We are watching a fundamental shift in how restaurant leases are structured in Ontario. Labour costs that once occupied a manageable third of operating budgets now routinely consume 31 to 34 per cent of revenue, and in many cases, the true burden—including payroll taxes, benefits, turnover expenses, and the often-invisible cost of owner labour—pushes the figure closer to 35 to 50 per cent. At the same time, real per capita spending on restaurant dining remains below pre-pandemic levels, and more than half of Canada’s restaurant operators report that they are unprofitable. This collision of rising wages and softening demand is reshaping every conversation we have with landlords and tenants, forcing both sides to rethink occupancy cost benchmarks, lease terms, and the very structure of deals that once seemed straightforward.
Ontario’s minimum wage reached $17.60 per hour in October 2025 and is scheduled to rise to $17.95 in October 2026, indexed to the provincial Consumer Price Index. This is not simply a matter of adjusting the rate for dishwashers or servers. When the statutory floor moves upward, the entire wage structure shifts. Line cooks who were earning $20 per hour now expect $22. Sous chefs move from $25 to $27. Front-of-house supervisors demand proportional increases to maintain appropriate differentials. The elimination of the lower liquor server wage several years ago means that every server in a licensed establishment must now be paid the general minimum, further tightening margins in an already labour-intensive segment.
The Labour Cost Reality in Ontario’s Restaurant Sector
Ontario’s minimum wage reached $17.60 per hour in October 2025 and is scheduled to rise to $17.95 in October 2026, indexed to the provincial Consumer Price Index. This is not simply a matter of adjusting the rate for dishwashers or servers. When the statutory floor moves upward, the entire wage structure shifts. Line cooks who were earning $20 per hour now expect $22. Sous chefs move from $25 to $27. Front-of-house supervisors demand proportional increases to maintain appropriate differentials. The elimination of the lower liquor server wage several years ago means that every server in a licensed establishment must now be paid the general minimum, further tightening margins in an already labour-intensive segment.
According to 2026 labour cost projections for Canadian restaurant operators, Ontario and British Columbia will see labour cost ratios climb to 31 to 34 per cent of revenue, driven by minimum wages exceeding $18 per hour. Restaurants Canada data show that salaries and wages represented 32.2 per cent of foodservice revenues nationally in 2023, up a full percentage point from the previous year. In Ontario’s financial operating ratios, labour sits at 31.4 per cent of operating revenue, while cost of sales occupies 34.7 per cent, leaving just 33.9 per cent of revenue to cover rent, utilities, repairs, insurance, marketing, and profit.
Yet these headline figures understate the true burden. Mandatory employer contributions in Canada—Canada Pension Plan, Employment Insurance, statutory holiday pay, vacation pay, and workers’ compensation premiums—typically add 15 to 20 per cent on top of gross wages. For an operator whose payroll report shows $240,000 in annual wages, the real cost is closer to $276,000 to $288,000 once these statutory obligations are included. Add to that the hidden costs of turnover, which average $3,000 to $3,500 per departure when recruitment, training, and lost productivity are factored in, and the implicit cost of owner labour, which often goes uncompensated despite representing substantial time and expertise, and suddenly the true labour share of revenue can reach 35 to 50 per cent.
This distinction between reported wage cost and full labour burden is critical for anyone underwriting a restaurant lease. A tenant whose payroll report shows 30 to 32 per cent labour may still struggle to meet rent obligations when occupancy costs climb beyond 8 to 10 per cent of sales, because the actual labour cost is materially higher than what appears on the profit and loss statement.
How Labour Costs Compress Occupancy Capacity
For decades, the Canadian restaurant industry has relied on the 30/30/30 rule as a rough guide to financial health: 30 per cent for food costs, 30 per cent for labour, and 30 per cent for overhead, including rent, utilities, insurance, and supplies, with about 10 per cent left over for profit. This framework aligns reasonably well with traditional occupancy cost benchmarks of 5 to 8 per cent of revenue for total occupancy, which includes base rent, property taxes, building insurance, and common area maintenance charges.
However, when labour costs rise from 30 per cent to 32 to 34 per cent, and food costs remain elevated near 35 per cent due to stubborn inflation in proteins and other inputs, the combined share of these two dominant cost categories reaches 66 to 69 per cent of revenue. That leaves only 31 to 34 per cent of revenue for all other overhead and profit. In Ontario’s operating ratios, labour at 31.4 per cent and cost of sales at 34.7 per cent combine to 66.1 per cent, leaving 33.9 per cent for rent at 8.5 per cent, utilities at 1.8 per cent, other expenses at 13.1 per cent, and pre-tax profit at just 3.1 per cent.
If labour costs increase even modestly—say by 1 to 2 percentage points as projected for 2026—while food costs remain flat, the residual share available for occupancy shrinks accordingly. An operator whose labour cost rises from 31.4 per cent to 33 per cent, with food cost unchanged at 34.7 per cent, now faces a combined share of 67.7 per cent, leaving only 32.3 per cent for rent, utilities, other overhead, and profit. Unless rent and other expenses are reduced, profit may be squeezed into the 1 to 2 per cent range or eliminated entirely. In such circumstances, any lease that pushes occupancy beyond 8 to 9 per cent of revenue materially elevates default risk.
This arithmetic is essential for landlords and investors modelling tenant viability over the life of a lease. When labour costs move from 30 per cent to 32 to 34 per cent of revenue, and food costs remain near 35 per cent, the margin available for rent becomes a binding constraint. The traditional assumption that restaurants can comfortably support 8 to 10 per cent occupancy costs is no longer universally valid. In many Ontario cases, 5 to 7 per cent occupancy is becoming the practical upper bound if operators are to maintain even modest profitability. The consequence is a negotiation environment in which tenants push aggressively on total occupancy cost, including property tax pass-throughs and CAM charges, and landlords must decide whether to accept lower effective rent or to seek alternative uses for their spaces.
Defining True Occupancy Cost
One of the most important distinctions we emphasise in lease negotiations is the difference between advertised base rent and true occupancy cost. A space marketed at $35 per square foot in base rent may cost $50 or more per square foot once property taxes, building insurance, and common area maintenance are added—often adding 20 to 40 per cent on top of the headline rate. For restaurant tenants operating on thin margins, this distinction is not semantic; it is the difference between a viable deal and a path to insolvency.
Industry benchmarks for Canadian restaurants generally suggest that total occupancy costs should fall between 5 and 8 per cent of gross revenue. Lower ratios—under 5 per cent—are uncommon and typically reflect below-market deals or owner-occupied space. Ratios of 5 to 6 per cent are considered strong, common in suburban and small-town locations. The 6 to 8 per cent range is healthy for most urban independents. Occupancy cost of 8 to 10 per cent is a warning zone that leaves little margin for error, and anything over 10 per cent is regarded as dangerous, particularly at average restaurant margins of 3 to 5 per cent.
For a restaurant generating $700,000 a year in revenue, these benchmarks translate into annual occupancy costs of $35,000 to $56,000, or approximately $2,900 to $4,700 per month, assuming total occupancy remains within the 5 to 8 per cent range. At 10 per cent occupancy, monthly cost rises to about $5,833, leaving significantly less room in the overhead budget for utilities, insurance, supplies, marketing, and repairs. When labour is already consuming 32 to 34 per cent of revenue, this compression can quickly erode profitability to the point of default.
Profitability Under Pressure and Rising Closures
One of the most striking features of the current environment is the disconnect between sales and profitability. Many operators have succeeded in raising menu prices and lifting nominal sales, yet their net profitability has deteriorated because input costs, including labour, have outpaced revenue growth. Restaurants Canada has reported that six in ten restaurant operators experienced weaker profitability in early 2025 than in 2024, even though higher menu prices and some recovery in traffic contributed to increased sales. Food costs, labour, and overhead expenses—particularly rent, utilities, insurance, and equipment—were cited as the primary drivers of this margin compression.
The degree of financial distress is reflected in the share of operators now reporting losses. Prior to the pandemic, only about 12 per cent of Canadian restaurant companies were unprofitable. More recent findings indicate that this proportion has surged to roughly 53 per cent, meaning that more than half of operators are now losing money or breaking even at best. Coupled with the fact that 87 per cent of restaurants surveyed in early 2026 identified labour costs as a major source of financial strain and 91 per cent cited food costs, the picture is one of widespread financial fragility that directly affects the ability of tenants to absorb rent increases or to commit to ambitious lease terms for new locations.
This financial strain has contributed to a significant increase in restaurant closures and bankruptcies. In the first three months of 2024, 357 foodservice businesses declared bankruptcy, compared with 184 in the same period of 2023. Over the course of 2023, 882 bankruptcies were recorded nationally, more than double the number seen in 2020. The net number of independent restaurants in Canada has declined by about 3,000 locations between 2019 and 2023, reflecting both closures and limited new independent openings.
We have seen this pattern play out across Ontario. In Ottawa’s Westboro neighbourhood, high-end restaurants have closed amid concerns that property values and commercial rents had risen beyond what local demand could sustain. Operators pointed to monthly rent increases from $3,900 to $6,100, almost doubling occupancy expenses and leaving far less funding for renovation and upkeep. In Toronto, brokers are advising some restaurateurs to consider selling their businesses before falling behind on rent, as landlords may become less willing to tolerate arrears in an environment where alternative tenants are actively seeking space.
Consumer Demand and Affordability Constraints
The demand side of the equation further complicates the challenge. Real per capita restaurant spending in Ontario has fallen from pre-pandemic levels, reflecting both macroeconomic headwinds and the lingering impact of elevated inflation on household budgets. In 2019, Ontarians spent about $2,592 per capita on restaurant food, whereas by 2024 this figure had declined to $2,378. Restaurants Canada estimates that Ontario real per capita restaurant spending in 2019, expressed in 2025 dollars, was approximately $2,710, but is forecast to be around $2,475 for 2025, underscoring the persistence of demand weakness.
At the same time, operators have attempted to raise menu prices to offset rising input costs, but these increases have been constrained by consumer price sensitivity. Full-service and limited-service restaurant menu prices increased 3.3 per cent and 4.5 per cent respectively in 2024 relative to 2023. However, over a similar period, electricity costs rose 6.8 per cent, protein prices increased 4.2 per cent, construction costs climbed 4.0 per cent, rent costs increased about 3.0 per cent, and average wages with overtime grew 2.7 per cent. Key inputs were rising faster than menu prices, eroding margins even as nominal revenues expanded.
The ongoing cost-of-living crisis, particularly acute in Toronto, has been cited as a catalyst for rising household debt and dwindling disposable income that could otherwise be spent at restaurants. As consumers cut back on dining out, especially in mid-priced segments, operators face a double bind: they must raise prices to cover labour and overhead yet risk driving away customers and accelerating the decline in traffic that already makes it harder to meet fixed rent obligations.
Lease Negotiations in the New Reality
The most direct way that rising labour costs affect restaurant leases is through the constraint they impose on what occupancy cost ratios tenants can sustainably accept. When labour and food together consume nearly 70 per cent of revenue, tenants must keep occupancy within 5 to 8 per cent to preserve a viable profit margin. When labour costs rise and demand remains soft, tenants become increasingly unwilling or unable to sign leases that, when modelled against realistic revenue projections, would push occupancy above 8 to 10 per cent.
Prospective tenants increasingly insist on modelling occupancy costs using realistic, not optimistic, revenue projections. Operators, and the brokers who represent them, demand full breakdowns of base rent, property taxes, insurance, and CAM charges rather than accepting headline rent figures at face value. They also pay closer attention to potential variability in CAM and property taxes—particularly in older buildings or gentrifying areas—because uncontrolled increases in these pass-through expenses can push occupancy ratios beyond safe thresholds without any nominal change in base rent.
In Ontario’s current environment, where labour cost pressure is a top-ranked concern for 87 per cent of restaurant operators, and more than half of companies are unprofitable, occupancy cost is not simply another line item but a binding financial constraint that shapes whether a lease is viable at all. Tenants know they cannot materially reduce statutory wage obligations or payroll burden, and they have limited room to raise prices. This leaves rent and occupancy cost as one of the few areas where negotiation can meaningfully improve their margin. As a result, lease discussions increasingly revolve around not only base rent but the full occupancy cost envelope, and landlords must either adjust expectations or accept higher churn and vacancy risk if they insist on rent levels that push occupancy ratios into the danger zone.
Changing Lease Structures and Risk Allocation
Rising labour costs also influence the structure of leases in terms of duration, escalations, and the allocation of risk between landlords and tenants. Historically, many restaurant tenants sought long terms—ten to fifteen years—to secure location stability and to amortise initial build-out investments over a prolonged period. However, as operating risks have increased due to wage and cost volatility, some independent operators have become more hesitant to commit to long terms at fixed rent escalations, preferring shorter or more flexible arrangements that allow them to reassess viability if labour or other costs rise faster than anticipated.
Landlords, for their part, must balance the desire for long-term income streams with the reality that restaurant business models are under stress and more prone to failure. Higher interest rates and tighter underwriting standards have pushed investors to focus more heavily on income durability and risk-adjusted returns, particularly in sectors like restaurants where operational risk has become more pronounced. This has contributed to upward adjustments in cap rates for restaurant-anchored properties compared to prior years, reflecting both elevated financing costs and increased tenant risk.
In this environment, rent escalation clauses become a sensitive point of negotiation. Ontario’s minimum wage is indexed to CPI, which means that wage costs will generally rise with inflation and can sometimes outpace it if additional policy changes occur. If landlords insist on aggressive annual rent escalations in addition to the inflationary pressure already embedded in wages and other inputs, the compounded effect can quickly erode tenant profitability. Consequently, some leases incorporate more moderate escalations or tie increases to broader metrics such as CPI, with caps, rather than fixed step-ups that may not reflect actual market conditions.
Furthermore, labour cost volatility and margin compression have led to renewed interest in percentage rent structures in some cases, where base rent is set at a level that covers landlord costs but the larger share of rent is tied to a percentage of tenant sales. Such structures can align landlord and tenant incentives and provide a form of risk sharing: when sales decline due to demand weakness or rising labour costs, rent falls proportionally, and when sales rebound, both parties benefit. Landlords are more willing to consider these structures when they believe in the long-term viability of a location and want to avoid vacancy, even at the expense of some immediate rent certainty.
Second-Generation Space and Tenant Allowances
One of the clearest trends linking labour cost pressure to lease negotiation is the growing preference among restaurant tenants for second-generation space, where much of the kitchen infrastructure, ventilation, plumbing, and layout is already in place from prior restaurant use. Faced with eroding margins and profitability, restaurant operators are increasingly favouring second-generation space to save on high construction and fit-out costs. In parallel, urban landlords are sometimes taking on part of these expenses through tenant allowances for extensive build-outs, recognising that offering more turnkey or semi-turnkey conditions can attract stronger tenants and reduce downtime.
Labour cost pressure plays an indirect but important role in this shift. When labour consumes a large and rising share of revenue, operators have less capacity to service both rent and debt associated with expensive build-outs or equipment purchases. They therefore seek spaces that minimise capital expenditures, allowing them to allocate more cash flow to labour and ongoing operating costs rather than to servicing fit-out debt. Landlords who understand this dynamic may offer higher TI allowances or agree to amortise part of the build-out cost in the form of slightly higher base rent spread over the lease term, thus improving tenant cash flow in the critical early years. For investors, these allowances represent an upfront reduction in net income but can improve long-term occupancy stability and reduce re-tenanting costs if tenants are better able to remain profitable despite rising labour costs.
For operators and the brokers who represent them, this means actively seeking out spaces with existing restaurant infrastructure and negotiating TI contributions that recognise the capital constraints imposed by high labour costs. For more guidance on navigating these decisions, we explore how to master commercial lease evaluation and demystifying restaurant lease types in our other resources.
Market Dynamics and Tenant Quality
Despite the financial challenges facing restaurant tenants, Canadian retail fundamentals have remained surprisingly robust, creating a tension between strong landlord positions and rising tenant risk. Retail fundamentals have continued to hold up and perform remarkably well, with deals still being completed, albeit with greater scrutiny and longer timelines. Tenant demand remains healthy across multiple sectors, especially health and wellness, fitness, grocery, and restaurants. Supply of quality retail space is constrained across most markets, with vacancy expected to remain low and rental rates for quality properties continuing to appreciate, though at a modest rate relative to earlier years.
In Toronto, dining and food and beverage concepts are dominating leasing activity, with restaurants and dining accounting for more than 40 per cent of retail expansion nationally. Leasing activity in Toronto is taking place against the backdrop of severe space shortages: net absorption in the first half of 2025 was 323,000 square feet, only one-third of the volume recorded in the same period the previous year, and availability rates fell to about 1.6 per cent, matching record lows seen during the pandemic recovery. Toronto restaurant real estate trends reflect this dynamic, with prime corridors like Bloor Street seeing availability reduce from over 40 per cent in 2020 to roughly 10 per cent by 2025.
These dynamics give landlords substantial negotiating power, particularly in urban cores where restaurant tenants compete for scarce, high-visibility locations. However, the same conditions also mean that landlords must carefully assess tenant quality and business models, as the consequences of a failed restaurant—vacancy, re-tenanting costs, and potential downtime—can be significant even in tight markets. This interplay between strong retail fundamentals and fragile restaurant economics is at the heart of how rising labour costs are reshaping lease terms and negotiation strategies in Ontario.
Tenant Underwriting and Benchmarks
As labour costs squeeze margins and increase failure rates, landlords place greater emphasis on tenant quality and credit assessment in lease negotiations. Investors in retail and mixed-use assets now pay closer attention to tenant risk and underwriting assumptions regarding rent coverage, particularly when restaurant tenants are involved. Landlords may favour national chains or well-capitalised regional groups over independent operators, believing that larger entities are better positioned to absorb labour cost shocks and to renegotiate supply contracts, staffing models, or menu pricing.
Nonetheless, the extremely low availability of quality retail space in markets like Toronto and the strong demand from restaurants mean that independent operators continue to seek space and, in some cases, can command competitive terms, especially for unique concepts that promise to activate a property and drive traffic. Landlords are aware that successful restaurants can serve as anchors that boost the performance of surrounding retail tenants, and savvy landlords view strong food and beverage offerings as amenities that enhance asset attractiveness. This recognition can increase landlords’ willingness to negotiate concessions on TI allowances, rent abatement periods, or CAM caps, particularly when they believe that a given restaurant will materially enhance the property’s profile.
However, negotiation leverage is moderated by the reality that many restaurants are operating with thin or negative margins. Brokers warn that some restaurateurs are missing opportunities to sell their businesses before they fall behind on rent, and that landlords may take action more quickly in pursuing arrears or replacing tenants with alternative uses if they see mounting operational losses. In Ontario’s context, where 53 per cent of restaurant companies are not profitable, landlords cannot assume that every tenant seeking space will be a reliable long-term rent payer, and they may require stronger guarantees, security deposits, or covenants to mitigate risk.
For investors and landlords underwriting restaurant tenants, key metrics to monitor include labour cost percentage, occupancy cost percentage, and profit margin under realistic operating assumptions. Quick service restaurants typically operate with labour cost ratios of 20 to 25 per cent of sales, fast casual concepts with 22 to 28 per cent, casual dining with 28 to 35 per cent, full service with 30 to 38 per cent, and fine dining with 35 to 45 per cent. Smaller operations with annual revenue under $500,000 often show labour costs of 30 to 40 per cent, whereas multi-unit chains and high-volume venues may achieve lower ratios due to economies of scale.
On the occupancy side, 5 to 8 per cent of revenue is generally considered a healthy range, and anything above 10 per cent is a warning sign, particularly if labour is above 30 per cent. Ontario’s financial operating ratios, with labour at 31.4 per cent, cost of sales at 34.7 per cent, rental and leasing at 8.5 per cent, and pre-tax profit at 3.1 per cent, can be taken as indicative of a typical but somewhat strained scenario for many operators in the province. Tenants whose labour costs exceed 35 per cent and occupancy costs exceed 10 per cent will often be operating at a loss unless they can significantly outperform average revenue levels or achieve exceptional efficiency in other overhead areas.
Strategic Implications for Property Investment
For investors focused on commercial, mixed-use, and restaurant-anchored properties in Ontario, rising labour costs translate into higher tenant risk and, consequently, adjustments in valuation and cap rates. Higher interest rates and tighter underwriting standards are prompting investors to focus more heavily on income durability and risk-adjusted returns, rather than speculative upside based on rent growth or rapid appreciation. Pricing across retail and mixed-use assets has recalibrated to reflect the cost of capital and tenant risk, with cap rates for restaurant-anchored properties adjusting upward compared to prior years.
These adjustments reflect several intertwined concerns. First, rising labour costs and compressed margins increase the probability of tenant default or lease renegotiation, particularly in segments where wages and staffing are structurally high, such as full-service and fine-dining restaurants. Second, the ability of tenants to absorb scheduled rent escalations is diminished when labour costs rise faster than revenue, forcing landlords to consider slower or more modest rent growth assumptions in underwriting models. Third, the risk of downtime and re-tenanting costs increases if restaurants close or downsize, particularly in spaces specifically designed for restaurant use that may not easily be repurposed.
From a valuation standpoint, investors must incorporate more conservative assumptions about rent coverage ratios and stress-test operating models under scenarios of further labour cost increases. For instance, if a restaurant tenant currently pays 7 per cent of revenue in occupancy cost and has labour at 32 per cent and food at 34 per cent, the investor might model a scenario in which labour rises to 34 per cent, food to 36 per cent, and revenue declines by 5 per cent due to demand weakness. In such a scenario, occupancy cost might effectively rise to 8 to 9 per cent of revenue even if nominal rent remains unchanged, and the tenant’s profit margin could fall to near zero, elevating default risk. By incorporating such sensitivity analyses into underwriting, investors can better judge whether a given rent level is sustainable or whether concessions are necessary to enhance income durability.
Understanding restaurant startup costs in Toronto and the related capital constraints helps frame these investment decisions. Similarly, weighing the question of whether to lease or buy a Toronto restaurant involves many of the same occupancy cost considerations that now dominate landlord-tenant negotiations.
Portfolio Strategy and Tenant Mix
At the portfolio level, rising labour costs encourage investors and landlords to consider tenant mix strategies that balance restaurant risk with other uses that may have more stable cost structures. While restaurants remain attractive for their ability to drive foot traffic and animate retail environments, the high variability in their operating margins under labour cost shocks suggests that pure restaurant-heavy portfolios may carry elevated risk.
In practice, this may mean pairing restaurant tenants with fitness, health and wellness, grocery, and discount retail uses that can help buffer income volatility. It may also mean favouring restaurant concepts with more flexible staffing models—such as limited-service or hybrid formats—over labour-intensive fine dining in certain locations, particularly where occupancy costs are high and demand is volatile. For Ontario investors, an awareness of the labour benchmarks by concept type, as well as the broader economic trends affecting the accommodation and food services sector, is essential for constructing tenant mixes that can sustain rent streams even as labour costs evolve.
Innovative property strategies can also play a role. Mixed-use developments that integrate restaurants with residential, office, or entertainment uses can create environments where restaurant tenants benefit from built-in customer bases, improving revenue stability and reducing labour-induced risk. Similarly, landlords may experiment with shared kitchen facilities, food halls, or incubator spaces that lower individual tenant capital and labour burdens while still activating the property. These models can spread risk across multiple operators and provide flexibility in adjusting tenant mixes as labour costs and demand patterns evolve.
Urban Versus Suburban Contexts
The interplay of labour costs and occupancy varies significantly across Ontario’s urban and suburban markets. In Ottawa, high rents in gentrifying neighbourhoods have destabilised independent restaurant operations, with monthly rent increases from $3,900 to $6,100 almost doubling occupancy expenses. Operators pointed to not only rising rents but also higher taxes and hydro costs as sources of financial strain. For independent restaurants, labour costs often include substantial owner labour contributions, which may not be formally recognised in payroll reports but nonetheless represent a real burden on the business. When occupancy costs rise sharply, owner-operators may find themselves working longer hours for diminishing returns, eventually opting to close or sell rather than continue under unsustainable financial conditions.
Toronto offers a contrasting but equally instructive case, where restaurant leasing activity is robust even as labour and occupancy costs squeeze operators. Dining and food and beverage now account for 55 per cent of transactions in some brokerage teams, and demand for restaurant space remains strong despite broader economic uncertainty. However, Toronto is also facing a prolonged cost-of-living crisis that has driven household debt higher and reduced disposable income available for discretionary spending on restaurants. The recent minimum wage increase to $17.60, coupled with the elimination of a lower liquor server wage, has raised labour costs across the staffing hierarchy, with brokers noting that the timing is “terrible” given that many people are too cash-strapped to dine out as frequently.
Toronto’s retail market also features a severe supply shortage, with availability rates around 1.6 per cent and net absorption well below historical norms. Prime areas like Bloor Street have seen availability drop from over 40 per cent in 2020 to roughly 10 per cent. In this context, landlords maintain strong negotiating positions on base rent, and asking rents continue rising, though at a moderated pace. Yet the economic strain on restaurant operators casts a shadow over this leasing boom. Nearly half of Canada’s restaurant owners expect profits to worsen due to labour constraints, and falling profits leave some operators unable to pay rent on their restaurant space. Toronto’s market thus combines intense demand for space with widespread tenant fragility, creating a situation where lease negotiations are both highly competitive and fraught with risk.
Outside major urban cores, Ontario’s suburban and small-town markets present a somewhat different balance between labour and occupancy costs. Occupancy cost benchmarks suggest that suburban and small-town restaurants more often achieve rent shares in the 5 to 6 per cent range, compared with 6 to 8 per cent in urban locations. However, labour shortages can be particularly acute in smaller markets, and average wages may need to be higher relative to local income levels to attract staff. The accommodation and food services sector across Ontario employed around 420,500 people in 2024, with job vacancy rates at times significantly above the provincial average. By mid-2025, vacancies in the sector had risen again to around 22,070 positions, with a job vacancy rate of 4.5 per cent, compared with 2.8 per cent for all industries. For suburban landlords and investors, the lower occupancy cost ratios may provide some buffer against labour cost shocks, but the sustainability of restaurant tenants remains contingent on demand stability and effective staffing strategies.
Practical Strategies for Operators and Landlords
Given that labour has become a binding constraint on occupancy and profitability, restaurant operators must prioritise operational discipline and labour productivity to preserve capacity for rent commitments. Operators should begin by measuring their true labour cost, including payroll burden and owner labour, rather than relying solely on payroll reports. By pulling remittance reports from payroll providers and calculating the employer contribution rate—often around 17 per cent above gross wages—operators can determine their actual payroll burden and incorporate it into labour cost tracking.
Operators are also encouraged to track turnover costs and owner hours, estimating annual turnover expenses by multiplying the number of departures by roughly $3,000 to $3,500 and valuing owner time at a fair market rate. Once these components are included, many operators discover that their real labour cost is closer to 35 to 50 per cent of sales, rather than the 28 to 33 per cent suggested by wage-only percentages. Recognising this reality can change how operators approach lease negotiations: they may become more conservative about occupancy cost ceilings and more assertive in seeking concessions that keep rent within sustainable bands.
Additionally, operators can seek to improve labour productivity through menu simplification, technology adoption, and staffing model adjustments, especially in formats where staffing intensity historically runs high. Shifting toward limited-service or hybrid service models can reduce front-of-house labour requirements, while improved scheduling and cross-training can help minimise idle time and ensure that each labour hour contributes more directly to revenue. Such strategies do not eliminate the impact of rising minimum wages but can slow the growth of labour cost as a share of revenue, thereby preserving more room for occupancy costs within the operating model.
Site Selection and Lease Negotiation
On the real estate side, restaurant operators and their advisors must integrate labour cost considerations into site selection and lease negotiation strategies. Industry guidance stresses the importance of demanding a full occupancy cost breakdown from landlords, including base rent, property taxes, insurance, and CAM, rather than relying on base rent alone. Operators should calculate the occupancy-to-revenue ratio using total occupancy cost and realistic revenue projections, walking away from deals where this ratio exceeds 10 per cent or where landlords are unwilling to provide full transparency on operating costs.
Furthermore, operators should consider second-generation spaces and landlord TI allowances as tools for mitigating capital costs that would otherwise consume cash needed to cover labour and rent. Selecting spaces with existing kitchen infrastructure, adequate venting, and appropriate layout can substantially reduce upfront expenditures and shorten ramp-up periods, which is critical in an environment where labour costs are high and demand may be uneven. Negotiating graduated rent structures or initial rent abatement periods during opening can also help align occupancy commitments with the timing of revenue growth, improving the odds that tenants can survive the first years of the lease when labour and build-out pressures are most intense.
For Ontario-focused operators, it is particularly important to factor in statutory minimum wage trajectories and the likelihood of further CPI-indexed increases when modelling long-term leases. Assuming flat labour costs over a ten-year lease would be unrealistic; instead, operators should model wage growth aligned with CPI and additional wage drift due to labour market conditions, then test whether rent commitments remain viable under those scenarios. When landlords understand that such modelling is being conducted, they may be more receptive to structuring leases in ways that support tenant sustainability, recognising that long-term occupancy often yields better returns than aggressive initial rent levels that lead to early default or closure. Our guide to restaurant property negotiation strategies offers further insights into these tactics.
Landlord and Investor Strategies
Landlords and investors likewise have strategic options to manage the impact of rising labour costs on their portfolios. One constructive approach is to foster collaborative relationships with tenants, offering targeted concessions or adjustments when labour shocks threaten viability, rather than defaulting to rigid enforcement of rent obligations that may lead to vacancy. For example, landlords might temporarily adjust rent escalation schedules, provide deferred or reduced CAM charges during periods of exceptional labour cost increases, or assist with marketing initiatives to boost traffic, thereby helping tenants maintain revenue and cover rent.
At the same time, landlords must remain selective in tenant acquisition, prioritising operators with sound financials, realistic business plans, and demonstrated awareness of labour and occupancy cost constraints. Tenant financial disclosure, including labour cost percentages and detailed operating budgets, can be requested as part of lease negotiations, enabling landlords to assess whether proposed rent levels are consistent with sustainable operating margins. Where tenants appear over-leveraged or overly optimistic about sales, landlords may adjust rent expectations, require stronger security, or decline leases to avoid future distress.
Innovative lease structures and property strategies can also play a role. Mixed-use developments that integrate restaurants with residential, office, or entertainment uses can create environments where restaurant tenants benefit from built-in customer bases, improving revenue stability and reducing labour-induced risk. Similarly, landlords may experiment with shared kitchen facilities, food halls, or incubator spaces that lower individual tenant capital and labour burdens while still activating the property. These models can spread risk across multiple operators and provide flexibility in adjusting tenant mixes as labour costs and demand patterns evolve. For more on how mixed-use environments support restaurant success in Toronto’s mixed-use developments, we have explored this dynamic in depth.
Regulatory Context and Future Outlook
Ontario’s regulatory environment will continue to shape labour costs and lease negotiations in the years ahead. The minimum wage is indexed to the provincial Consumer Price Index, which means that wage costs will generally rise with inflation and can sometimes outpace it if additional policy changes occur. With the general minimum wage scheduled to reach $17.95 in October 2026 and further increases likely in subsequent years, operators and landlords must plan for ongoing upward pressure on labour costs.
At the same time, the provincial government has shown limited appetite for regulatory relief on other cost drivers, such as property taxes, hydro rates, or insurance premiums, meaning that the burden of cost management falls primarily on operators and property owners. The elimination of the lower liquor server wage several years ago removed one avenue for cost control, and there is no indication that differentiated rates will be reinstated. Restaurants Canada and other industry associations continue to advocate for measures such as reduced Employment Insurance premiums, relief on commercial rents, and support for workforce training, but progress has been incremental.
For investors and landlords, this regulatory outlook underscores the importance of conservative underwriting and flexible lease structures. Assuming that labour costs will remain flat or decline is unrealistic. Instead, investors should model scenarios in which labour costs rise by 1 to 2 percentage points over the next several years, and test whether tenant rent coverage ratios remain viable under those conditions. Where coverage ratios are already tight, landlords may need to consider rent caps, percentage rent arrangements, or other mechanisms that prevent occupancy costs from rising faster than tenant revenues. Understanding restaurant leasing laws in Canada can also help both parties navigate the legal framework that governs these relationships.
Conclusion
Rising labour costs in Ontario’s restaurant sector have fundamentally reshaped the landscape of restaurant leases and landlord negotiations. With labour now consuming 31 to 34 per cent of revenue for many operators, and full labour burden often reaching 35 to 50 per cent when payroll taxes, benefits, turnover, and owner labour are included, the margin available for occupancy costs has been compressed to the point where traditional assumptions about sustainable rent levels no longer hold. Real per capita restaurant spending remains below pre-pandemic levels, more than half of Canadian restaurant companies are unprofitable, and closures and bankruptcies have increased significantly, all of which heighten tenant risk from the perspective of landlords and investors.
Within this environment, traditional occupancy ratio benchmarks of 5 to 8 per cent remain the guide, but many Ontario operators now find that any lease pushing total occupancy above 8 to 10 per cent is unsustainable, particularly in urban cores where labour-intensive concepts face high rents and softened demand. Lease negotiations increasingly focus on the full occupancy cost envelope, including property taxes, insurance, and CAM, and tenants seek transparency and caps on these components to prevent unexpected cost surges. Labour cost pressure also encourages preferences for second-generation space, TI allowances, and lease structures that align rent with realistic revenue trajectories, such as graduated rent and percentage rent arrangements.
For landlords and investors, the rise in labour costs has translated into higher tenant risk, adjustments in cap rates for restaurant-anchored properties, and a stronger emphasis on income durability and risk-adjusted returns. Tenant underwriting now requires careful attention to labour and occupancy cost metrics, with benchmarks indicating that labour above 36 per cent and occupancy above 10 per cent of revenue often signal danger, especially when profit margins hover around 3 to 5 per cent. Portfolio strategies increasingly consider tenant mix diversification, pairing restaurants with other uses to buffer income volatility, while innovative property models such as mixed-use developments, food halls, and collaborative build-out approaches offer avenues for sharing risk and supporting tenant sustainability.
For commercial, investment, and restaurant property professionals operating in Ontario, the key insights are clear. Rising labour costs are not an isolated operational issue but a structural shift that must be incorporated into lease design, rent expectations, and valuation models. Sustainable restaurant leases now require more nuanced negotiations around occupancy cost, revenue projections, and risk-sharing mechanisms, particularly in high-rent urban markets. Collaborative landlord-tenant relationships, careful tenant underwriting, and strategic tenant mix decisions can help mitigate labour-driven risk and preserve income streams in an environment where both demand and operating costs are volatile. By grounding decisions in robust data on labour and occupancy costs, and by aligning lease structures with realistic operating economics, Ontario’s commercial and investment property stakeholders can navigate the challenges of rising labour costs while still harnessing the enduring value that successful restaurant tenants bring to their assets and communities.
