Greed and real estate

images-3There has been a lot of conversation in the twittersphere about a variety of restaurants closing down in NYC due to the rent going up. It has become too costly for those restaurants to pony up for a new lease with a higher rent.

A variety of things went through my head when I saw Bobby Flay’s tweet;  A note to NY landlords. Good restaurants are closing all over the city because the rents are impossible to pay. Stop turning NYC into a mall and then a few days later with Union Square Cafe??? Who’s next?

I have seen more than a few restaurant investment opportunities over the years and IMHO they all come down to three components.  How much is being raised, how many seats and how much is the rent.  Of course, good management and good food would be important too but those are things that don’t always turn out even if you believe that part wrapped up.  Being a good chef is different than being a good chef that can teach a crew in the kitchen to execute on your recipes day in and day out whether the chef is there or not.

In the 80’s Columbus Avenue was booming.  People actually went there as a destination location for restaurants even if they lived downtown.  What happened was the real estate landlords got greedy.  They saw what was happening and raised the rents to a point where every Mom and Pop store or local restaurant closed.  What came in was an influx of nation wide chains because they can afford to pay the rent even if they are losing money in that location.  It is a branding opportunity as much as it is a brick and mortar location.  It was sad to see because at one point the big national brands pulled out when the economy had a downturn and the store fronts remained empty.  Perhaps if the landlords had figured out how to keep the locals there then the storefront would have remained open.  Who knows.

One restaurantier who will go unnamed wasn’t buying if that the imminent closing of Union Square Cafe and WD-50 had anything to do with rent but that they were just not doing the same type of revenue that they were doing years ago.  They had lost their customer base and it is a good way to close shop by blaming it on the rent.  That is up for debate.

What I don’t know is if the landlords of these buildings have used their buildings as collateral to pull out cash so they actually need to raise their rents or if they just see an opportunity to make more cash.  I believe there has to be a balance.  What makes NYC so unique is that it defines capitalism.  Supply and demand work here.  It is also an incredibly creative place and it would be really sad to see chains take over each block.  I can live in other areas of the country to go shop in a mall.  I really do not want to do it in NYC.

Call me naive or crazy but if I was the landlord I would try and find a happy medium.  It is good for the neighborhood and in turn good for NYC.

Comments (Archived):

  1. pointsnfigures

    Interesting points. Did NYC raise taxes on the property and then did the owners pass the increase down to their customers? Food prices have also been on the rise, which has squeezed restaurant margins.

    1. Gotham Gal

      Bloomberg made NYC a financially solid city. Neighborhoods throughout the boroughs got safer and cleaner. I am not so sure it is higher taxes as much as it is let’s grab more cash because it appears like we can due to the booming neighborhoods

      1. jonathanc

        I have owned a 3 family brownstone on the UWS for 20 years. The rents in the 2 tenant-occupied apartments have gone up, but my net cash flow has not changed since buying the place. Real estate taxes are up almost 3 times, higher water/sewer, utilities, repairs and maintenance costs all contribute. New York has some of the lowest ROI on residential real estate in the country, 2.6% according to RealtyTrac. I don’t know about commercial space, but all things being equal, that return implies residential rents that are actually pretty low (relative to investment).I was in London last week and was amazed by the number of unique stores. Sure, if you go on Oxford Street its all H&M and Primark. But in many areas its not like that at all (Chiltern Street was my favorite). Like in NYC, this is often driven by the inability to carve big box stores out of old buildings. But meanwhile, London residential real estate in the more central areas is easily 1.5 or 2 x New York. Yet somehow they survive…and make NYC look cheap!

        1. Gotham Gal

          london has always been more expensive than nyc. crazy but true!

          1. AG

            So I guess part of the question is whether retaurants like Danny Meyers’ can’t afford increased rents or whether the owners would rather pay lower rents elsewhere and take home more money. Certainly, some restaurants couldn’t survive…

    2. awaldstein

      This is pure land grab.I priced a bunch of storefronts for my investment in Lulitonix. Astronomical prices for tiny tiny spots.

      1. Gotham Gal


        1. pointsnfigures

          Good thing is markets correct, but real estate takes a lot longer than most.

  2. awaldstein

    I’m there with you in belief, in pain and in concern over this as you know

    1. Gotham Gal

      I do. Very concerning

  3. Doug

    Sometimes I think part of the problem might be the way these leases are structured. Often they are 15 years or longer without adjustments along the way. If the neighborhood changes during that period (as we’ve seen in the West Village, for example) the landlords end up resenting the tenants. When the leases are up, they feel they’ve under-earned for years and deserve a chance to cash in.

    1. Gotham Gal

      I have yet to see a lease that does not go up over 15 years by a small percentage annually.

  4. Tracey Jackson

    I’m really starting to hate what is happening to NYC. It’s all giant towers, chain stores and restaurants. I was trying to explain to my kids how back in my day, the UWS was where kids who moved here went, then it was the lower East, Bowery, now Brooklyn, which is getting too pricey.NY will be all foreign money, bankers and now charm before long. Sad.

    1. Gotham Gal

      Cycles exist. Capitalism always prevails

  5. Dave Hopton

    “What makes NYC so unique is that it defines capitalism. Supply and demand work here.”Fascinating statement. As a Brit I wonder whether it’s more a phenomena of major world cities; do you think the same thing about London, and if not what makes NYC different? And as an investor what do you do? Just keep funding things like the Beerg’n project and wait for the cycle to create opportunities like the Columbus Avenue example or actively push back against rising rents (if that’s even possible!)?Completely agree with @traceydjackson:disqus – foreign money, bankers and missing charm is something London has been grappling with for a long time.

    1. Gotham Gal

      It works in London too. Look at East London or even Shoreditch. That is not taken over by chains. London is a great example of a city that has gone through a lot of change over the past 20 years. Lots of creativity returning to the city. At least there was when I was there three years ago. As an investor I like funding projects like Berg’n because I am hoping that area will be transformed into something better than it was. A safe neighborhood community. 20 years ago you would not have walked around there and felt safe when the sun went down.

      1. Dave Hopton

        ‘Doing good’ as an investment thesis is one I think will – in the long run – pay off handsomely. I’m not a direct beneficiary but thanks for putting your money to work in that way; it’s inspiring.

  6. JLM

    .As a guy who has actually built or renovated office buildings with ground floor signature restaurants, I can tell you the real world pressures on both sides.First, let me take out the suspense — I have leveraged the popularity of really good restaurants to fill up the buildings I have developed. It is a formula which not every developer subscribes to but I did. I love having a signature restaurant in a building as I think it adds to the allure of the building.I think I got more rent from the balance of the office tenants because of the cachet of the restaurant. I always did the restaurant deals first so they added to the marketing pizzazz. In my view, they did.In the case of the Norwood Tower, it now has arguably the best steak joint in Austin on the ground floor. This space has been a bank (which will always pay a lot more than a restaurant) and a restaurant.A restaurant cannot pay more than 7% of gross revenue and survive. That is 30 years of real world experience talking. Any developer or real estate investor who thinks they can get more — which is the issue at hand in NYC — is nuts. I have looked at monthly statements for the best restaurants for a long, long, long time. The profitable ones cannot pay more than 7%. That is a fair rent.Every restaurant lease has a fixed rent v a percentage rent (paying the greater of) and has annual increases (if by nothing else the percentage rental clause). Most such leases are 15 years with an option to renew at some agreed upon rent. This is long settled science and the lenders rely and insist upon it. Anybody who tells you otherwise is a complete idiot, a liar or a novice. I used to give anyone who asked a copy of our “standard” restaurant lease if for no other reason to rationalize the market.A restaurant has a limited upside. They can only leverage a number of seats a finite number of times. They can only sell so much whiskey. It is a business process or model with a “maximum” outcome given times of meals, price points, number of seats and seasonality.Alternative uses may not be similarly constrained. There is a difference.Real estate investors and developers are always going to be drawn to making the maximum possible rent. Bit short sighted in my view.Plus, I have consumed a lot of free meals in my day. And I never, ever have to wait for a table. That says something. Plus I just like restaurant people. It is a very hard business.Note on the taller building — Starbucks is a tenant. These guys can pay some high rent. They are at the corner of 6th and Congress in Austin, TX — in the corner of the building, THE 100% location.JLM.

    1. JLM

      .You may have to click on the tiny icon under the first pic to see it for some reason.JLM.

    2. Gotham Gal

      great info. 7%.

  7. AG

    The real estate market is hot now, and I’m not certain how the price war could be prevented, though I agree losing restaurants and charm is not what anyone wants. But do we really think restaurants should be immune from demand? I’m not sure myself.Funny that you and others reference the UWS. I was recently speaking with a colleague, who mentioned how old the neighborhood has gotten. And though he is of an “older generation” himself, he misses the UWS he moved to years ago.

    1. Gotham Gal

      everyone who gets to a certain age in nyc misses their old stomping grounds and bemoans how they have changed. it is called capitalism.

      1. JLM

        .”Meet me under the clock at the Biltmore” — bit of Mad Men lore. The phrase when I first worked in NYC more than a few years ago.JLM.