Are Commercial Rents Crushing a New Generation of Restaurant Innovation?

The economics of your local restaurant depend on skyrocketing commercial rents—and the bottom line doesn't look good.

May 23, 2017

By Matt O'Grady / Photo: Andrew Querner

I meet Seán Heather on a snowy Friday two weeks before Christmas in his flagship gastropub, the Irish Heather. It’s 10:30 in the morning and already he says he’s had over a dozen cancellations for dinner because of the weather. Not that he’s worried: “I have 160 seats here,” says the gruff 50-year-old, who insists on doing the interview at the bar, standing up, in the still-unlit room. “We’ll easily do 400 people through the door tonight.”

When he opened the Irish Heather in Gastown two decades ago, success was no sure thing. Heather was born in Toronto but moved to Ireland as a toddler, and had only returned to his mother’s native Canada—this time, to Vancouver—in his early 20s to launch his restaurant career. After managing Benny’s Bagels in Kitsilano for four years, the ambitious Limerickman decided he wanted to open his own place. “I knew everybody in Kits, so it made the most sense for me to open something there. But there was nothing I could afford anywhere in Kits. I almost gave up.”

At the last minute, his real estate agent suggested he consider Gastown—then, much more so than now, a haven for drug users and petty crime. “I’d never been to Gastown in the seven or eight years I’d been in Vancouver,” recalls Heather. But he says it reminded him of the streets of Dublin or London, where he’d worked as a dishwasher, and he found a great lease in the historic Alhambra building—across the road from his current location. He initially built his business on what he now calls the “naive” concept of “serving the perfect pint of Guinness,” but in time the Irish Heather was earning equal acclaim for its food program. (It moved across the road in 2008, when the Alhambra had to undergo seismic upgrading.)

Seán Heather’s journey from washing dishes in Dublin to running a mini-Gastown empire was not without its bumps, but the industry veteran wonders how new restaurateurs will make a go of it in today’s climate.

Twenty years after opening the restaurant, he’s the undisputed godfather of Gastown. He, along with wife and business partner Erin, has parlayed that one restaurant into a thriving mini-empire—one that also includes neighbouring Salty Tongue, Shebeen Whiskey House (in the back of the Irish Heather) and Salt Tasting Room, in Blood Alley, within sight of where we’re speaking. While Heather has managed to build a diverse portfolio of restaurants, he wonders what the future is for the area—and the business.

“Our industry—with a few exceptions—is in danger of becoming a bunch of businesses owned by old fogeys and chains. There might be places in Mount Pleasant, places like that, but even there the rents are starting to scream up. I don’t know where in the downtown core, like Gastown, this kind of opportunity presents itself for young people.”

When he launched the Irish Heather in 1997, he was paying $16 a square foot; it’s now more than double that amount. “I’ve been renewing (my leases) at current market rates. It’s dramatically gone up. But I’ve been able to develop my business to where I can afford those rents. If I were starting out at those rates? Well, I just wouldn’t have done it. I couldn’t have done it.”

Higher and Higher

The story of Vancouver’s otherworldly real estate market has been told in media around the world in recent years, but only now are we hearing about the trickle-down effect on quotidian cornerstones of the local economy: the gas stations closing to be redeveloped as condos, the garden centres fleeing for greener pastures on the city’s fringes, the restaurateurs pushed east as rents push north.

While Heather laments what’s happening around him, the man who inherited the original site for the Irish Heather—Paul Grunberg, co-owner of L’Abattoir—has a more Darwinian take on the restaurants that will survive in the competitive downtown scene.

“If you want to make more money, you’ve got to go out and work harder. I know that may come across as being insensitive, but from a guy who’s worked his tail off for a very long time, I know for a fact that the more I want, I’ve gotta make more money, I’ve gotta work harder, I have to push my team harder, I have to drive my guest experience,” says Grunberg, the animated 36-year-old son of a Romanian-immigrant litigator. “I have to make sure my product is better than yours. That’s competition. That’s healthy. And I think that as Vancouver grows, competition is going to get more fierce—and people are going to have to open up their concepts with that in mind. I need to be the best. I can’t go at it half-assed, or else I’ll get swallowed up.”

In addition to L’Abattoir, Paul Grunberg is also a partner in Savio Volpe in the Fraser neighbourhood, where he lives with his wife and two young kids.

L’Abattoir opened in 2010 (after Seán Heather had moved out and seismic upgrades had been completed), and in short order the “French-influenced West Coast fare” establishment became one of the city’s most acclaimed fine-dining restaurants. Grunberg, who had previously been GM at Chambar and worked with Rob Feenie at Lumière, says he’d always wanted to have his own restaurant—and, along with partners chef Lee Cooper and Nin Rai, he worked 16-hour days, seven days a week, to make it happen.

With a regularly packed house, expansion came naturally. “We just grew out of L’Abattoir and were really busy, and we had an idea to open up a private dining room,” says Grunberg as we sit at the long table in the sleek 50-seat brick-and-beam space, just behind the main restaurant. “We thought, well, we could open up another restaurant—but why not open up another venue that can create the same kind of revenue that piggybacks off the concept we already have?” This spring, after just over three years running the private dining room, L’Abattoir will launch a monthly “restaurant within a restaurant” concept called No. 1 Gaoler’s Mews—transforming the lower-level kitchen area into an exclusive chef’s table-style dining experience for a limited number of guests.

L’Abattoir has found a way to grow its empire without extending its footprint—testament to the limitations, even for a successful restaurateur like Grunberg, of expanding downtown. “It would be my goal to take a concept like L’Abattoir and be able to compete on Alberni, compete with Nightingale and Cactus Club and Joey. I think we’d do very well downtown,” he says. “But where, as a modest restaurateur, do you get the capital? Where do you get that $5 million or that $10 million? Do I even want to do that, given the risk involved and how long it would take me to pay it back?”

Eastward Ho!

For many other restaurateurs—especially those who can’t get away with charging $40-plus for an entrée—the possibility of setting up in Gastown, or anywhere downtown, is a ship that sailed long ago. Ron Oliver and Simon Kaulback are two Gastown graduates who’ve found success further east, on the fringes of Chinatown. The late-30s duo behind Mamie Taylor’s met a decade ago while working at Century House and went on to work the front of house at the Diamond (Oliver) and the former Boneta (Kaulback). When they decided to launch their southern-style American restaurant in 2013, they wanted to do it in the neighbourhood they knew best—but Gastown rents, says Oliver, were two to three times what they were able to secure in Chinatown.

That said, the move east four years ago was a big gamble. “Back then, Chinatown was a bit of a closed market,” says Oliver as we chat at one of the homey restaurant’s high tables, with Kaulback in the background talking to a supplier on the phone. “There wasn’t much of an opportunity for non-Chinese to come in and open businesses.” They found the property through their friends James Iranzad and Josh Pape, the restaurateurs behind Wildebeest, whose landlords—Steven Lippman and Christian Willows, of Living Balance Investment Group—had helped them get established on a gritty stretch of West Hastings in 2012. Now the developers were shopping a former bakery on East Georgia as a linchpin to the “next new ’hood” for aspiring restaurateurs.

Oliver and Kaulback: “The next thing, if there is a next thing—well, the likelihood of it being in Chinatown is getting slimmer by the year.”

“When we came down here, we said to [Lippman], ‘You need to invest in us like we’re investing in the neighbourhood.’ And they were more than happy to do that. Steve has been nothing but fantastic for us. He’s been really generous and helpful at the times when we’ve needed it the most.” Oliver and Kaulback say they have a long-term “10 and two 5s” lease (a 10-year lease, with two five-year renewable terms), which has allowed them to lock in a good rate. (“Some of the guys coming in now are paying $8 or $9 a square foot more than what we were paying when we started,” says Oliver.)

“When we started, everywhere on the block, with the exception of Phnom Penh, was 6 p.m. shutters down—gone,” he says. “I don’t even know if the streetlights came on.” Now with a flurry of new restaurants opening within blocks—including the most talked-about addition from the past year, Kissa Tanto, due north on East Pender—Chinatown basks in the limelight as Vancouver’s new foodie nexus. Like Gastown, though, Chinatown also risks becoming a victim of its own success, says Oliver.

The Flip Side

From  their fourth-floor offices overlooking the 100 block of Powell Street, Steven Lippman and Christian Willows are flipping through a folder of old photos. The before-and-after shots detail the transformation of the once-derelict stretch of West Hastings that now houses Wildebeest, Catch 122 and Noodle Box.

“We did the equivalent of seven buildings there,” says Willows. “At that point in time, 2008, Woodwards was three-quarters done and there was a lot of uncertainty in what was going to happen in the market.”

Adds Lippman, in his still-thick Queens accent (he moved to Vancouver in the 1970s): “And that building—it was really fucking scary, all full of rats and garbage and shit.”

Lippman, 61, and Willows, 47, met 25 years ago while working out at the same gym, Ron Zalko, and quickly struck up a friendship. Willows, a recent Kootenays émigré, went to work for Lippman’s latest start-up, Polaris Water, maker of the Whistler Water brand. Lippman sold the business in 1999, and for the past decade the men have paired up doing what Willows calls “renovations”: Lippman scours the city with real estate brokers for hot deals, and then Willows goes in and fixes them up.

More often than not, they put an ambitious young restaurateur on street level to bring buzz and excitement to the property. “Wildebeest is where it all began,” says Willows. “Where we started to get into heritage restorations.” Their list of tenants, past and present, is a veritable who’s who of Vancouver’s restaurant scene: Wildebeest, Catch 122, Cuchillo, Kissa Tanto, Torafuku, La Bodega and Mamie Taylor’s. “There are a lot of landlords that have cool buildings, but they don’t want to do the work,” says Willows. “We put in the infrastructure, get the change-of-use permits, redo the ductwork.” On average, he estimates, they spend $400,000 to $450,000 to bring each building up to snuff.

Lippman—whose early career includes his own short-lived restaurant at Broadway and Manitoba, Lippy’s Bar-B-Q, and stints as a waiter, busboy and dishwasher at Kettle of Fish, Victoria Station and Hy’s Mansion—has a clear affinity for the restaurant trade. And as much as he aims to make a profit (one of the reasons he’s since sold the buildings where Cuchillo and Catch 122 are located), he also sees nurturing young entrepreneurs with favourable long-term leases and generous tenant improvements as key to his mission.

“I want to make sure that, whoever the tenant is, they’re not just paying my mortgage,” he says, glancing at his buzzing Motorola flip phone. “That they can make money and then eventually buy their own building and pay their own mortgage. We nurture their future—it’s a win-win.”

Of course, it’s not always a win-win. One of Living Balance’s tenants, Ray Loy of the contemporary Chinese restaurant Bambudda—across the road at 99 Powell Street—was told late in 2016 that he’d have to vacate the space in 2017 as the landlords remodelled the building: adding two floors on top, underground parking and an elevator. When I reach Loy, he’s winding down Dine Out Vancouver and trying to plan a special “last supper” for closing day at the end of February.

“I’ve looked at trying to find a new space, but when you consider the prices—the cost of relocation, and look at what people are charging per square foot now—it’s not very promising,” says the 45-year-old Loy, who was part of the opening team at Market by Jean-Georges before launching Bambudda in July 2013. “I’m going to take a break for now. I haven’t had a vacation for four years, so it’s time for a vacation.”

Even battle-scarred veterans like Heather aren’t sure how long they can stick it out. “People like me may become victims. I was one of the original people down here, but if rents keep going up and up and up? Will it make sense for me to stay here, or does it make sense to move on? I’ve got five kids, and I’d like for some of them to be in this business, but am I going to hand over a business that’s paying massive amounts of rent? That would be unfair to them. It’s going to be interesting to see it play out. I don’t know that we’ve plateaued yet—not even close.”


The other culprit? Taxes!

For Ian Tostenson, president and CEO of the B.C. Food and Restaurant Services Association, the main culprit in this real estate squeeze is city hall. “The major thing has been the increased property taxes. It’s staggering,” he says. He cites an example of a restaurant in South Granville that recently closed: “Their property taxes—for maybe an 80-seat restaurant—were $120,000 a year. The property taxes were more than the business owner was earning—about three times as much.” And in an industry where a six- or seven-percent profit is considered healthy, that’s a burden fewer and fewer can bear.  “There’s too little margin in this business to manage that incredible commitment—the taxation—while still fighting to find staff to run your business,” says Tostenson. “I think there’s an awareness that Vancouver is becoming so bloody expensive that there’s going to be a revolt from taxpayers saying, enough’s enough.”


What do you think of the Vancouver’s rising commercial rents? Let us know in the comments below!

 

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