Upscale dining gives way to street food

While fancy restaurants close, some innovative and moderately priced eateries and bars expand, taking advantage of weakened retail competition
By Melissa Dehncke-McGill | June 01, 2010 07:00PM

There is no disputing New York’s status as one of the world’s key culinary capitals. Indeed, news of restaurant openings gets reported on foodie blogs before the ink is even dry on the lease.

But the recession has unequivocally altered how often New Yorkers eat out (needless to say, for many, seven nights a week is now out of the question) and where they’re willing to spend their hard-earned cash. White-tablecloth restaurants have, not surprisingly, seen the worst of it, and the new restaurants that are taking advantage of market conditions and opening now have far more moderately priced menus.

In this month’s Q & A, The Real Deal talked to retail brokers, consultants and lenders who specialize in restaurant and nightlife real estate. Not only is the industry struggling to keep up with the changing times as diners document their culinary experiences on Facebook and Tweet about their meals, they are also adjusting to the economic landscape.

While business is down an estimated 20 to 25 percent from peak in the industry, one broker noted that 2009 saw a jump in restaurant permits as new eateries tried to take advantage of the drop-off in retail competition from drugstores and cell-phone shops that were once willing to pay exorbitant rents.

Another broker said he’s seeing more young, first-time restaurateurs looking to jump in while rents are down, and landlords who are willing to “take a risk on people who have never signed a lease before.” In many cases, those newbies are looking to take over failed restaurants or bars where the infrastructure is already in place and they don’t have to pour in extra money to build out the space.

Meanwhile, some celebrity chefs have shifted to what one source called “street food” concepts, similar to Danny Meyer’s Shake Shack. The idea there, of course, is to offer less-pricey options.

For more on which neighborhoods are faring best and worst when it comes to attracting restaurants and bars, what sorts of changes brokers are seeing, and what kinds of negotiations are taking places between tenants and landlords, we turn to our panel of experts.

Spencer Levy

director, Robert K. Futterman & Associates

We know that when the economy went south, a lot of people scaled back on eating out. How is the retail market for restaurants in New York right now and how does that compare to a year ago?

A lot of restaurants still look busy, but people are spending less while they’re out. This is a prime time to shop for spaces that just weren’t available last year. There are new spaces on the market that have never been considered food locations before because landlords are widening their breadth as they get more desperate for tenants. … I’m working with several under-30-year-old “foodies” looking to open 500 square feet in areas like the West Village, Lower East Side and Murray Hill. They are all looking to jump in while the rents are low and landlords are willing to take a risk on people who have never signed a lease before.

What’s the most surprising thing about the restaurant and nightlife business in the city right now?

Technology and social media. First, there is the power of the blog. It is amazing how informed people are — informed about food, informed about the chef, informed about the owner. Also, apps like Foursquare and Twitter have become mainstream marketing. People take pictures of their food and Facebook their dining experience.

What kinds of deals are restaurants and nightlife establishments getting from landlords? How do rents compare to three months ago, six months ago and a year ago?

There is still a [rent] disconnect between landlords and tenants, but the gap is closing compared to a year ago. The bigger disconnect is the CapEx [capital expenditure] it takes for a restaurant to open. Money is tight and most restaurants fail [because they are] undercapitalized. A successful deal addresses this up front. I believe landlords are willing to finally give bigger concessions and even help tenants with improvements or give allowances to make a deal with a proven entity. The rent is almost secondary.

Can you tell us about a recent deal involving a restaurant or bar that you’ve either worked on or heard about that illustrates what’s going on in the market today?

We just recently closed an 11,000-square-foot Restaurant Lease On 26th Street and Park Avenue South for the Hurricane Club, and Brookfield Properties secured an 11,000-square-foot STK [the steakhouse] for the Grace Building at 43rd Street and Sixth Avenue. These are two perfect examples of medium-size restaurant groups looking to expand in this market.

What sorts of changes are brokers who specialize in restaurants and nightlife facing in this market? Are commissions changing?

All leasing brokers can do restaurant deals, so those of us who specialize in these transactions have more competition now that the market is tighter. While most brokers used to shy away from restaurant deals because they are typically more difficult to close, now they embrace them. As far as commissions, they have gotten better. Landlords are more willing to pay full commission if you bring the right tenant with the right deal. [But] deals are taking twice to three times as long to close because tenants and landlords are negotiating harder and tenants need more time to secure funding.

Marc Frankel

managing director, Newmark Knight Frank Retail

How is the retail market for restaurants and bars in New York right now and how does it compare to three months ago, six months ago and a year ago?

A year ago was probably the height of bad. The market seems to have bottomed out anywhere from three to six months ago. Starting three months ago we started seeing signs of a turnaround, with restaurants doing well nationally and particularly in New York. Some of the better companies, McDonald’s on the low end and Chipotle on the fast casual, and even some of the steakhouses like Del Frisco’s, they didn’t really notice as much of an impact as the [retailers] who hadn’t paid attention to fundamentals and maybe overpaid or chose locations that didn’t make sense.

What types of restaurants and food establishments are struggling most and scaling back most now?

Conspicuous-consumption-type places seem to be adjusting — like San Domenico going to SD26. It’s a more neighborhood-centric location, more focused on food, less focused on being on Central Park South. [Chef] Ed Brown opened Eighty One, which was a very good, well-executed restaurant, but the fundamentals weren’t followed. He opened up in an area where most of his customers were not immediately around. He expected people to travel to the Upper West Side for very high-end cuisine. It didn’t do well and closed. He partnered with [restaurateur and financier] Jeffrey Chodorow and opened up Ed’s Chowder House. The price point is a little bit more geared for the Upper West Side. It’s located closer to the demand, right next to Lincoln Center. It’s a good example of what didn’t work and what did work. Expensive restaurants that don’t have a lot of income generation around them aren’t doing well, yet the steakhouses that are located near their customers in Midtown West or Midtown East continue to do well.

What about bars? Are they doing better or worse than restaurants?

Most of my work is with restaurants, but from going to community board meetings, I have been seeing that while liquor licenses are getting easier to obtain, many are restricted to 1 a.m. or 2 a.m. or favor establishments that have a significant amount of food. I think there’s a shift toward smaller neighborhood bars and less of the big clubs.

What kinds of deals are restaurants and nightlife establishments getting right now from landlords?

The spaces that were always prime, whether it’s a great corner in Tribeca or Union Square, haven’t adjusted as much as the weaker areas. What’s changed is that landlords are looking for better credit; they’re giving away less up front so they have less exposure should things not go well. I don’t think the market is really perceived as down anymore; it’s perceived as coming back. Landlords who want restaurants will take restaurants. Those who were objecting to them are starting to firm up their businesses once again.

Faye Fisher

vice president, Advance Restaurant Finance

Which kinds of restaurants and food establishments are taking the most space right now?

[As has been reported], there are a ton of burger places opening. They are generally smaller, the rents are cheaper and it’s comfort food. … [Also], all of a sudden these neighborhood breakfast and lunch places have people going for dinner because it’s a lot less expensive. Le Pain Quotidien is a good example. They are all over, and they are opening five new stores. I find it formulaic, but they have really decent food and it is the higher end of the less expensive places. Whoever does their locations is very smart.

Which neighborhoods are doing best in this market?

Neighborhoods with restaurant rows like Fort Greene, Carroll Gardens, Williamsburg, Dumbo, Park Slope, the Upper West Side and Tribeca are all doing fine, but [business is] down 20 percent across the board. If restaurants are down 20 percent, bars are down about 10 percent. [But] so many new bars are opening. People are borrowing money and that’s a very positive sign.

What types of restaurants are struggling most now?

The superstar restaurants [have seen business drop] 25 percent versus moderate places.

What’s the most challenging thing about the restaurant and nightlife business in the city right now?

They’ve had to scale back on employees [and] they’ve had to lower prices. Fruit, vegetable and meat prices have not gone down so people are not paying their vendors less.?One guy told his employees he was lowering their pay by 20 percent and that he had to Do It Or Close The Place. This will loosen up, but in the meantime, how do you make a profit? That has caused people to try to negotiate on leases. Some have been able to, even if, say, the five-year lease has been in effect for two years.

What’s happening with restaurant expansion in New York now?

[Even though the market is down in the restaurant business from the peak], we are entering a phase where people are getting back to [business], without question. In the past two weeks I have worked with some top people who are opening up a number of restaurants. In the last two months people are asking me for money to [open] two, three or four restaurants.

Lisa Rosenthal

director of retail services group, Lansco

What are some of the trends you’re seeing in the restaurant world when it comes to retail right now?

National restaurant chains are actively looking in the market. … I’ve [also] seen people who got downsized from their corporate professions starting businesses to fulfill their dreams. I have a client who was at a crossroads in her professional career but had always wanted to open a candy store. In January, she opened Dewey’s on Front Street in Dumbo.

What other types of restaurants and bars are taking the most space right now?

We are seeing an emphasis on comfort food. It’s part of the zeitgeist. I [also] have many people calling me who want to open liquor stores. [And] we are seeing a lot of new ice cream concepts and fast-food concepts.

How do rents for restaurants compare now to a year ago?

It definitely feels like the market is tightening from where we were a year ago. While rents are still not at the same point they were before the economic downturn, rents are inching back from the bottom. Both tenants and landlords are clearly aware of and sensitive to each other’s needs. Before the downturn everyone was a little more bullish on their side. Now both are trying to be helpful to make deals work for everybody.

What sorts of changes are brokers who specialize in restaurants and nightlife facing in this market?

Deals are taking much longer than before the downturn. Everything that you think is going to be simple isn’t that simple anymore.

Jason Pennington

retail broker, Ripco Real Estate

How is the retail market for restaurants and bars in New York right now and how does it compare to three months ago, six months ago and a year ago?

During the latter part of this past summer, retail leasing in strong areas of Manhattan and Brooklyn began picking up steadily. The uptick in leasing activity was heavily populated by established restaurant groups that took advantage of limited national competition from banks and drugstores, reduced rents, and eager landlords open to creative deals. New restaurant permits were up 10 percent in 2009 from 2008.?There was definitely more restaurant-ready space on the market from failed operations. That [provided] tremendous savings in start-up costs.

Which areas of Manhattan and Brooklyn are faring best when it comes to retaining and attracting restaurants and bars?

The Bowery is [one place that’s on] everyone’s radar. Meatpacking, East and West Villages and Harlem are as hot as ever. In Brooklyn, Williamsburg, Park Slope and Carroll Gardens are getting a bunch of attention.

Alexander Picken

president, Picken Real Estate & Nightlife Brokerage

How is the market for restaurants and bars in New York right now?

There are certainly many bottom-feeders out there searching for deals with built-out facilities and/or infrastructure and little or no key/fixture fee. But there are plenty of well-funded prospects as well who are willing to close on a reasonable deal. The highest demand seems to be for bar and restaurant spaces 4,000 square feet or smaller.

Which kinds of restaurants and food establishments are taking the most space?

Burger joints, pizzerias and noodle shops are a real popular type of venue [for] our customer base. Some of the finest food operators in the city are modifying their business plans to adjust to the changing times — Danny Meyer with Shake Shack and Simon Oren with 5 Napkins, to name a few.

What about bars? Are they doing better or worse than restaurants? Which areas of Manhattan and Brooklyn are faring best when it comes to attracting new bars right now?

Bars are definitely doing better than restaurants. Their profit margin is much higher. People seem to be going out less, but they are still going out. Williamsburg seems to be maintaining well and there are still many prospective tenants looking to acquire space there. Dumbo also seems to be doing fairly well, especially for clubs and bars. Both of those areas are still in the relatively early stages of development, as opposed to a place like Park Slope. There is also the effect of some of the bigger clubs being driven out of Manhattan. If you want to open a larger club or bar you’re probably going to be more successful in getting through the community boards in the boroughs. Within Manhattan … the Lower East Side, south of Houston along blocks like Ludlow and Orchard streets, is still experiencing strong demand.

Which areas of Manhattan and Brooklyn are struggling most in terms of retaining and attracting new restaurants and bars?

The downturn is everywhere you look, but it’s the Upper West and Upper East sides right now that are the ones suffering most in terms of restaurants and bars. We have more new inventory there. Along the Second Avenue corridor, bars that would typically be packed after work on Thursdays and Fridays and even Saturday evenings are just not doing the same numbers. Also, in the Alphabet City area we’ve seen a little bit more of a struggle.

What’s the most challenging thing about the restaurant and nightlife business in the city right now?

A couple of years ago, many restaurants were crowded on Mondays and Tuesdays. You just don’t see that as much these days. The challenge is how to produce that extra revenue to keep your business running in the black. A major part of that is trying to do something special to entice customers to come on alternative nights.

How do rents compare to three months ago, six months ago and a year ago?

Overall rents have gone down as much as 20 to 25 percent from our peak prior to ’09. Tenants are receiving more concessions on new deals. In some instances, landlords are giving them a free option period to go in front of the community boards to see if they can acquire support for new licensing. Smaller or zero percent increases in annual rent for the first couple of years has become more of a norm. Before, we were seeing increases of 2.5 to 3 percent per year on most leases.

Steven Kamali

principal, Steven Kamali Hospitality

Which kinds of restaurants are taking the most space right now?

Fast casual and quick-serve restaurants are expanding at a phenomenal pace, well ahead of all other segments of the marketplace. We are also finding that celebrity chefs and restaurateurs are focusing on their “street food” concepts, at spots such as 5 Napkin Burger, ‘Wichcraft, Shake Shack, Bill’s Burger and Fatty Crab.

Which areas of Manhattan are struggling most right now in terms of retaining and attracting new restaurants and bars?

The Upper East Side has lost a lot of the luster with respect to dining venues. We find that the expectations of property owners is far too great and unrealistic at times, making it difficult to make deals.

What kinds of deals are restaurants and nightlife establishments getting right now from landlords?

The majority of hospitality deals are done with existing operators [not landlords]. Due to the stringent policies of the community boards and the [State Liquor Authority], it’s often best to transfer an existing license instead of applying for a new one.

What types of restaurants and food establishments are struggling most and scaling back most now?

Large and grandiose restaurants with big price tags are bearing the brunt. We’re seeing Wagyu beef being replaced with organic chicken, as was the case with Tom Colicchio, who replaced Craftsteak with Colicchio & Sons — a brilliant shift in gears.