Bay Area restaurants struggling, high rents

Skyrocketing commercial rents exacerbated by a high cost of living in the Bay Area have taken a toll on some restaurant owners in San Francisco, forcing them to deal with the inability to meet the bottom line.

“It’s a losing proposition to open a restaurant in San Francisco these days,” said Erik Reese, a restaurant specialist from TRI Commercial, a real estate company based in Northern California.

“You are paying out 10 to 15 percent of your revenue in rents. The landlord is making all the money, but you are the one working,” Reese said. “It’s a lopsided balance.”

Hans Hansson, president of Starboard Commercial Real Estate, said that in addition to the mounting rent, several other factors contributed to the pressure of breaking even and operating a successful restaurant in San Francisco.

First of all, the cost of building a new restaurant has tripled in the past three years along with a steep increase in material costs. The average cost of opening a new restaurant in San Francisco is now around $750,000, he said.

The biggest challenge for some existing restaurants are the rising rents, which are likely to double when a building changes ownership.

“That’s substantial, because the ability to pass that on to the customers is tough, because there’s a certain price point, particularly in Chinatown, that people are willing pay for Chinese food,” Hansson said.

The rent for restaurants is calculated in amount per square foot, Hansson said. In Chinatown, that means the rent could easily go from $6,000 to over $10,000 a month for an average-size restaurant, he said.

“If a 2,000-square-foot restaurant is available in Chinatown, and again, in one of the better locations, that’s probably $6 to $8 a square foot per month,” Hansson said. “If it costs $6 a foot, then it would be $12,000 in rent, as a starting point, to $16,000. For a 2,000-square-foot restaurant that’s not uncommon.”

The other big problem is labor costs. San Francisco has a minimum wage of $15 an hour. Employers also have to pay mandatory health care benefits for their employees, per San Francisco’s 2008 Health Care Security Ordinance.

According to the San Francisco Chronicle, the 2018 set-aside rate is $1.89 per employee per hour worked for businesses with 20 to 99 employees, and $2.83 per employee per hour worked for businesses with more than 100 employees.

Further exacerbating the difficulties is the high cost of living in San Francisco. Hansson said a lot of restaurant owners are finding it hard to keep their employees, even with the minimum wage hike.

“Chinese restaurants used to be able to bring a lot of chefs from overseas, but it’s a struggle now to get those people to come here, particularly with the high cost of living here,” Hansson said.

According to Reese, roughly 200 restaurants in San Francisco shut down in 2017.

Although it’s not clear how many of those closed are Chinese restaurants, Reese said part of the problem is that landlords are pumping rents up.

“The best thing for people to do if you want to have a restaurant: buy the building,” Reese said.