location.
Expansion isn‘t only about finding a new location, but about assessing what you need to do in order to operate successfully. Take a look at your existing operational capacity and ability to scale. Can your existing resources and infrastructure support the expansion? Are there reliable supply chains and staffing solutions available for the new location?
Finally, think about your brand. Maintaining consistent brand identity and customer experience across all locations is crucial. Restaurants need to ensure that a new location aligns with their brand values and standards, and that they have the necessary resources and management in place to oversee multiple locations effectively.
Thoroughly research the neighborhood
The adage “location, location, location” rings true when it comes to which restaurant property you choose. Where do you want your restaurant to be located? Tom Scarda, CEO and Founder of The Franchise Academy, recommends that restaurateurs thoroughly research a commercial space’s location based on these eight factors:
- Neighborhood
- Street
- Nearby competitors
- Turnover
- Customer base
- Foot traffic
- Ambiance
- Accessibility
1. Neighborhood
Do you want to be in a well-established area, or one that’s up and coming? While either of those options has its pros and cons, you need to make sure that your target market either lives there or frequently visits that area.
2. Street
What kind of street do you want your restaurant to be on? You’ll pay a pretty penny to be on the high street, but an off-the-beaten-path location could mean you’ll have to spend a lot on marketing to get people to find your restaurant. Find a location that gives you as much visibility as your budget can afford.
3. Competitors
What other businesses are nearby? If you want to open a smoothie shop, having a gym next door will help you generate business. However, if there are already a dozen smoothie shops in the area, yours will have a hard time standing out.
Think about the surrounding competition and complementary businesses near a potential location. If the location is surrounded by similar establishments that target the same crowd, you’ll in all likelihood need to increase your marketing spend to attract customers. If there are businesses that complement yours, you can forge a strategic partnership that encourages patrons to visit each of your establishments.
4. Turnover
Be wary of spaces, streets, or neighborhoods that you’ve seen get turned over a lot. Yes, you’re a fantastic business person and matcha may be all the rage right now, but if the commercial space or area didn’t work for others, it probably won’t work for you and your matcha cafe. Take your time to find a location that will help your business thrive.
5. Customer base
Is the neighborhood known for attracting the type of customers you’re catering to? Does your target customer live in this area? Consider using a census explorer to understand who lives in the neighborhoods you’re interested in and see if their demographic information matches your restaurant’s target market.
6. Foot traffic
Is the neighborhood densely populated? Can you rely on walk-in customers or will you need to invest more in marketing to attract customers?
7. Ambiance
Visit the neighborhood during the day and at night. Does your business fit into the neighborhood’s vibe?
8. Accessibility
Is the commercial space easy to access via public transport? Is there parking?
Make sure your restaurant location is attractive and accessible for your target customer, that there’s enough foot traffic to keep you busy each service and that the neighborhood’s population corresponds with your target customer.
Find out how much square footage you need
How much space does your restaurant need? The more space, the more you’ll be spending. The less space, the fewer customers you’ll be able to serve inside the restaurant. Smaller locations do, however, present several benefits.
For one, when you have less square footage of service space, you can pay more attention to your guests and deliver more intimate dining experiences. Additionally, a smaller space means that you need to hire less service staff.
Consider these factors when deciding how much space you need for your restaurant.
Concept
Your restaurant’s concept and service style will affect the amount of space it needs. A takeout spot can require just a pickup counter, while a cafe or full-service restaurant would need ample seating. Guidelines recommend that you allocate 60% of your square footage to the dining room and the remaining 40% on kitchen space.
Also, take into consideration industry guidelines for seating space per customer. For example, fast-food restaurants adhere to 11-14 square feet per seat, while fine dining establishments give their customers 18-20 square feet per seat.
Event space
Do you want your restaurant to double as a banquet hall or event space? Consider how much more room you’ll need for a private dining space.
Maximize space
In cities like New York, where commercial space is among the most expensive in the world at $171 per square foot, a larger space can cut into profits and is sometimes just downright inaccessible. In expensive cities, it’s important to think about how to make the most of a smaller space. Read up on tips for maximizing a small restaurant space before knocking any small commercial spaces off of your list.
Let your restaurant’s concept and budget dictate the size of the commercial space you need.
Calculate estimate sales targets to cover expenses
Remember, the commercial space you choose has a big effect on your daily operations, your recurring expenses, and the number of customers you can serve, and your food sales need to be strong enough to support those recurring expenses.
To find out how much you need to sell per seat to afford a commercial space, you need to first do the following:
- Find the commercial space’s cost per square foot
- Calculate your square footage per customer
How to find a commercial space’s cost per square foot
A location’s cost per square foot impacts how many people you can serve and how much you need to charge for your food to stay profitable. In New York, the average commercial space in trendy neighborhoods like Manhattan or Brooklyn is $120-per-square-foot. For comparison, the average price-per-square-foot in Los Angeles is $52.
How to calculate square footage per customer
Dining spaces take up roughly 60% of most restaurant’s total square footage. The other 40% is allocated to your kitchen, storage space, service stations, etc.
- Dining room: 60% of your total square footage
- Kitchen, storage space, etc: 40% of your total square footage
How much square footage you allocate to each seated guest depends on the type of establishment you want to open, but here are some general guidelines:
- Fine dining: 18 to 20 square feet per person
- Full-service dining: 12 to 15 square feet per person
- Counter service: 18 to 20 square feet per person
- Fast food dining: 11 to 14 square feet per person
Now, let’s put this into practice and use a commercial space’s cost per square foot and seating capacity to determine how much you’d need to sell per seat, per service, to cover all your expenses.
For example
Let’s say Johnny finds a 1,200 square foot commercial space in Brooklyn that costs $52-per-square-foot. He researched the neighborhood and knows that there’s a market for his high-end, full-service Italian fusion restaurant concept. He’s in love and thinks the space has potential, but how can he tell whether or not it’s a financially responsible investment long-term?
How much does Johnny need to make per month to cover his lease?
- Annual lease cost: 1,200 x 52 = 62,400
- Monthly lease cost: 62,400 / 12 = 5,200
To cover his estimated food, labor, and utility costs, Johnny wants his monthly rent to account for only 8% of his total monthly sales.
- Monthly sales target: 5,200 x 100 / 8 = 65,000
Johnny needs to sell for $65,000 per month to cover all his expenses.
How many people can Johnny seat?
Now, let’s calculate how many people Johnny can comfortably seat in this commercial space. He wants to offer 15 square feet per person. Remember, dining space typically accounts for 60% of the commercial space’s total square footage.
- Available dining space: 1,200 x 0.60 = 720 square feet
- Total seating capacity: 720 / 15 = 48 seats
The commercial space can comfortably seat 48 people (or 24 tables for 2).
How much revenue per seat does Johnny need to make to cover his expenses?
Johnny wants his restaurant to offer 2 services: one starting at 6:00 pm and the other at 8:30 pm. His goal is to turn each of his 24 tables twice each day, and he’s open 6 days a week.
- Services per week: 2 x 6 = 12
- Customers served per week: 12 x 48 = 576
- Average revenue per seat: 65,000 / 576 = $112.84
Johnny’s restaurant needs to make an average of $112.84 per seat, per service to cover his expenses.
Johnny can now take that information to plan a menu that assures that he’s making an average of at least $112.84 per seat each service.
Assess the restaurant space’s potential
Beyond the external factors like location and price, it’s important to think about the space’s long-term potential and consider internal factors like its condition and features before signing a restaurant lease.
Located in Montreal’s up-and-coming neighborhood, Saint-Henri, Elena took over an abandoned dive bar and transformed it into a modern hotspot. They were even named one of Canada’s Best New Restaurants!
Condition
Do you want a space that’s virtually turnkey, or do you want the challenge of making a commercial space your own? You’ll always need to do some work to customize a commercial space, but some require less work than others.
If you’re taking over a former bakery and you plan on opening a bakery, the space may already be configured for your needs and you’ll only need to make a few changes. However, transforming a former dentist’s office into a restaurant would take more work, time, and money.
Also, consider how the condition of the restaurant affects its price. If you can lock in a great monthly rent because the space is in disarray when you sign the restaurant lease, but you can cheaply transform it, you’re looking at a lot of savings.
Features
Do you dream of having an outdoor space for patio seating for your restaurant when the weather is nice? Then an outdoor space should be a must on your list. Do you want a waterfront location, or would you be fine with installing a water feature in your restaurant?
Consider which elements you can compromise on, and which ones are must-haves for your restaurant. Having an idea of what you want your restaurant’s design to look like before shopping for a space will help you make sure you meet your needs.
Having a vision for your restaurant can help you see a space’s potential.
10 ways to negotiate the best rate for your retail space
- Don’t be afraid to walk
- Consider using a broker
- Be subtle
- Get feedback from other building tenants
- Consider rejecting the first offer
- Assess your bargaining power
- Ask for more than you need
- Be mindful of phantom space
- Negotiate
- Get help
1. Don’t be afraid to walk
When negotiating a restaurant lease, it’s important to be rational above all else and to make objective decisions.
If your heart is in love with a space but the numbers don’t make sense and the property owner isn’t prepared to lower their ask, be prepared to walk away. Securing a beautiful location that you can’t afford could result in you not having enough to pay your bills or cover the other startup costs associated with opening a restaurant.
2. Consider the pros and cons of brokers
While it may be tempting to work with a real estate agent or broker, it’s important to note that they typically work for the landlord. Their goal is to get the landlord the highest rent possible and secure a big commission for in the process, not to get you, the tenant, the best deal possible.
The longer your restaurant lease term, the higher the rent and the more space you agree to lease, the more money the real estate agent earns.
If you’re in the process of researching several properties, consider dealing directly with each property’s listing agent rather than letting one show you other agent’s listings. By doing business with each property’s agent, they avoid commission-splitting, which makes your tenancy more desirable.
3. Be subtle
As a buyer, you want to hide your intentions and desires from sellers. Saying things like “this space could easily fit our tables’ ‘ or “I love that the space has its original moldings” demonstrate your clear interest in the space and that you’re already envisioning setting up shop there.
Avoid communicating clear buying signals because they weaken your negotiating power.
4. Get feedback from other building tenants
Other tenants can offer a ton of useful feedback on the building’s landlord. Do they maintain the property? Are the rental rates stable? Do they plan on staying for another leasing term? The things other tenants tell you can help you during your negotiations.
5. Consider rejecting the first offer
Even if the first offer falls within your set budget, the real estate agent and the landlord may be willing to lower their price—but if you never push, you’ll never know for sure.
Oftentimes, the first offer presented to you is inflated. Many real estate agents ask for a higher number first-thing so that they have more space to negotiate.
Most agents fully expect you to present a counteroffer and have that possibility baked-in to their first asking price. Always try to push back on the original asking price to secure the best possible rate.
6. Assess your bargaining power
There are several things that factor into your overall bargaining power (the leverage you have in negotiations), such as the building’s vacancy rate and the tenant turnover rate.
Other factors include whether you’re opening a franchise or independent restaurant, your business history (have you opened other successful restaurants as well?) and your credit history.
7. Ask for more than you actually need
If you don’t ask, you’ll never know. Let’s say you want the two first months of rent to be free; ask for six. Similar to how real estate agents ask for more so that they secure more during negotiations, you want to do the same thing.
What’s better? Asking for two months free rent and getting it (or getting none), or asking for six and getting three (half of your original ask)?
There’s no harm in asking. Landlords expect negotiations and the worst that can happen is them saying “no”.
8. Be mindful of phantom space
Many restaurant tenants are paying per square foot, but not getting as much as they’re paying for. Consider independently measuring the space to make sure you’re getting fair pricing.
9. Negotiate
Negotiating a restaurant lease is a process. There’s supposed to be offers, counter-offers and back-and-forth between you, the real estate agent and the landlord.
If you don’t negotiate, you risk not getting what you want or, worse, unknowingly agreeing to a one-sided deal. Don’t be afraid of taking your time, negotiating the deal in stages over time and, if things aren’t going the way you’d like, moving on to another prospective location.
10. Get help
In any case, knowledge is power. Whether you read up on leasing laws, connect with other restaurant owners to learn from their experience or reach out to an experienced restaurant consultant, actively learning about restaurant leases before diving in head first will make a difference.
In most cases, a restaurant lease is expensive. Not making the right decision the first time is even more expensive. Make sure you negotiate at every stage and prioritize what’s in your best interests.
Takeaways for leasing the perfect commercial restaurant space
The space you choose for your restaurant can make or break the business. There are a lot of factors that go into making a commercial space the right space for your restaurant. Here are the key considerations you need to think about before leasing a restaurant space:
- Budget: How much can you afford to pay for your space?
- Location: Where will your restaurant thrive?
- Size: How much space do you need for your concept and service style?
- Potential: What condition do you want the space to be in, and what features are on your list of must-haves?
Follow these four tips to make sure that you’re leasing a restaurant space that’s right for you in the short and long-term.
Does your restaurant technology measure up to your new space? Talk to one of our experts to find out how Lightspeed can help you equip your space with best-in-class POS technology.
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