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Good landlords and agile concepts help independent hospitality bounce back

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The future of the high street and how operators can meet returning demand

The uncertainty that’s bought the future of our industry and businesses into question is far from over.

With the furlough scheme now extended until March, conversations this month centred on rent as the central tenement to the survival of many hospitality businesses. And how accommodating many landlords have been.

The bounce-back is likely to look very different depending on where you are. And on the kind of trade businesses rely on.

So what do some of our friends from the sector think about how the tenant-landlord relationship will underpin growth and future trading? And what will hospitality need to do to withstand future uncertainty?

Read on to find out.

Landlords and tenants need to understand each other’s businesses

Camilla Topham of Distrkt hospitality property consultancy admitted that landlords have been on a steep learning curve over the last few months.

“Transactions have always been done at arm's length and restaurants have always been a bit of an alien. A lot of landlords have never fully understood them. Getting under the skin of how restaurants actually operate has been crucial.”

Alex Moore agrees but hasn’t had the same experience with some of the smaller landlords across his estate of brands. But he understands that they’re limited by their resources.

“The bigger landlords like Shaftesbury have been fantastic and supportive. They seem to have got their head around the economic reality of the situation. The other landlords who may only have one or two sites have been a lot more difficult to deal with. They haven’t had the ability to be more flexible.”

With both parties more invested in the other’s success, the conversation seems to be turning to creating win-win relationships. Acknowledging that the future needs to be faced together.

Camilla cites the Crown Estate’s incubator on Heddon Street - currently occupied by success story Fallow - as a great example of a landlord taking a personal, and longer-term view, on bringing talent into their estate.

Harry Badham from 22 Bishopsgate developer Axa, thinks it's all about driving value for tenants over strong-arming them into long, restrictive and punitive leases.

“I don’t mind if tenants want to sign a one year lease or a 20-year lease. To me the contract is not the valuable bit. The important bit is that tenants are getting value out of using the building.

“Landlords who rely on long leases from tenants like Debenhams are only fine until Debenhams can’t pay the rent. Then the lease is worth nothing. “Anyone who thinks a lease is a proxy for stable cash flow is going to be a loser. You’ve got to create a place, space, or asset where people are getting value out of using it.”

Camilla believes that fairer terms and better behaviour now will aid landlords in attracting the best new tenants in the future.

“From the operator’s point of view, they’re looking to take spaces with landlords that have behaved themselves and behaved well and transparently. Operators are concerned how their relationship with the landlord will fare if this kind of thing happens again.”

Turnover based rents may be here to stay

Opinion appears divided when it comes to fundamental changes to the types of deals that are done.

Alex believes “they [turnover based tents] were on the up anyway. That their acceptance has been accelerated and that they’re here to stay.

“They’re a fair mechanism for both operator and landlord. I don’t mind paying a landlord more if we’re making more. But I expect them to make less when we’re not doing so well.”

Camilla agreed that turnover only deals have been a hot topic recently, but feels their wholesale acceptance may not be a foregone conclusion.

“There are still rents being paid. And what we’re hearing from our clients is that we’re brokering fair deals. In good locations and good areas, there’s still demand.

“Landlords are looking at stepped rents, perhaps with a turnover-only period, or turnover set into a base rent. Most operators are happy to look at things on a stepped basis up to a base rent they’re happy within a few years’ time. The market has not completely fallen away.”

Camilla has seen strong interest from independent operators for a recently-marketed site on Soho’s Kingly Street. Arguing that thriving areas such as Borough “are stronger than they were before.”

Growth is however likely to remain slow into next year. With concerns over future lockdowns and increased disruption causing people to hold onto cash and back from making decisions.

Could turnover based rents also help push some accountability back on to developers and asset managers, should they fail to deliver the footfall they promised into their developments? A problem that many operators we know have faced in the past.

A changing city landscape

Harry remains buoyant about the future of The City and its high streets.

“I do think that people will come back en masse. It will just be an acceleration of the trends we saw before. Variable work patterns, elongated ‘peek time’ commutes, work based on personal preference or character. Or on a job role. We’ll see people choosing different ways to work.”

Whilst he acknowledges that this is likely to result in lower densities in buildings at any given time, he’s confident that demand for quality office space is going to continue to increase. With companies giving their employees compelling reasons to come together and into the office.

“People are going to be free to dictate the time they spend in the office. But they will [be compelled to do so] if they feel that it’s a great space and if they feel that they’re getting something out of it. Whether that’s learning, career progression, or whether it’s social interaction.”

With the future of work playing a crucial role in the future of hospitality, how will other areas fare differently?

Camilla highlights the inherent differences between key London neighbourhoods and the audiences that they serve.

“Canary Wharf and The City are going to take longer to get back on their feet. With some companies reporting that they’re not expecting to be back ‘in the office’ until June.

“A shift is going to need to happen in those locations for operators to be successful going forward. Traditionally inflexible companies and their employees would have been working at home for eighteen months at least. The likelihood is that this is going to continue to the point where there won’t ever be the same volumes of people.”

“Soho is different. It’s made up of much smaller, creative businesses. It’s much more dynamic. The theatre crowd is also incredibly powerful. The market may contract over the short term. But it will build and build again. No question. In fact, it may even be wilder!

“Somewhere like Covent Garden relies too heavily on tourism. Whilst CapCo have worked really hard to reintroduce Londoners to Covent Garden, and has done so brilliantly, the makeup of the space is predominantly tourists and it’s being felt now. Lagging behind places like Soho.”

Alex agrees that we may never see a return to the same quantity of restaurants in areas that cater predominantly to office workers. “I would argue that there would be fewer restaurants. Sadly. There will be fewer bums, but there will be fewer seats.”

And when it comes to residential neighbourhoods, he’s seen a fundamental shift in the makeup of the businesses he’s involved in.

“The locations in the middle of town are now being outperformed by places like Tooting or Clapham. The West End numbers have moved out to the suburbs and the numbers from the suburbs have moved into the West End.”

From surviving to thriving on the high street of the future

So what will hospitality businesses need to look like in order to succeed in the face of these changes? As we emerge from the pandemic and look toward a vaccine.

Camilla is certain that the demand is there. But that confidence really is everything.

“The Pizza Pilgrims guys said that ‘demand is like a coiled-up spring’. Once lockdown eases, the demand is there. And people do feel safer eating out. Even now in lockdown, the confidence is there.”

“Confidence really does drive everything and the uncertainty has been the biggest challenge.”

Agile, evolving concepts and businesses will be the winners as we face a new, uncertain future. With further unpredictable challenges likely to remain a part of our lives. At least in the short term.

Alex believes the fundamental makeup of hospitality businesses has changed for good.

“We’ve survived the last nine months by constantly tweaking the metrics”.

“They used to be quite straightforward. - 30% staff costs, rent, and rates shouldn’t be over 10%, head office costs should sit at 6%, delivery of between 20 and 30% [of revenue]. It’s all changed.

Success for Rosa’s Thai Cafés was very much down to the nature of the product.

“It’s the concepts with delivery-friendly offerings that will continue to thrive. 5% of our trade at Ceviche and Andina was delivery and those businesses, compared to Rosa’s, are struggling. Thai food and delivery is a match made in heaven.”

With on-demand delivery likely to be a key part of a high street business’ model moving forward, how will the explosion of in-home meal kits contribute to the continued success of operators?

Camilla thinks that “being able to tap into your favourite restaurants at home is amazing”.

“It’s here to stay and we’re now seeing loved local brands going nationwide, such is the demand for their food and the love of the brand.”

Alex is less certain.

“Meal kits at home - a lot of people are doing it now and it was a novelty before. Will then end up being around in five years? Will it ever fill the hole of the lost office worker? Let’s see.”

He predicts that cloud kitchens that evolve with tastes and trends, will be required to offset any future disruption to the viability of restaurants.

“[The fun and innovation will be in] collaboration. Restaurants with multiple cloud kitchens. Concepts which only exist virtually. On the front door, you’ve got your main brand, and in the kitchen, you’ve got 4 or 5 different operations running virtually. I think that’s going to be a big thing that we’re going to see a lot more of. And off the back of that, some of those businesses may end up turning into physical businesses.”

Harry sees a bright future in multi-use spaces, underpinned by good design, planning, and product. Catering to a tribe but for a variety of different uses and occasions.

“I do believe - and we’ve said this for a while - that we’ve got this concept of what used to be called ‘mixed-use city centres’. Often called 15-minute cities. Shops, offices, hotels, transport hubs all working together.

“Whereas what we’ve been seeing is a move to ‘multi-use’. A train is an office, a coffee shop is an office, but also an office can be a hotel. A hotel can be an office. The idea that spaces don’t have to be static.

“They can change hourly, daily, seasonally. But what’s important regardless is ‘good bones’. Good light, good air, good space. Allowing you to use the space in different ways.

From an operator's perspective, he thinks that “the winners will be the people who can leverage up.”

“Whether that’s using scale, innovation, technology, or sheer hard work. Those who can accept that life is going to be different and can react quickly."

“People wouldn’t have felt like they could go into a Hilton because they felt that was reserved for the people staying there. The Ace Hotel didn’t feel like you’re going into a hotel when you walked through a flower shop.”

“And a lot of that is psychology and human behaviour.” Breaking down barriers to find new ways of enticing people through your doors.

A boom for independent operators

Pent up demand is being felt across hospitality.

And landlords and asset managers will be looking for ways to entice people back into their buildings and developments. Marketing a return to work to their tenants’ employees.

Hospitality businesses will play a key role in making these trips worthwhile. Even cherished.

“Landlords have to keep marketing, and tempting people into their locations,” says Camilla. “Outdoor seating, bike racks, get people there and maintain that buzz.

“Kingly Court is a brilliant example - good vibe, good outside, covered seating. Nothing is ever going to take away from being at a restaurant.”

The inevitability of vacant sites will create opportunities to meet returning demand. Much of this will be driven by the launch of unburdened independent businesses. And existing operators who have remained agile throughout the pandemic.

Camilla thinks that “now is the time for the independents! Some, but not all, of the big casual dining brands, have been suffering a lot and they’re not as agile as the smaller operators”.

Harry is also confident that a returning workforce will be quick to flock back to their favourite venues. Whilst eager to try what launches in the market.

“[Before the second lockdown] offices were empty but the ground floor of The Ned was heaving. So people are coming in to meet other people. For no other reason [other than missing human interaction].

“If you’re going to meet people, you’ll do it in a more interesting environment. Even if it costs you a bit of money.”

“A lot of the themes we’re seeing are not new. City centres are hubs for people to meet rather than a workhouse for people to come into to sit at a desk.”

A good December’s trading is in no way going to compensate for the losses accrued this year. And the beginning of 2021 is going to be a bumpy ride.

But on the other side, opportunities abound for concepts and brands that are agile and multi-faceted. Those who embrace change. Serving diverse communities what they want, wherever they want it. Be that in dining rooms, at their desks, or at home.

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