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Even In Posh Districts, New York’s Commercial Real Estate Market Struggles

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Why It’s So Hard for NYC Restaurants to Calculate a Rent That Works

Most try to keep rent below 10 percent of gross sales — but with rising minimum wage, that doesn’t ensure survival

Vacant stores in West Village
| Photo by Spencer Platt/Getty Images

Restaurateur Yves Jadot knew that when the lease for Petite Abeille expired this year, the landlord would bump the rent from $18,000 to $30,000, a rate he says would make it impossible to keep the restaurant afloat. In October, the popular Belgian bistro near Stuyvesant and Peter Cooper closed after 15 years — making it one of many New York fixtures in the last year to close because it was unable to renegotiate a feasible lease.

At its prime, Petite Abeille had multiple locations, but the increased costs of running a restaurant in New York City slowly chipped away at Jadot’s mini-Belgian empire, he says. This was his last location.

“It wasn’t making any sense to keep going,” Jadot says. He closed before the lease was even up.

It’s been a common complaint for restaurants struggling against pricey rent hikes and other factors that lead to closings, like ever-increasing construction and labor costs, a tighter regulatory environment, and a simple lack of customers due to changing tastes. Tons of restaurants managed to ink new leases last year, but for many others, long-term leases expired — which ultimately meant the expiration of their businesses as a whole.

The reality, restaurateurs and industry experts say, is that a lot of the full-service restaurants whose leases were up last year simply couldn’t keep up with the surrounding real estate market, with new market-rate rents quoted thousands of dollars above what they were paying. Some were forced to change their concepts, while others paused their expansion plans.

Restaurateurs across the city say calculating a viable rent is key to surviving in today’s climate, and most stick to a simple yet proven equation. But it’s not always enough to keep businesses alive — leading to an environment where it’s easier for monied fast-casual chains to thrive.

Petite Abeille on a sunnier day Petite Abeille/Facebook

Industry standard is for a restaurant to pay 10 percent or less of its gross sales in rent, according to multiple restaurateurs and an industry broker, meaning restaurant owners need to calculate what they think they might earn before signing a lease. But even if longtime businesses make the proper estimates for the duration of their lease, predicting what happens afterward is nearly impossible, which is why places tend to close during lease-renewal negotiations.

Rent goes up between 2 to 4 percent every year with most lease deals, says Jasmine Moy, a lawyer who specializes in restaurant leasing. Real estate values, though, generally escalate much faster, so even at its peak, a 10-year lease rarely matches the market rate of the surrounding neighborhood.

Take the influential Flatiron Lounge, whose rent in 2003 was about $9,000 — low enough for the restaurant to cover in one weekend night of sales, co-owner Julie Reiner says. Fast-forward 15 years and the market rate for the bar’s venue at 37 West 19th St. in the Flatiron District is as high as $30,000, which is what the landlord asked for when the bar was up for a lease renewal. The new rate marked a 36 percent increase from the $22,000 the lounge was paying in 2018. It closed.

“Maybe SoulCycle will pay that, but a cocktail bar that has reasonable prices for cocktails and serves no food, doesn’t do bottle service, and doesn’t have a door charge, it can’t sustain that,” Reiner says. “When it gets to the point that you’re going to have to pay money to keep your bar open, it no longer makes sense.”

It’s a particular twist for restaurants whose presence played a role in boosting a neighborhood’s value. Now, few independent restaurants exist in the Union Square area; ones like Union Square Cafe and Coffee Shop that helped turn the neighborhood into a dining destination have moved elsewhere or shuttered.

The gap between market rates and expiring leases makes it “especially challenging” for a restaurateur to re-negotiate, says Moy, the lawyer. “[A restaurant’s] entire business model was built around the rent as fixed, and when the lease is expiring and the landlord wants to raise it 15 percent or 50 percent, that would essentially require a re-tooling of their whole business model.”

Erin Patinkin, who owns bakery Ovenly with Agatha Kulaga, says there are restaurant owners whose recession-era leases are up for renewal, and because of rising real estate values, “there’s no other option than to go out of business” when they expire, she says.

“If you’re a company that only wants to open one restaurant, the lease is essentially the life of your restaurant,” she says.

Ovenly cupcake
An Ovenly cupcake
Jenny G. Zhang/Eater

Some restaurateurs tackle the high-cost environment by changing up their concepts: They raise menu prices or go counter-service to reduce labor costs. Ravi DeRossi, who runs a network of restaurants and bars in NYC such as Ladybird and Avant Garden, says he often switches things up when business begins dying down.

Though he caps the rent at 7 percent of gross sales, sale volumes eventually drop over the course of 10 years, he says. He’s making changes right now with East Village Cuban rum bar and restaurant Cienfuegos, converting it to a vegetable-heavy, Texas-style barbecue spot.

It’s becoming increasingly difficult to find rent under a reasonable percentage of gross revenue, some say — which is curbing some acclaimed restaurateurs’ expansion goals.

Patinkin of Ovenly says her business is growing slower than anticipated because it’s hard to find spaces. She looks for rent deals that fall within 12.5 percent of the bakery’s gross sales, a higher margin than restaurants can afford since her stores don’t have servers or kitchens, greatly decreasing operating costs. Still, she says store opportunities are “are hard to find,” mostly because the rents landlords ask for are “just really high.”

And Einat Admony of Balaboosta, Taïm, and Kish Kash — who looks for rent that’s no more than 8 percent of projected revenue — says it’s become so financially difficult to run a restaurant in Manhattan that she’s looking for spaces outside the borough for her fast-casual concept, Taïm. She says she probably won’t open another full-service restaurant any time soon.

“Even for someone like me, that’s been around for a while, it’s still very tough,” Admony says.

A pair of benches beckon outside.
Kish-Kash, Einat Admony’s newest restaurant
Alex Staniloff/Eater

This is all why in a tough real estate market, it’s easier for big fast-casual chains like Chipotle to thrive, versus independent places like Petite Abeille and Flatiron Lounge. Nowhere is this more noticeable than in high-rent areas like Times Square and Bryant Park.

Coffee shops, pizza counters, and fast-food chains that only need two or three employees behind the counter have much lower labor costs than full-service restaurants or bars, where a team of servers, cooks, bartenders, and hosts are needed. It’s why a fast-casual store can spend a larger margin on rent, sometimes up to 15 percent of its sales, says Julian Hitchcock, a broker who specializes in restaurant leasing.

Restaurants in Times Square and Bryant Park also pay a premium to be near high foot traffic. Rental rates reach $400 per square foot, or four times the rate in other neighborhoods like the Lower East Side. It’s a big risk, and one that cash-rich operators like Starbucks can more likely take, Hitchcock says.

On a smaller scale, local chains like Chinese noodle shop Xi’an Famous Foods also take risks to have a presence in specific neighborhoods. Owner Jason Wang says the restaurant pays $25,000 per month for its Flatiron District store at 38 East 23rd St., one of the chain’s most expensive rents. “It’s always about what we think the business will make in that location,” Wang says.

Though it’s one of his top-performing stores, it’s not necessarily the most profitable. But the whole street is peppered with fast-casual restaurants, and Wang wanted Xi’an Famous Foods to be a part of it.

Some big companies are willing to park in high-rent areas and will even do so at a loss as a branding play for New York’s international audience. Right now, there’s a Starbucks at each of the four corners of Bryant Park.

After all of last year’s closures, advocacy groups are again pushing for relief. Recently, a bill that seeks to level the playing field between landlords and commercial tenants was introduced to City Council, proposing that tenants should have the right to arbitration if a rent hike is too high, but it remains controversial.

Some landlords are also now cutting special rent deals, says Jadot, who owned Petite Abeille and still owns Jones Wood Foundry, the Bennett, and Dear Irving, plus others. Sometimes, they’ll offer a low base rent that’s under market value and instead ask for a share of the restaurant’s revenue. For example, the monthly rent is a minimum of $10,000, or 9 percent of the venue’s gross sales, whichever is higher.

“There’s an upside for the landlord to do that as well because he knows if I do well, they’ll do well,” Jadot says. And retail rents have been gradually decreasing over the past three years, what the Real Estate Board of New York is calling a “natural correction.”

Yet rent, of course, isn’t the only thing driving restaurant closures. Hitchcock, the broker, says the biggest driver in restaurant economics is labor. He saw a flurry of restaurants put their spaces up for sale last year; owners told him they were selling their leases because they wouldn’t be able to stay afloat when the minimum wage hike arrived in 2019.

Still, with other costs increasing or changing, rent plays a big role in the equation.

Jadot, who is now looking for a new space for Petite Abeille, predicts restaurateurs will soon have to lower their rent margins to less than 8 percent of gross sales due to rising minimum wage costs — or diners will need to be more comfortable with higher menu prices.

“Something’s got to give somewhere,” he says. “Either the customers are going to be willing to pay $25 for a burger, or the landlord will lower his rent.”

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