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The 2019 Economic Outlook for the Restaurant Industry in California’s Major Geographic Regions

By in Restaurant Rap with 0 Comments

This article is a result of my experience selling and overseeing the sale over 1,000 restaurants throughout California as well as the research I have completed. My research includes the review of many publications and websites including Nations Restaurant News, upserve.com, San Francisco Chronicle, fooddive.com, Modern Restaurant Management, restaurantbusinessonline.comfoodandwine.com and various other articles I read on the California Restaurant Association and National Restaurant Association websites.

Although there are many challenges to the restaurant owner operator per the items discussed below, people will always need to eat and there will continue to be a demand for restaurants.  Those restaurant operators that provide consistently good food, good service in a well maintained facility while providing price value to its customers should continue to thrive.

I will break down this study based on an economic overview high lighting the following major California geographical regions:

  1. San Francisco
  2. Silicon Valley (including San Mateo and Santa Clara Counties)
  3. Sacramento and its surrounding areas
  4. Greater Los Angeles area
  5. Orange County, and
  6. San Diego County

San Francisco

It is a very tight market to find employees due to the low unemployment rate which is approximately 2.2 percent and the shortage of affordable housing. The average price for a one (1) bedroom apartment is $3,560 per month and $4,730 for a two (2) bedroom apartment and the average price of a home is $1.3 million which puts this price structure out of reach for most restaurant service employees.  Consequently most restaurant service employees have at least a one (1) to two (2) hour commute to get from their home to their place of work.  This additional commute time puts additional stress on employees and makes them vulnerable to find job opportunities closer to their home.   Minimum wage is $15 hour as of 7/1/2018 and will increase annually based on the cost of living index. Most back of the house employees (kitchen personnel, dish washing, pantry, etc) are making substantially more than minimum wage. I know of many restaurants  that have reduced their operating hours and/or eliminated a day or two a week of being open as they can’t find employees to staff their restaurants.  The above circumstances have increased restaurant operators labor costs far in excess of their ability to offset these costs to the customer which has resulted in reducing their profits.  Additionally increased occupancy costs and other operating costs have exacerbated the reduced profits to the operator as restaurant rents in this area range from $36 to $96 per sq foot per year.  Conventions are important to the San Francisco economy and make up approximately 20% of the tourist market which draw close to 17 million people to the city yearly.   The partial closing of Moscone Convention Center the past two years due to the centers remodeling and expansion has hurt tourist business.  However the convention center project was completed the end of 2018 which will increase the number of major conventions scheduled in 2019 to 17 versus 7 in 2018. Also the completion of the Chase Center towards the end of this year which will be the new home to the world champion Golden State Warriors and many other entertainment venues will help business in the city.  The large homeless problem in the city has hurt business and has discouraged tourists and conventioneers to visit the city.  The homeless issue is a high priority of the new city government to get under control.

As a result of the above circumstances buyer demand is down for purchasing restaurants especially for larger restaurants – 3,000 square feet or more.  The sweet spot for buyers are restaurants 1,000 to 2,000 square feet where operators can minimize the number of employees and have a number of family members and themselves replace normal staffing as well as keeping occupancy costs reasonable so they operate a more profitable business.  Additionally bars continue to be In high demand due to their low pouring cost and other operating expenses compared to restaurants.

Silicon Valley (San Mateo and Santa Clara Counties)

These counties are the heart of the world internet hub and the following are a few of the major technology companies headquartered in these counties;  Apple, Oracle, Facebook, Google, Cisco Systems, Intel, LinkedIn, eBay, Yahoo, You Tube, Alphabet, Seagate Technology, National Semiconductor, Juniper Networks, Hewlett-Packard, Adobe and SAP.  Most of these companies have free in-plant feeding facilities that offer quality breakfast, lunch and dinner free to its employees which don’t help restaurants in these areas. Additionally the many restaurant employees that are working in these in-plant feeding facilities exasperate the shortage of available employees for restaurants in this region.   There are lot of major new developments in the works including multi-residential housing, industrial and office construction.

It is a very tight market to find employees due to the low unemployment rate which is approximately 2.0 percent in San Mateo County and 2.4 percent in Santa Clara County. In both counties there is a shortage of affordable housing. The average price for a one (1) bedroom apartment in is $3,250 per month in San Mateo County and $2,870 per month in Santa Clara County and $3,876 per month for a two (2) bedroom apartment in San Mateo County and the $3,264 a month for a two (2) bedroom apartment in Santa Clara County.  The average price of a home in San Mateo County is $1.450,000 (the highest average cost for a single family in the San Francisco Bay Area) and in Santa Clara County $1,185,000 which puts these price structures out of reach for most restaurant service employees.  The reason housing costs are especially high in San Mateo County is because it is equal distance between San Francisco and San Jose. Consequently most restaurant service employees have at least a one (1) to two (2) hour commute to get from their home to their place of work.  This additional commute time puts additional stress on employees and makes them vulnerable to find job opportunities closer to their home.   Minimum wage is $15 hour in most cities in these two counties as of 1/1/2019 and will increase annually based on the cost of living index. Most back of the house employees (kitchen personnel, dishwashing, pantry, etc) are making substantially more than minimum wage. I know of many restaurants  that have reduced their operating hours and/or eliminated a day or two a week of being open as they can’t find employees to staff their restaurants.  The above circumstances have increased restaurant operators labor costs far in excess of the ability to offset these costs to the customer which has resulted in reducing their profits.  Additionally increased occupancy costs and other operating costs have exacerbated the reduced profits to the operator as restaurant rents in this area range from $30 to $84 per sq foot per year.  Additionally the downtown San Jose homeless problem has been a detriment to restaurants doing business in the downtown area.

Sacramento and Surrounding Areas

The unemployment rate is approximately 3.7 percent. The average price for a one (1) bedroom apartment is $1,363 per month and $1,984 for a two (2) bedroom apartment and the average price of a home is $352,000 so housing costs are much more affordable for restaurant service employees versus the bay area. For businesses with 25 employees or less minimum wage will be $11.75 hour as of 7/1/19, $12.50 hour as of 7/1/20 and then on 7/21/21 be indexed to cost of living. Most back of the house employees (kitchen personnel, dish washing, pantry, etc) are making more than minimum wage.  Increased occupancy costs and other operating costs have reduced profits to the operator and restaurant rents in this area range from $18 to $48 per sq foot per year.

In downtown Sacramento there is lot of new development around the Old Town area with the new basketball stadium as well as new multi residential, office buildings and other large multi-use investment properties underway.

Los Angeles County

The unemployment rate is approximately 4.6 percent.  There is a shortage of affordable housing. The average price for a one (1) bedroom apartment is $2,371 per month and $3,060 for a two (2) bedroom apartment and the average price of a home is $566,000. For most cities in this county businesses with 25 employees or less the minimum wage will be $14.25 hour as of 7/1/19, $15 hour as of 7/1/20 and as of 7/1/21 indexed to cost of living. Most back of the house employees (kitchen personnel, dishwashing, pantry, etc) are making more than minimum wage. The above circumstances have increased restaurant operators labor costs far in excess of their ability to offset these costs to the customer which has resulted in reducing their profits.  Additionally increased occupancy costs and other operating costs have reduced profits to the operator as restaurant rents in this area range from $24 to $96 per sq foot per year.  There is large large homeless problem in Los Angeles which has not helped the restaurant industry particularly in downtown Los Angeles.

Los Angeles County is by far the largest county in the state with a population of 10.1 Million. In addition to high tech expansion underway, the county is strong in the aerospace industry, has a large manufacturing base and is the world capital to the entertainment industry in the movie and television sectors.  Additionally there are hundreds of new projects underway including multi-unit residential buildings, industrial buildings, office buildings and various mixed-use buildings.

Orange County

It is a tight market to find employees due to the low unemployment rate which is 2.8%.  The average price for a one (1) bedroom apartment is $2,027 per month and $2,244 for a two (2) bedroom apartment and the average price of a home is $796,500.  Minimum wage is $11 hour as of 1/1/19 and will increase annually based on the cost of living index and will go to $15 hour no later than 2022. Many back of the house employees (kitchen personnel, dishwashing, pantry, etc) are making more than minimum wage. The above circumstances have increased restaurant operators labor costs far in excess of the ability to offset these costs to the customer which has resulted in reducing their profits.  Additionally increased occupancy costs and other operating costs have exacerbated the reduced profits to the operator as restaurant rents in this area range from $24 to $72 per sq foot per year.

Orange County is the third largest county in the state with a population of 3.2 Million.  The county includes 34 incorporated cities and is home to Disneyland and Knott’s Berry Farm.   Additionally there are hundreds of new projects underway including multi-unit residential buildings, industrial buildings, office buildings and various mixed-use buildings.

San Diego County

It is a tight market to find employees due to the low unemployment rate which is approximately 3.2 percent.  The average price for a one (1) bedroom apartment is $2,168 per month and $2,670 for a two (2) bedroom apartment and the average price of a home is $610,000.  Minimum wage is $12 hour in San Diego and in most other cities in the county as of 1/1/19 and will increase annually based on the cost of living index and will go to $15 hour no later than 2022. Most back of the house employees (kitchen personnel, dishwashing, pantry, etc) are making more than minimum wage. The above circumstances have increased restaurant operators labor costs far in excess of the ability to offset these costs to the customer which has resulted in reducing their profits.  Additionally increased occupancy costs and other operating costs have exacerbated the reduced profits to the operator as restaurant rents in this area range from $24 to $72 per sq foot per year.

San Diego County is the second largest county in the state with a population of 3.3 Million.  Additionally there are hundreds of new projects underway including multi-unit residential buildings, industrial buildings, office buildings and various mixed-use buildings.

The Other Factors Impacting Restaurant Revenues – On Line Sales, Delivery Sales and Price Discounting.

On Line Sales – These sales are growing dramatically especially among Millennials removing many customers from occupying seats in restaurants.  Millennials and others prefer to eat their meals at home and order their meals through delivery services such as Uber Eats, Door Dash, Caviar, Grubb Hub, Amazon and Postmates.

Delivery Services –  Amazon’s recent purchase of Whole Foods and additional food preparation and delivery services such as Home Chef, Terra’s Kitchen, Green Chef are eroding restaurant sales.

Price Discounting – In addition to the massive fast food price wars going on ($2.99, $3.99, $4.99 pricing including 2 sandwiches, 2 sides and a drink, etc.) some independent operators are forced to discount their menu items in order to be competitive and maintain market share which further erodes their profit margins.

What are the Buyers Criteria for Buying Restaurants, Bars and Clubs in 2019

1.  Profitable restaurants and bars that have been established for at least a few years with seasoned earnings. Specifically there is a strong demand for sports bars, and casual restaurants that have a high percentage of alcohol sales.

2.  Restaurants and bars including the real estate.

3. Restaurants that are conducive to more of a life style situation such as a breakfast and lunch business, a 5 day week food-service business in a densely populated downtown area and a successful franchise that doesn’t require the owner to be a full time hands on owner operator.

4.  Restaurants that are located in affordable housing areas where there is a reasonable supply of restaurant employees.

5.  In areas where there is a shortage of employees due to lack of affordable housing buyers are looking for restaurants that are smaller in the 1,000 to 2.000 square foot range so they can be easily operated by an owner operator and their family members with a minimal number of non family employees. These restaurants are conducive to lower labor and occupancy costs.

Who are the Sellers in 2019

1.  Baby boomers who no longer want to deal with the physical demands and stressful aspects of the business.

2.  Operators businesses that are marginally profitable or not profitable and they can no longer afford to keep the business operating.

3.  Operators who are having disputes with partners that can’t negotiate an acceptable buy out, operators that have health issues and/or operators that need to relocate due to personal reasons.

4. Operators that are burned out from the demands of the business and want a career change.

5.  Operators that have profitable businesses and are concerned that there will be a reversal in the economy in the near future and want to cash out before the economy turns.

With all the challenges indicated above a progressive restaurant operator who is attentive to their customers needs while maintaining control of their costs should continue to provide a good living for themselves.

Restaurant Realty Company has the largest inventory of California restaurant, bar, club and related commercial building opportunities as well as the largest proprietary database of buyers for these opportunities.  

If you are a seller or buyer please contact us by going to our website –www.restaurantrealty.com or call us at 888-995-9701.

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About The Author
Steven Zimmerman, CBI, M&AMI, CBB, FIBBA

Steve is the Founder, Principal Broker and Chief Executive Officer of Restaurant Realty Company. Steve has personally sold/leased over 1000 restaurant, bar or club businesses, sold many commercial buildings and completed over 3,000 restaurant valuations since 1996. His real estate experience also includes sales, acquisitions, management and ownership of numerous properties throughout California including restaurants, hotels, apartment buildings, single family houses, an office building and a multi-use retail building. Steve is also the author of Restaurant Dealmaker – An Insider’s Trade Secrets for Buying a Restaurant, Bar or Club available on Amazon. Prior to starting Restaurant Realty Company Steve had over 20 years of restaurant experience and was President and Chief Executive officer of Zim’s Restaurants, which was one of the largest privately owned restaurant chains in the San Francisco Bay Area. READ FULL BIO | HIRE EXPERT WITNESS - LEARN MORE