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The Real Deal

NYC Restaurants Feel The Heat

May 4, 2015

by: Jennifer White Karp

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New York City restaurants are feeling the heat in their kitchens, in the form of rising rents and competition from other well-funded retailers.

A spate of high-profile restaurant closures — and a pending shutdown in the case of the famed Union Square Café — has focused attention on the sector recently.

This month, The Real Deal talked to brokers who specialize in putting together restaurant deals to find out how restaurateurs and landlords are coping.

To be sure, restaurants are on the rise in New York City, and most brokers say leasing activity in the sector is up — or is at least stable. Still, many eateries new and old are getting priced out of prime avenue locations and getting pushed to side streets and emerging neighborhoods.

While brokers freely admit that many restaurants can’t afford the same rent bills that national retailers can, they note that landlords are often willing to cut them a deal because they act as foot-traffic magnets and drive up the prices for the surrounding commercial and residential space.

Brokers also note that brand-name restaurant groups, as well as the new wave of venture-backed healthy lunchtime chains, like Dig Inn and Sweetgreen, are the fastest-growing players in the sector.

In addition, large and “curated” Eataly-style food halls — which are popping up at new developments like Gotham West, the Gotham Organization’s mega residential project on the Far West Side, and the office complex Brookfield Place in Lower Manhattan — are gaining in popularity.

Steven Kamali’s SKH Realty “recently worked on several feasibility studies on behalf of developers and landlords who are considering this model,” said Karma McDermott, a partner at the hospitality guru’s firm.

For more on which neighborhoods are striving and struggling to land restaurants, as well as the skinny on which sectors of the business are oversaturated, we turn to our panel of experts.

Karma McDermott
Partner, SKH Realty 

A number of high-profile restaurants have closed in the last year or so, blaming their demises on rent increases. What are you seeing in terms of restaurant leasing activity?

We’re seeing continued stability in the volume of transactions, but more so amongst the fast-casual or [quick-service restaurant] concepts, as well as multi-unit restaurant groups who can afford the higher occupancy expense.

Which types of restaurants or chains are expanding most rapidly in NYC?

Health-focused, scalable, and attainable chains. Chef Franklin Becker’s Little Beet and ESquared Hospitality’s new [vegan] concept By Chloe are good examples of the types of concepts we see signing leases.

Are you seeing more expansion to other cities by NYC-based restaurants than you were a few years ago?

We have seen a sharp spike in restaurateurs who are open to, and actively searching for, licensing opportunities in other countries, particularly in Asia, and most commonly within hotels. Hong Kong has attracted Boqueria, Mario Batali and Shake Shack. Miami has continued to be a consistent expansion pad for New York operators, including Dale Talde who will be opening Talde at the Thompson Miami Beach.

Which neighborhoods in Brooklyn and Manhattan are faring best when it comes to retaining and attracting restaurants in this market?

With a surge in residential development in Downtown Brooklyn on the way, landlords [are valuing] food and beverage tenants in their buildings, and the deals reflect that. NoMad has also attracted interest from a wide spectrum of operators and groups, despite high rent.

Which areas of Manhattan and Brooklyn are struggling most on the restaurant front?

Park Slope has experienced a spell of turnover and difficulty attracting tenants. Chelsea, specifically on Eighth Avenue from 14th to 23rd streets, has seen a rise in for-rent signs and turnover.

Are landlords trying to avoid long-term leases these days so that they can capture future rent increases earlier?

The benchmark for restaurant leases is still a minimum 10-year term. Restaurant operators simply won’t sign short-term leases, other than in pop-up scenarios. We often suggest a percent rent as additional income to help landlords achieve their expectations on rent. Restaurants look at rents in terms of occupancy cost — usually 8 to 10 percent of gross sales — and not per-square-foot dollars. Landlords sometimes need to make concessions in their asking rents to accommodate for restaurant tenants. Dry-use tenants can typically pay higher per-square-foot rents.

There’s a notable increase in the number of Eataly-style food courts in Manhattan, such as the ones at Gotham West and Brookfield Place. What do these types of food courts offer landlords?

Landlords look to hedge their risk on multiple concepts and [rent to] operators who can be replaced individually in the event that they are not successful. Landlords who sign leases to a single operator for a single large-format concept run the risk of the concept not being successful. [We’ve] recently worked on several feasibility studies on behalf of developers and landlords who are considering this model.

What’s the most surprising real estate trend in the NYC restaurant business now? 

We’re seeing a dichotomy between landlords who will make significant concessions in rent to have a restaurant serve as an amenity to their buildings, versus landlords who are pricing restaurants out altogether, in favor of banks and dry-use retailers who will pay market rates.

What are the biggest challenges brokers who specialize in restaurants face in this market?

Rising retail rents coupled with the increasingly difficult process of obtaining or transferring a liquor license without time stipulations. Time stipulations on liquor licenses have made it much harder for restaurants to capitalize on late-night business, which is needed to drive revenue numbers when considering higher rents.

Jacqueline Klinger
Vice president, SCG Retail

What are you seeing in terms of restaurant leasing activity?

The current asking rents have created a challenging economic model for even the most talented chefs and restaurateurs. Closures like Mesa Grill and the [pending closure of] Union Square Café are purely based on increased rents. However, there are landlords that see a bigger picture … the true value of having a successful restaurant tenant. Deals are still getting made for the brand-name players, but the process is more complex and labor intensive than it once was. The key is careful site selection, looking for emerging neighborhoods and undiscovered sites.

How does restaurant leasing activity compare to activity of other types of retailers in NYC right now?

Restaurants and food are still a major part of the leasing in new projects like Brookfield Place, the World Trade Center, and Hudson Yards, as well as buildings that are being redeveloped and have big blocks of space like 1095 Sixth Avenue and 7 Bryant Park.

Are you seeing more expansion to other cities from NYC-based restaurants today compared to a few years ago?

Las Vegas, Chicago and Miami are some popular first destinations for New York–based restaurateurs. The West Coast also has appeal. At the end of the day, it’s not necessarily about being from New York, it’s about a concept that can be replicated profitably elsewhere, that’s often more to do with a ‘named’ chef, a brand, or a type of food that resonates elsewhere.

Spencer Levy
Managing director, Robert K. Futterman & Associates

What kind of retail leasing activity from restaurants are you seeing?

Restaurant leasing is up considerably in the last few years, and I believe it will continue to stay strong because there are many new projects coming to market simultaneously. Chefs like Gabriel Kreuther at the Grace Building, Joël Robuchon at Brookfield Place, Marc Murphy at the Viceroy New York [hotel], Shea Gallante at the Baccarat are bringing fine dining back to New York City.

Which types of restaurants or chains are expanding most rapidly in NYC?

Local restaurant groups with multiple concepts and locations like [Union Square Hospitality Group], Altamarea Group [owner of Central Park South restaurant Marea], Starr Restaurants and Major Food Group are doing well. These ‘blue chip’ brands have credibility with landlords. They understand the local markets, tend to be well funded and can move more quickly than national restaurant chains. Quick-service restaurants are also a growing segment of restaurant expansion. Their capital expenditures are lower than full-service establishments and the occupancy percentages they can pay are higher. [As a result] these tenants are able to secure prime spaces that full-service restaurants cannot afford. 

Do you think the quick-and-healthy lunch category is oversaturated?

People are finally willing to pay more to eat healthier foods. In central business districts, office workers tend to stay within a three-block radius for lunch. New York City remains underserved in the quick-and-healthy lunch market, and I believe there is adequate differentiation between the brands for competition.

Are you seeing more expansion from NYC-based restaurants to other cities?

There is something sexy about being international, and landlords in foreign markets think it’s compelling to have New York brands at their properties. Shake Shack Dubai, City Bakery Japan and  Jean-Georges Hong Kong are all cool, but the majority of the expansion I see is more local. Restaurateurs are looking at markets outside of New York City that are within an easy travel distance and where the cost of doing business is significantly lower. We’re seeing New York brands open locations in places like D.C., Philadelphia, Boston, and as far away as Miami. 

Which neighborhoods in Brooklyn and Manhattan are retaining and attracting restaurants in this market?

I think there’s a difference between retaining and attracting. Areas that retain restaurants usually have a large concentration of attractions and are in proximity to transportation, or  both, like Times Square. But Gramercy, the Upper East Side and Upper West Side are also stable markets with higher retention rates for restaurants because of the sheer density of residents. The areas attracting restaurants today are ones with new developments where landlords are offering large contributions toward the initial buildout or where rents are still affordable. Some of the markets  are Williamsburg, Bushwick, Midtown, Midtown West, Hudson Yards, FiDi, South Street Seaport and Downtown Brooklyn.

Max Talpalar
Director, Sinvin Real Estate

With retail rents rising so rapidly in Manhattan, are restaurants getting squeezed out of prime locations?

I think the characterization of squeezed out is unfair. It is a free market, and restaurants can take any space they desire if they can afford it. That said, most local restaurants cannot pay the same in rent as international retailers. Naturally, restaurants looking for value can find it in side streets,  second floors or basements.

Are landlords avoiding long-term leases to capture rent increases earlier?

Landlords understand that restaurants need a long enough lease to amortize their initial start-up costs. I wouldn’t say landlords are looking for shorter terms. However, with the increased demand for restaurant spaces, there is no longer an incentive for landlords to offer extra-long leases like they did in the past.

What do the new large, open food halls offer landlords?

In many cases the large food courts act as an amenity to a residential or office building. The food court at Brookfield Place acts foremost as a service to the office tenants of the building. It helps Brookfield retain those tenants and potentially charge higher office rents. Similarly, Gotham West helps attract residential tenants to a part of town that is otherwise short on restaurants. The rental revenue is secondary to the big picture.

Which types of restaurants or chains are expanding most rapidly in NYC?

Fast-casual healthy restaurants, like Dig Inn, are expanding very rapidly. Other examples include Fresh & Co., Roast Kitchen, Juice Press. The growth of these chains parallels the growth of fitness companies like SoulCycle.

Are you seeing more expansion from NYC-based restaurants to other cities?

Large hotels in major cities have been luring NYC restaurants to serve as an amenity for guests. The hotels can offer financial incentives and steady traffic. For example, the Dutch is at the W Hotel Miami; Scarpetta is at the Fontainebleau in Miami; Jean-Georges [is] at One&Only Ocean Club in the Bahamas, and Public in Chicago. Of course, Las Vegas has been doing this for some time, with restaurants by Mario Batali and others.

What’s the most surprising thing about the restaurant business in the city?

I am constantly surprised at the gall of people who create an uproar when an old restaurant announces a closure, rather than supporting the restaurant before it is forced to close. Where were those angry people when the restaurant was still in business? Why weren’t they visiting the restaurant to help it make money?

Josh Siegelman
Broker, Winick Realty Group

What kind of retail leasing activity from restaurants are you seeing?

In the last three to five years, there was a steady growth period for both full-service and quick-service restaurant concepts that catered to an … increasingly health-conscious demographic. However, as real estate values continue to grow, there is a smaller window of growth for restaurant tenants within those spaces. As a result, in the last six to eight months, I think restaurant activity has plateaued. Restaurants are also evolving and changing their formats to fit in smaller spaces and operate efficiently with less overhead.

Are restaurants getting squeezed out of prime locations?

Real estate values are infinite, whereas a restaurant’s ability to monetize a space is finite. Prospective restaurants can only fit a certain number of seats, turn the tables over a certain number of times and only charge so much for a hamburger. In general, restaurants are getting squeezed out of main avenue locations, but they have shown an interest in securing side-street space that can harness the same market with decent visibility.

Are NYC landlords avoiding long-term leases with restaurants these days?

No prospective operator really considers less than a 10-year term, especially for a space that requires a full buildout. As a new tenant secures the space, they need to amortize that initial construction cost over the term of the lease to actually make money. The shorter the term they have, the harder that is.

James Famularo
Senior director of retail leasing, Eastern Consolidated

What kind of retail leasing activity from restaurants are you seeing?

Leasing activity has increased 25 percent within the last two years, and I think this is due to the extremely talented chefs and foodie culture. Everyone wants to be in the restaurant business. But I would only recommend it to someone who has a passion for it. Unfortunately, when things go wrong, people point their fingers in every direction.

Are you seeing more expansion from NYC-based restaurants to other cities?

Yes, we are working with several concepts looking for locations in Shanghai, Hong Kong, Dubai and Panama, and some are considering Cuba.

Which neighborhoods in Brooklyn and Manhattan are faring best when it comes to retaining and attracting restaurants?

Midtown East and West are very popular in Manhattan. Greenpoint and Flatbush are hot in Brooklyn. The retail rents in those areas are still very reasonable compared to the West Village, Meatpacking, or Williamsburg.

Marc Frankel
Senior managing director, Newmark Grubb Knight Frank Retail

What kind of retail leasing activity from restaurants are you seeing?

There’s no shortage of new restaurant openings. The past 12 to 18 months have been as active as I can remember. While certain areas have increased in value beyond what is comfortable for many food establishments, [they have] created new corridors where more upscale restaurants open, drive traffic and generate vibrancy for other retailers, residents and office dwellers. NoMad is a great example of this transition.

Which types of restaurants or chains are expanding most rapidly in NYC?

I’m seeing several areas. There is the ‘natural’ or ‘healthier’ segment such as Little Beet/Little Beet Table, Sweetgreen, Lyfe Kitchen and Dig Inn that seem to be the right thing at the right time. I’d expect much growth in that arena. That being said, comfort offerings like Melt Shop, Shake Shack and Five Guys continue to have lines out their doors.

Do landlords charge restaurants the same rates as other retailers?

If there’s some benefit that the landlord gains from the restaurant’s presence — such as more traffic or extended stays from customers or as an amenity to its [commercial] tenants, then [the landlord] will often offer either a lower rent or other favorable deal terms.

What are the biggest challenges facing brokers who specialize in restaurants?

Time is probably the biggest challenge. Restaurant deals are often some of the most complicated. Often in the time it takes to work out the design, the deal points and the financing, something else can happen to put the deal in jeopardy.