NEW YORK—The highest retail rents in a decade are pushing restaurant owners out of their traditional venues in Manhattan, where renewal of their lengthy leases would mean paying double or triple the rent.
Going back 10 or 15 years, when the leases were signed, Manhattan was markedly different. Many neighborhoods were run down, or not yet fashionable, and rents reflected that.
Leases usually stipulate incremental rent increases each year, of at least 3 percent as a rule of thumb, to cover inflation and other costs.
So restaurant owners with 10- or 15-year leases can, as the lease progresses and the neighborhood improves, benefit from below market rents.
Landlords, on the other hand, are often waiting for leases to expire so they can raise the rents to market rates, and cash in on their investments.
All-Time High
Faith Hope Consolo, chair of Prudential Douglas Elliman’s Retail Leasing and Sales Division, said the retail rents in Manhattan are at an all-time high.
“The key is fashion follows food. So very often the restaurant opens the door to the neighborhood, and then the game changer—the neighborhood becomes hot,” she said.
While restaurant owners pin the blame on the landlords, Consolo defended them, “Everybody slams landlords, because it’s easy, you know.
“I’m not going to say that all of them hold out for the highest rent. They are in a predicament—so many people clamoring for the same space. Do they stay with the same tenant or try someone new? It’s going to depend on the landlord, it’s going to depend on the location.”
“Everybody wants to live here, work here, shop here, and visit here and that creates competition and demand,” Consolo said.
The highest retail rents can be as much as $5,000 per square foot on Fifth Avenue, $3,500 per square foot on Madison Avenue, and $2,500 per square foot in Times Square, Consolo said.
The most expensive restaurant lease, by square foot, that Consolo helped negotiate was in the Beekman Tower on Park Avenue in Midtown East in 2006. She did not disclose the price, but said the deal was a “trifecta” with two townhouses also part of the package.
Consolo said many of the restaurants in Brooklyn contributed to the “revitalization that made Williamsburg, Greenpoint, and Downtown Brooklyn in fashion,” thus pushing up the rental prices.
A Long-Term Lease Strategy
Chef Bernard Ros opened his first restaurant in Manhattan in 1967, and has moved eight times “running away from greedy landlords. … From Tribeca, the East Side, Midtown, just running away from the rents.”
“The excuse they give you is the tax went up on the building, but the rent goes up $10,000 a month?”
Last year he opened Paname, a French neighborhood restaurant, in Midtown East.
Ros said his strategy is to only ever own one restaurant at a time, and find a lease that is at least 15 years long.
“With 15 years you can play with the restaurant,” he said.
“I pick neighborhoods that are off the mainstream, with low rent, and I promise a good meal for not much money.”
If, after a few years, the restaurant is not able to provide a living for him, Ros “can turn around and sell it,” he said.
He said it’s more attractive for a potential buyer if there is still 10 years left on the lease.
Paname is across from what will become a 64-story apartment building. “The whole neighborhood will change. That’s how you get yourself a good deal,” Ros said.
With most buildings now going through real estate agents or brokers, Ros said, “If you find a landlord that’s renting his own building, sit down with him.”
He said brokers make you believe they work for the building, but in reality they are simply looking at the numbers, for the highest commission. “It’s a no-brainer,” Ros said.
Renowned Restaurants Not Immune
Consolo negotiated some of the original leases for the city’s most well known restaurateurs, including for Danny Meyer.
At the end of 2015, Danny Meyer may lose the site that has housed his first restaurant, Union Square Cafe, for almost 30 years.
His second 15-year-lease expires in December 2015, and Meyer has been negotiating with his landlord, Ari Ellis, of David Ellis Real Estate, since late last year.
Ellis wants to raise the rent to market rates ($650,000 a year), which is three times the rent Meyer currently pays, according to an editorial Meyer had published in the New York Times in June.
“A lot of the restaurants were pioneers in their neighborhoods,” Consolo said during a phone interview. “Danny Meyer was in Union Square before anything was there.”
His Union Square Hospitality group now owns more than 50 restaurants nationwide, including the Shake Shack burger chain.
“If he [Meyer] moves to another neighborhood, he will likely be very successful,” Consolo said.
Two celebrity chefs, Bobby Flay and Marco Canora, have also faced rent increases. They vented their frustrations over Twitter—a week before Meyer’s editorial was published.
Flay wrote on June 18, “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.”
Canora responded to Flay with, “Amen.”
Flay closed his 22-year-old flagship Mesa Grill restaurant on Fifth Avenue in Flatiron, September of last year, because the rent was set to double or even triple, according to the New York Times.
Canora, who owns Hearth in East Village, told the New York Times his whole business model may need to change after his rent rose 65 percent a couple of months ago.
At the end of November, another celebrity chef, Wylie Dufresne will close wd-50 on the Lower East Side, because developers want to start demolishing the building.
Even the famed Four Seasons in the Seagram Building in Midtown may find itself forced to move when the lease expires in 2016, according to the New York Times. The landlord Aby Rosen is seeking market rent (about $3 million per year), which is two or three times what the restaurant’s owners are currently paying.
Moving Forward
The future could see more luxury stores, fashion retailers, or even chain restaurants and drug stores move into these popular high-traffic, high-rent restaurant locations in Manhattan. With landlords asking such high rent, generating profits often proves difficult, so the spaces could be used for branding, or billboards for their chains, rather than for turning huge profits.
Meanwhile, restaurateurs with the financial means are seeking long-term stability by buying into the ownership of the buildings that will house their restaurants, according to Derek Wolman, the chair of Davidoff Hutcher & Citron LLP law firm’s restaurant and hospitality group.
“That takes someone that is very established, with their own finances, or the ability to attract new investors,” Wolman said.
Young restaurateurs and chefs, however, might have to look to Brooklyn to open a restaurant, because of the high Manhattan rents, he said.
“Even in Brooklyn it’s hard to find a place that’s affordable,” Wolman said.
James Versocki, NYC chapter counsel for the New York State Restaurant Association, said the cost of doing business in New York is already astronomical, and yet rents in many neighborhoods continue to skyrocket.
“Even profitable restaurants cannot afford it when their rents increase threefold or more. ... We must have a plan to protect the institutions that make neighborhoods what they are and continue to protect the character of our great city,” Versocki said.
