While the hospitality industry faces struggles due to closures mandated because of the COVID-19 pandemic, there continues to be a large demand for people looking to buy commercial and restaurant properties.
And currently there is a lack of inventory in that area.
Government support programs have kept many businesses alive, so to speak, in the sense that they haven’t closed their doors for good.
But a day is coming in the future when support is no longer there and many opportunities will open up as a result of the mountain of debt many businesses built during the pandemic.
Ori Grad, Broker & Managing Director and Mark Parmegiani, Director of Commercial Sales and Leasing from CHI Real Estate Group, are hospitality business brokers who specialize in helping clients buy and sell restaurants.
Parmegiani said large spaces for night clubs and sit-down restaurants fell away during the pandemic, leasing activity went to near zero and deals fell apart, particularly in the financial district of Toronto.
“What really emerged is we had endless calls for restaurant spaces up to 1,500 square feet, direct entry into a restaurant of course, and patio spaces. So either used as a pure QSR (quick service restaurant) or a QSR with patio or a small space with patio.
“That’s been kind of an ongoing trend and a hot property, especially in the suburbs but outside of the financial district. The financial district remains definitely in a lull compared to there.”
Grad said the market is starting to see some of the big real estate space come available.
“The government has stepped up big time in paying people’s rent. That’s a very important factor right now why there’s not mass vacancies all over the place. The government is paying up to 90 per cent of some businesses’ rent right now including wage subsidies,” he said.
“I was really expecting last year I thought in August ‘oh man the ball’s going to drop. We were going to see mass vacancies’. But that didn’t happen. I thought it would be October/November. Now we’re in May and really while the government’s paying everybody’s rent there’s a huge lack of inventory out there right now and we have an awful lot of buyers, qualified buyers looking to buy restaurants but there’s very, very little available for sale right now.”
Many restaurants were struggling pre-COVID and the question is how are they going to fare when the doors open again.
“There are tough times ahead once the subsidies stop,” said Grad.
“We definitely expect way more inventory to come to market,” added Parmegiani. “It appears like the government is trying to push the subsidies long enough and then have other incentives and programs to reopen so that whoever is well-positioned to survive will survive and manage to squeak through with the revenues they are getting. For the rest, it really remains to be seen.
“All of these restaurants are in buildings that are most likely owned by someone else who is the landlord and they are paying rent to. We looked at all the transactions for buildings with restaurants for the City of Toronto from 2019 to 2020 and Q1 of 2021 and it was really interesting to see a lot of buildings traded hands. It was almost 100 in 2019 but the same number of buildings traded hands in 2020 which we didn’t expect. And a lot of buildings we never expected to come to market came to market. The average price went up. The average price per square foot went up because we were seeing buildings trade on Queen Street that used to have restaurants.”
He said that from all indications the price per square foot for buildings that are under 3,000 square feet went from about $750 to over $1,000 on average in Toronto.
“It’s not that suddenly there’s a rush of bidders on these buildings and all values are rising but suddenly a lot more premium corner spots, corner buildings, they’re highly valued in commercial on Queen Street that have started selling. And you’ve never seen this come to market before because they were just too valuable and pulling in great rents and they had such high demand for them,” said Parmegiani.
Grad said there’s still not enough inventory out in the market.
“There’s still many more buyers out there than sellers, which also inflates the market on a supply and demand scale,” he said.
Some of the market trends in the industry include the growth of the ghost kitchen concept and the shift in desirable locations where buyers are looking at locations near condo developments and densely populated areas.
In the marketplace, CHI Real Estate offers clients a discreet listing service. It can sell a restaurant without the whole world knowing it’s for sale.
When businesses want to sell, Grad said they don’t want their staff and others to know for various reasons.
“What we do is very discreet. Most of the deals I do don’t hit the open market and I represent both parties because they want to keep discretion,” he said.
“It’s a service I’ve been doing since I started this – the discreet listings. Almost exclusive listings. Just more private and we bring buyers with discretion.
“The people buying buildings are buying them in great locations in areas that are the most distressed like Queen Street, down on King. They’re betting on the future. And there has been, in the background with this pandemic, there have been huge lease deals that have been executed by restaurant groups around this country. So people are betting on large developments like you see by the number of condo development applications that are still going into the city. They’re pouring in if you take a look at what’s happening right across the board. People are making large bets that we’re coming back and we’re coming back really strong.”