Ryan is an attorney and valuation specialist residing in Chicago. He chronicles his thoughts and research on FranchisePundit.com. You may reach him by email ryanknoll@gmail.com or mobile telephone 312-212-3423.
Looks like Houlihan’s still can’t find the right balance of seating capacity, location, and affordable rent. Their Stamford franchisee was open 6 months and then closed after not paying for those 6 months.
"There’s a lot of competition, and 250 seats is a lot to fill and a lot of rent to pay," he said. "Sometimes, smaller is better."
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My opinion for quite some time has been that overall (some areas of the country are exempted) commercial real estate is way overvalued. Scarcity or bidding wars seems the likely explanation for today’s valuations, the innate ability of the location to actually generate revenue simply does not seem able to justify the rents.
I suspect a lot of current franchise failure (the last 7 years) can be explained by onerous rental contracts in conjunction with non-functional build-out costs. IN the end a location needs to drive enough traffic to pay for itself. It seems on the whole “we” have moved beyond that.
I looked at several properties today and frankly with a 50% drop I would think they would be appropriately valued. I suspect the commercial correction has a long way to go.
FuwaFuwaUsagi
As a commercial real estate broker, I must disagree with your conclusion that most commercial real estate values are inflated by 50%. Building owners are not making exceptionally high returns above carrying costs, and frankly never have. The net income from a fully occupied building usually pays everyone’s salary and that’s it. The payday if it comes at all is achieved upon the sale. The economics and market demand for income property won’t let prices drop that much.
Devon:
I always encourage polite discourse.
Here is the primary point we are disagreeing on:
“The economics and market demand for income property won’t let prices drop that much.”
I just find no evidence that the current rental rates in my area are sustainable. In other words the economics of the situation indicate many retail operations simply cannot afford to pay the rent even under optimum conditions. And note I said optimal. The problem is not necessarily related to the economy often the problem is simply logistical. For instance consider a sub shop. You have some idea what a ticket average is and you have a peak capacity you can operate at. You also have limiting factors, key among these is either foot traffic, parking, or line turnover. In my area you can take guest check average x turnover x parking spaces + walk ins and simply do the math. At some rent rate the concept is simply not viable. You can do the same math for many concepts, auto repair etc. You have so many bays, even at full capacity you can only work so many people per hour and the market will only bear so much mark-up. Those factors cap the rent that can be paid in the long term. From what I have seen rents need to decline substantially in order to make many concepts viable in the long term.
In others words what the landlord paid for the land and build out 2-5 years ago has nothing to do with the value of building in terms of profits it can generate for the business that occupies it.
Regards,
FuwaFuwaUsagi
I believe the market will thin out the owners of commercial properties. Businesses can aford only so much rent. As these tennants continue to fail or bow out, landlords will have to adjust to a new reality; either lower rents, sell short, or stay empty. If prices fall enough, perhaps successful tennants will be able to afford buying property at reasonable prices.