How can restaurants survive?

Time and time again we have seen landlords get excited about the height of a market so tenants have to pay top dollar for their properties.  Then there is that turning point when multiple tenants leave and instead of putting a new tenant in their place, the landlords hold on to the hope that someone else will come in at the same price that the last tenant paid even though the market has softened.

I was involved with a lease where the company (I am an investor) quickly realized it could not even break even with the price of the lease.  They needed the price to be lowered at least 25% than they were paying.  The property had been empty for years and was owned and managed by a very large real estate company.  I took it upon myself to negotiate the rent reduction with the landlord ( who was the VP of the company).  I kept driving home that the place had been empty for years and that empty property made no sense for the local community.  Wouldn’t it make more sense to at least have a tenant in there and get rent vs just sticking with an empty space for more years?  In the end, he gave me what I wanted and the company has occupied the property for many years.

Landlords should be fined if their properties remain empty eye-sores to the local community.  We are seeing so many empty stores these days and it is not a good look.  I have never understood why a landlord would rather have an empty space vs finding the right tenant at the right price.  The numbers just don’t make sense.

Restaurants are having a really difficult time surviving in NY these days.  The price of real estate is super high and the cost of staff is changing with minimum wage.  I am all for minimum wage, family leave and all the other costs associated with running a restaurant (business) even down to the person washing the dishes but these costs make it really difficult for most restaurants to break even.  It was hard enough without these changes to survive.  The survival rate was low even before these changes.

We live in a city where going out or ordering in is the norm.  Perhaps there should be some type of tax break for restaurants so that they can survive.  How do we create tax incentives for eating establishments?  Every time I talk to a restaurant owner, they lament about how these costs have changed everything and it is making it difficult to even survive.  As in they are barely breaking even.

Something has to change around the restaurants and the empty spaces.  It impacts our city and there must be a creative way to make sure that the stores are full and the restaurants can survive.  It will be better for everyone.

Comments (Archived):

  1. kirklove

    The numbers actually do make a “bit” of sense as a lot of these properties have switched from individual owners to orgs and hedge-funds. They squat on them and write them off (when empty), and are content to wait for a larger chain and lock in at the higher rate. It’s a good short-term strat, but shitty long-term one, especially for the community. But, clearly they don’t give a shit about “community” just profit.

    1. kirklove

      it’s also why you’ve seen the Brooklyn restaurant scene explode and now is just starting to experience the same thing. Which is why places like Red Hook and Sunset Park and Ditmus Park are starting to “benefit” from the great new places to try.

      1. Gotham Gal

        Agree but that’s a far haul from Manhattan on a Monday evening.

    2. Gotham Gal

      Long term having anything empty for years on end definitely makes zero sense. I agree, they don’t give a shit about the community.

    3. Anne Libby

      There used to be a family owned health food store on Reade Street in lower Manhattan, Bell Bates. Returning home to the neighborhood after 9/11, I went in to restock my refrigerator — power had been out for weeks. My credit card didn’t work for some reason, and I didn’t have cash. The owner said, “Don’t worry, we know you. Just come back in and pay us later.”They closed a few years back, and I’m doubtful that Whole Foods would offer me the same courtesy. Sigh.

      1. Gotham Gal

        Big sigh

  2. awaldstein

    Love the idea of fines being paid for empty spots. Don’t see this happening and honestly in the face of this problem–and it is a real one–i’m a bit stumped.As well as an investor in a food business back when to deal with the very real fact that it is really challenging to pay living wages up and down the chain and still have a market competitive price.Huge issues both.The later one takes its toll big time each and every day.

  3. LE

    Wouldn’t it make more sense to at least have a tenant in there and get rent vs just sticking with an empty space for more years? I used to wonder about this as well seeing empty industrial buildings but now that I own property (medical tenants typically) I understand the thinking.First, I am not saying it is always entirely rational, it’s not, but here are some of the reasons:a) You are waiting for the ‘bigger better deal’ to come along that will sign a long term lease with renewals at the price or close to it that you are asking for. And bumps in rent as well.b) If you tie the property up (even on a short term basis other than a pop up) you won’t be able to get ‘A’.c) Most people will not rent without certainty for the future. In the case of a restaurant example who is going to open and operate without some guarantee or security that they won’t get kicked out of the space? (Long term lease options and so on).d) Carrying costs may be nominal compared to the potential gain. Last I checked property taxes in NYC were low at least compared to where I am. (I am paying property taxes of roughly 4% of the property value in some places!)e) People are more likely (human nature) to stick with a strategy once they go down a road.f) The opposite of ‘e’. At the start they are less likely to make a concession because they haven’t seen the lack of results yet. Strange for sure.g) Tenants are always crying poor and saying they can’t pay more for this or that reason. First building I bought (1990) had an art gallery as a tenant and I got the song and dance. On renewals I got the song and dance. After I sold the building the new landlord jacked the rent up and put in increases. They stayed for another 10 or 15 years. (The new landlord was my Dad who bought the building from me..)h) In the case of your example ‘a very large real estate company’ they have the staying power to hold out for the bigger better deal and cover any and all carrying costs. That is their business. And once again once the property is occupied it’s not liquid. And if it’s an agent then they don’t want to leave money on the table for the owner because then they could pull other properties that they have to lease and give to another broker.i) Gambling mentality. Nothing is worse than trying to buy (or rent) something from a gambler. They don’t operate rationally.That said with the properties that I own my strategy is to lock up the best tenant that I can at the time. I am close to 100% rational. And that is easy because I am not operating in a hot real estate market. I had a sub tenant for a medical office (1 room in the larger office) offer to pay me for the entire year to get a rent concession. I gave it to him but told him to post date the checks. Why? Because a) I didn’t want to record all the income this year and b) I didn’t need the money and c) I actually like getting the money over time, it’s more fun for me (I point this out only to illustrate that different people have different motivations for why they operate a certain way).

  4. LE

    Perhaps there should be some type of tax break for restaurants so that they can survive. Well in theory if the city gives a tax break that allows a restaurant to pay the higher rent that will just shift the rent curve up as landlords will then get what they are asking in the market and continue to operate and charge what they do.Landlords should be fined if their properties remain empty eye-sores to the local community. You might be able to fine if an eye sore but not for being empty.And unfortunately simply removing an eye sore is not that expensive.As an example see what any mall does when they have empty stores.And to take care of ‘occupancy’ you could put in and allow a pop up [1] which solved the empty problem even though as mentioned I don’t think in any way that would pass legal muster.[1] Or simply rent it to someone who paid for storage space that was willing to vacate on 30 days notice would take care of occupancy.

  5. Matt Kruza

    vacany taxes are the answer.. very few places have them, but the idea is instead of paying normal property taxes (usually 1.5-3% of property value), you pay closer to 5-8% to make up for all the lack of payroll, sales, business taxes and fees. It massively changes incentives. 3 year carrying cost of a property at 20-25% vs 5-10% massively changes the likelihood of a deal. The problem is real estate owners obviously would fight tooth and nail against them, and locally real estate interests are often more powerful than any other business. And good luck trying to explain this a big issue to the voting public… hence… not that typical, but I expected someone else to formally mention vacancy taxes so i wanted to lay out the framework

    1. Gotham Gal

      it is definitely all about changing incentives.

    2. LE

      This would deprive the property owner the right to rent their property as they see fit.But more importantly it would work to drive down the value of real estate since if an owner were compelled to rent (or face higher property tax costs if they did not) any investor (which increases the liquidity in the market by increasing the pool of buyers) wouldn’t pay as much for a property. Unfortunately there are not, in many places, ‘end users’ that will buy only investors. [1]The problem is real estate owners obviously would fight tooth and nail against them, and locally real estate interests are often more powerful than any other business.This assumes they are wrong in what they are fighting against as if it’s a big lobbying conspiracy at the local country club which is not necessarily the case.Small example in the township that I live in work in (and one that I own property in) the township building sat empty and vacant for 3 years until a buyer came along. This was after the township received an incentive from a local mall (which had falling occupancy due to retail trends) and relocated there. Most people recognized (residents) that the township was not going to sell at a loss or rent at a loss. They finally got the right buyer and price I assume.[1] What do I mean by ‘liquidity’. Take as an example a doctors office that I bought when a Physician who got Alheimers had to retire. He needed to sell and I was the buyer. I had to factor into the amount that I would pay how long I felt it would take me to rent out to another Doctor as well as carrying costs (property taxes and condo fees). There were no ‘end users’ that would buy when he wanted to sell (the liquidity) only me (so I got a good deal of course..) Now if my carrying costs had been higher (vacant property taxes) I would not have even paid what I did for the property. This is a real life example (that has played out many times as the offices I buy typically are being vacated by a former owner or a tenant is leaving) not theory.

  6. Jeremy Robinson

    Apologies for being late to reply to your intriguing post about the dynamics between landlords and restaurant and other small store owners in NYC. I do like the idea of imposing some kind penalty on landlords who leave property vacant- maybe it does involve some type of luxury tax- a la baseball when rents reach a certain rate and remain vacant? At the very least I think that the city should convene discussions involving interested businesses and act as more of an innovator in this. I’ve been depressed about the lack of innovation coming out of the DeBlasio administration [this is an entirely new discussion] and think the Mayor needs a lot more help in executing a progressive agenda for the city. His joined at the hip relationship with Big Labor in NYC is a huge impediment. On the other side of the page, i think there is an opportunity for Angel Investors to partner with restaurant owners and other small business folks. One of the first things i learned about being in business for myself was to own the office or building in which you conduct your business. Lack of small building ownership has been the cause of more wonderful restaurants disappearing in Manhattan over the years than anything else. I’d love to still be able to have a celebratory meal at Lutece, right? Do I date myself? It is the remembrance of things past.

    1. Gotham Gal

      There has been zero lack of innovation out of this administration…for sure.