Is a 12% occupancy cost too high for a restaurant?

Twelve percent occupancy cost is above the healthy range for most restaurants. Public chains report rent and occupancy between roughly 5% and 11% of sales. At 12%, a restaurant is carrying rent that will show up as thin margins by year three, if the year is otherwise ordinary.

What occupancy cost actually includes

Occupancy cost is total annual occupancy divided by annual gross sales. It includes base rent, CAM, property taxes, building insurance, and percentage rent where it applies. Utilities usually sit outside it, though some operators fold them in — so agree on the definition before comparing two numbers.

Agree on the sales side too. Delivery, catering, gift cards and online orders shipped from the store all belong in gross sales, and operators do not always include them.

The range, at companies that publish their numbers

Chipotle reports 5.2%. Shake Shack 7.7%. Sweetgreen 9.6%. Potbelly 10.8%. Those are average-unit figures from each company's most recent filings, and they span most of the format spectrum from high-volume quick service to sit-down sandwich.

That spread is not random. Occupancy cost tracks the kind of location more than the kind of restaurant. High-volume quick service spreads a rent across enormous sales. A format with lower daily volume cannot.

Why 12% is different from 10%

Two points of occupancy cost is most of a restaurant's profit.

Independent full-service restaurants reported a median labor cost of 36.5% of sales in 2024, including benefits, and industry food cost runs near 32%. That is roughly 69% consumed before rent, utilities, insurance, marketing or debt service. What remains has to cover all of it and leave something for the owner.

Move occupancy from 10% to 12% and you have taken two points out of a number that was already under ten. That is the difference between a business that survives a slow quarter and one that does not.

When 12% still works

Occupancy above 10% is defensible when the location supplies traffic the operator could not generate on their own.

Interior high-traffic retail commands that premium, and it can be worth paying. One coffee operator running two locations carries about 12% at a busy interior store, and runs a second location at roughly a third of the rent per square foot elsewhere. The first store bought traffic. The second bought cost. Both decisions were right.

The question is not whether 12% is too high in the abstract. It is whether the location is producing the volume that makes 12% arithmetically survivable.

How to test a rent yourself

Divide the proposed annual occupancy cost by the tenant's realistic annual sales.

Realistic is doing the work in that sentence. If the tenant gives you a good month, do not multiply it by twelve. One seasonal café reports $75,000 in a strong month and $45,000 in a weak one — a 67% swing inside the same year. Multiplying the strong month gives you an annual number the business never earns.

If the result exceeds 10%, the tenant needs higher volume than projected or a lower rent. A concession somewhere else in the deal does not fix a structurally high ratio. Free rent delays the problem by a few months; the ratio is the same in month thirteen.

What to do with the answer

If the number comes back at 12% and the location genuinely produces traffic, say so and defend it with the traffic. If it comes back at 12% and the location is ordinary, the deal needs restructuring before it needs selling.

Understanding Retailers covers occupancy cost in depth, along with healthy ranges by use and how to back into a rent a tenant can actually carry.