One Challenge Too Many

For a few decades, I have seen data on the death rate of restaurants. A study from The Ohio State University, released in 2019, mirrored the results that I have observed forever. In brief, they found that 60% of restaurants failed in the first year and 80% did not stay open long enough to celebrate their fifth anniversary. Reasons are many but big ones include the owners chasing a dream but not having enough experience in the field and not realizing how hard the job of running a profitable restaurant can be. Also, financial issues dominate led by poor cash flow management.

Today, as the shutdowns of businesses continue due to the Covid 19 pandemic, it appears that many restaurant owners consider this horrible event to be one challenge too many. They have survived previous recessions, blizzards, hurricanes, change in consumer tastes but many much loved dining establishments are closing for good. A restauranteur in the midwest put it to me this way: “Mr. Cole, we tried to do curbside for a few weeks. It went okay, I suppose, but, even with a skeleton staff, we are losing money. Few people are ordering alcohol and that is where are big margins always were. No one wants to hear about my spectacular wine pairings these days when we put  a to-go dinner in their trunk. I am 62 and my wife and I are tired. It is time to go.” Another in the Northeast wrote that most restaurants operate on the edge and, even if you last a while, you are often not super profitable. “Why work 12 hours a day when you will be in a deep hole for at least 18-24 months. My landlord is a decent sort but I have to start paying him soon.”

Others have hinted plus the media has covered that with 25-50% capacity allowed as states “open up” their economies, most restaurants can not make money. Others fear that many regulars (the mainstay of successful independent restaurants) will stay away out of fear of the virus. So, the outlook, always a challenge, is now scary.

Some financial analysts have hit the issue from another angle. There are some very high end restaurants that cater to the wealthy. They have what analysts might call “fortress balance sheets.” They can ride out this unpleasantness not forever but for a long time. The individual restaurants that are unique and perhaps small but part of our lives are really under siege. So some pundits say our choices in dining out in about two years will be the high end who will be a bit bruised but resilient and chain restaurants which have stronger investor backing. Also, it will be harder for dreamers to get funding for a new restaurant as Angel investors will be more gun shy than ever when it comes to funding a dining establishment.

Casualties may also be in places that are not top of mind. The small lunch counters in the backroads of rural America may not reopen. Many faced closure when the talk of a $15 minimum wage was floated a couple of years ago. If such a plan takes hold or something close to it, the little guys in small towns will likely not survive in most cases.

So, there is one thing that we all can do. Each week since the lockdown my family and I have picked a couple of local places that we have always liked. We get a lunch or dinner from them and will continue it for some time to come. These restauranteurs have brightened our lives and survived while most have not. As they face their greatest challenge ever, they deserve our business. So support your favorite local restaurants. If you help them get through this once in a lifetime event, they just may be around when some sense of normality returns.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Greedy Landlords?

I hate to admit it but 50 years ago this week I was introduced to economics by reading a little book by Henry Hazlitt entitled ECONOMICS IN ONE LESSON.  It set me back 75 cents! The paperback changed my life as I shifted from being a history major to an Economics major and I have never looked back. While Hazlitt, a journalist who is widely respected in libertarian and conservative circles was prolific (he lived to be 98), his little book had a different message. Simply put, the one lesson was that most people think only of the immediate effect of government policy actions in the economy and few, especially politicians, think of how their actions effect the long term. The erudite Thomas Sowell of Amherst and Stanford fame, expanded on the argument in a brilliant but much heavier book entitled APPLIED ECONOMICS. I recommend both highly.

Okay, what does that have to do with our title of greedy landlords? A lot. Our friends in the media continue to do slice of life stories about people suffering horrible economic conditions due to the pandemic. Some are heart wrenching and the stories need to remain front and center to the national dialogue during an election year. To their great credit only CNBC, our leading business cable channel, has effectively expressed how small time real estate operators better known as landlords are also in a terrible bind.

When one hears the term landlord most people conjure up the presence of an older person who is very affluent or wealthy with dozens or hundreds of rental homes or apartments. While they exist and most are fair sized corporations, several million landlords are basically what I would describe as bootstrap entrepreneurs. They may live in a duplex and rent out the upstairs to a tenant who helps them pay for their home. Or, they may have a small apartment building with six to 10 rental units. Almost all are leveraged unless they have held the properties for 15-20 years. So, what is happening to these greedy millionaires? Many are in a spot not dissimilar to many of their tenants. If you have a 10 unit apartment building, you easily may have a million dollar mortgage on it depending on its location.
If your tenants, who have been legally excused from paying rent for a few months, do not pay as many are out of work, you still owe the bank the mortgage payment.

A small player in central California who has read MR for years put it to me this way: “Don, for the moment, I am really lucky. I have 10 tenants. Two are in small bungalows and eight are in my apartment building. Only two have not paid rent the last two months. One honest young woman came to my office and paid her May rent saying that with her $600 weekly bonus in federal unemployment pay, she is more flush than when she is working. She could have not paid for a while but has earned my everlasting respect. Many times, I have vacancies and repainted or repair a place after a tenant leaves so missing two payments for a few months will not kill me. Yet, I still to have pay my real estate taxes at the end of June and, so far, our county has not offered any delay in payment. I have been doing this for 30 years so I know dozens of small real estate players across the state. I even mentor some of the young ones. They are really in a bind. One wonderful 35 year old immigrant has eight properties. All of her tenants have lost their jobs and no one is paying her. She does not have the kind of relationship that I have with my community bank and is getting hassled. She is a complete wreck even though she is the hardest working and most resourceful person that I have ever met.”

There is another shoe to drop as time goes on. Let us say the country opens up and many of these tenants get their old jobs back. Remember, a few years back when the Federal Reserve published the now famous report that more than 40% of American households could not readily pay for a $400 auto repair bill or an emergency room visit? The Fed was telling us that a huge minority of Americans were living on the edge. They were a paycheck or two from being close to homeless. So, assume many of the renters get their jobs back after a four month hiatus from paying rent. They still owe the rent and the landlords still owe the bank for their mortgages and the counties for their real estate taxes. If people were fighting to pay their rent PRIOR to the pandemic, how will they be able to come up with the money to pay the back rent. Most landlords will stretch out the payments to be sure but if you were living hand to mouth before the crisis, can you afford an extra $150-200 per month in rent once work resumes. Am I exaggerating? Well, Fed chair Jay Powell rattled markets a few weeks ago when he stated that 40% of persons earning less than $40,000 per year were currently unemployed. A few will take their extra unemployment compensation and $1200 recovery checks and be very disciplined about using it. Many, not used to such a cash infusion, will likely not plan properly for a “return to normalcy.”

So, I did not post this to defend landlords. I am not one and have never been one. My point is that the media, with few exceptions, have done a poor job to date, of really examining the ripple effect that the pandemic is having on many people whom you may think are sitting pretty.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com