Are High Rents Pricing Manhattan's High-End Restaurants Out of the Market?
Here's how Danny Meyer found the storefront on East 16th Street in the mid '80s when he opened Union Square Cafe.
Courtesy Union Square Cafe
Celebrity chef Bobby Flay closed his Fifth Avenue restaurant Mesa Grill last year, laying to rest a landmark that, when it fired up its burners in 1991, was the only destination restaurant in an area dominated by garment factories.
In February, Keith McNally shuttered Pastis, a Meatpacking District institution, amid rumors that the building it inhabited was slated for renovation. He initially maintained he would reopen there, but now says he will have to relocate.
Wylie Dufresne will close wd~50 before the year is out, removing an internationally famed bastion of molecular gastronomy from the Lower East Side block it helped colonize.
The Union Square Cafe today.
And late last month, Danny Meyer told the New York Times that he intends to close Union Square Cafe, a restaurant whose renown helped to revitalize the neighborhood from which it took its name when it opened on East 16th Street just west of the park in 1985.
All of these restaurants are victims of real estate changes they played a part in creating: All are either being forced out for redevelopment or discovering at the tail end of a long lease term that they can't afford the current market rent. And they almost certainly won't be the only ones to go. At the turn of this century, restaurant owners commonly signed 10-year leases with a five-year option tacked on. (Many still do.) That means many restaurants that signed leases between 1999 and 2004 will likely face the threat of extinction.
Given that New York City's current restaurant landscape is built on a foundation of institutions that opened during that era, an industry upheaval might be afoot. Just as distressed areas can engender bargains, spruced-up blocks can take them away.
"It's hard to come to grips with the notion that our success has, in part, contributed to our inability to remain in our neighborhood," Meyer wrote in a piece published on the Times' July 2 op-ed page. "There are neither victims nor villains in this story; no sympathy is being asked for, and no fingers are being pointed. But as a city, we've got a problem." (Parts of the op-ed didn't quite add up; for more on that, see "Danny Meyer's New York Times Op-Ed Proves Indigestible.")
Wylie Dufresne's wd~50 was featured in the Voice's "99 Essential Restaurants in Lower Manhattan" issue earlier this year. It will close before the year is out.
As recently as 1976, when the Union Square Greenmarket came into existence, its home was famous less for homegrown tomatoes than for the "derelicts, drug addicts, panhandlers, and prostitutes" who gathered there, as described in a New York Times story that year. The area had improved a bit by the time Meyer came along -- the neighborhood was no longer "full of communists," as one Union Square Cafe bartender noted in an early Times review -- but Union Square was still an eyebrow-raising site for a high-end eatery. The café earned two stars only three months after it opened; critic Bryan Miller wrote that Meyer's café had a refreshing lack of pretension, offering up hearty, substantial flavors, not "dainty big-city fare."
Five years later, the café's fame still far eclipsed that of its neighborhood. In a 1990 story, Meyer told the Post-Dispatch, the daily paper in his native St. Louis, that the area around Union Square didn't even have a widely accepted designation.
"Actually, we're not in a neighborhood at all, at least in terms of one with a name," Meyer said. "There has been talk of calling this 'Flatiron South,' because we're not far from the Flatiron Building, but I'm not sure about that."
Nowadays the neighborhood known as Union Square -- bordered by 14th and 18th streets on the south and north, and Fifth Avenue and Irving Place on the west and east -- is home to a Starbucks and a Whole Foods, luxury condominiums, trendy retailers like Lululemon, high-end exercise studios like SoulCycle, and, of course, restaurants galore.
Ari Ellis, whose company, David Ellis Real Estate, has been Meyer's landlord for nearly 30 years, says the restaurateur's entrance helped create an anchor for the gentrification that followed. A restaurant's buzz can draw crowds in ways that other businesses can't, Ellis explains. Few people will trek to an obscure corner of the city, particularly one with a bad reputation, to shop for clothes at some isolated boutique, Ellis points out. "But you'll happily go to a marginal neighborhood for a great meal," he says.
"Usually the high-end restaurants establish the neighborhood, and fashion follows," Faith Consolo, a commercial real estate broker with Douglas Elliman Real Estate, adds. "Danny Meyer really made Union Square. They were the first to be there."
The trajectories of nearby Mesa Grill and its stretch of Fifth Avenue are similarly twinned. When Flay opened his restaurant in 1991, the area was edging upward. But you wouldn't have found the stretch of tony shopping destinations like Banana Republic and Anthropologie, stores that now line its streets.
"There certainly is some irony to that," Consolo says.
Historically, Consolo explains, large, midblock commercial spaces with ample sidewalk-facing windows and abundant natural light have housed banks and retail stores, not restaurants. An Apple Store, Gap, or Citibank can derive great benefit from a row of windows and an airy floor plan. It's a built-in billboard of sorts, an amenity that's mostly lost on a restaurant.
But when New York saw a boom in new, high-end cuisine in the late 1990s, the real estate market in neighborhoods like the Flatiron District and Union Square couldn't support large retail outlets. So landlords took what they could get, which often meant restaurants.
"In a down market, restaurants are able to get some of the best spaces," Ellis says.
But as demand for Manhattan real estate rises, landlords try to steer their properties back to what might be called their natural state. Spacious, midblock locations with lots of light will revert to retail and banking, and displaced restaurants will shift into the deeper, narrower locations they once occupied.
"Twenty years ago, 25 years ago, the ground-floor spaces were all banks," Consolo says. "And then we pushed them out for the Gaps and the Banana Republics. Then, during the downturn, we came and pushed retail out, and restaurants went in. And now it's banks again."
Courtesy Marc Murphy
It is not, however, a simple matter of white toques versus black hats.
"I don't blame the landlords for wanting to bring in money," Marc Murphy, a celebrity chef with a regular role on Food Network's Chopped and the man behind Benchmarc Restaurants, says. Murphy was an early player in Tribeca and is the sitting president of the Greater New York City Chapter of the New York State Restaurant Association. "If you have four rent-controlled or rent-stabilized tenants, you can't get blood out of a stone," he says. "You need to get the money from somewhere to pay your taxes, and you're going to hit the restaurants or retail stores."
(City records indicate that for property-tax purposes, the assessed value of the building that houses Union Square Cafe has roughly doubled since 2006.)
When a restaurant hits the five-year-extension point in its lease, the landlord can charge market-rate rent, Murphy explains. "Fair-market value is a lot of money," he says. "If you have a bank on every corner paying $500 per square foot, that's the comparable the landlord is going to use. No restaurant can operate paying that kind of rent."
That's because restaurants contend with high overhead -- labor costs, food costs, taxes, health department fees, insurance -- which translates to low profit margins.
"It's a difficult business to pay high rent in," agrees Peter Hoffman, who owned Savoy in Soho for more than two decades before reinventing the space at Back Forty West. "There are very high labor costs and a very high cost of goods. It's a tricky formula for people to make work."
A well-run restaurant operates with a profit margin of about 5 percent, says attorney James Versocki, counsel for the local chapter of the New York State Restaurant Association. "A big component of this is that restaurants have a limited ability to absorb costs in the ways that other businesses can," he adds, explaining that aside from the thin margins, there's the fact that diners are only willing to pay so much to go out to eat.
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Ari Ellis says -- and Meyer acknowledged in his July 2 op-ed -- that the two sides tried their best to keep Union Square Cafe at Union Square. Ellis says he likes and admires Meyer; having sustained a business relationship for nearly 30 years, he would have loved to have kept him in his building for reasons that go beyond steady rent payments. Union Square Cafe, Ellis says, "has soul. And I want soul in my neighborhood. Soul is good for business."
But Ellis doesn't think rising rents forced Meyer out. As he sees it, Meyer is betting on the possibility that he can get a better deal elsewhere, as any good businessman would. "He's a super-bright guy and he's found a way to monetize what he brings to the neighborhood. Danny's going to open a much larger, nicer Union Square elsewhere," Ellis predicts.
Through his publicist, Jee Won Park, Meyer declined to comment for this story.
If Meyer moves to a new space, he won't be the first restaurateur to have worked a favorable deal based on his name and reputation.
Murphy partnered with a hospitality company, the Gerber Group, to open Kingside Restaurant in the Viceroy Hotel last year, a deal that spared him lease negotiations and build-out headaches.
Similarly, since opening the Spotted Pig in the West Village in 2004, co-founders Ken Friedman and April Bloomfield have struck deals with hotel operators at the Ace in the Flatiron District and the Pod 39 Hotel in Murray Hill to open the Breslin, John Dory, and Salvation Taco.
"The hotel needs food and beverage, so they build restaurant spaces anyway," Friedman explains. "Often they'll fund the whole thing." The catch, he says, is that restaurant operators often retain only a small percentage of ownership. Friedman and Bloomfield, though, were able to strike favorable deals as equal partners.
"These developers can actually lose money on a restaurant, and it still makes sense," Ellis says.
That's not a solution for most landlords, however.
Nor is it a likely solution for the industry at large. "We're talking about probably 2 percent of the restaurant population," Murphy says. "We need to concentrate on the 24,000 restaurants that make up the fabric of this city."
Murphy notes that New York's Office of Film, Theatre and Broadcasting will roll out the red carpet to attract movie and TV producers, but there's no city agency advocating for the restaurant industry.
Instead restaurants fall under the aegis of the New York City Department of Small Business Services. Meredith Weber, a spokeswoman for the agency, declined to comment about why the mayor's office doesn't have a department dedicated to restaurants but says SBS has some programs specifically tailored to their needs. She points to the New York City Business Acceleration Team, which was formed in 2010 "specifically to help them open their doors faster, since restaurants face most of the rules-and-regulation requirements." According to Weber, the program can speed the permitting process by as much as two months.
"We can help connect small businesses to lenders and to pro bono legal services. That service is often used to help negotiate leases," Weber adds.
"It's embarrassing that our city has an office of television and movies and there's no restaurant and hospitality office to talk about what's going on," Murphy scoffs. "The movies are great, but restaurants bring in way more money. These closures are going to be a big problem. Union Square Cafe employs more than 100 people. Where are those people going to go?"
One possible answer: outside of Manhattan.
"I have a lot of friends who've been here for years and they're now saying, 'I'm done in Manhattan, I'm not doing it anymore,'" Murphy says. "That upsets me."
Friedman echoes the sentiment. "The really great, hip, new restaurants tend to open in Brooklyn and places that aren't Manhattan, and that's too bad," he says. "It's not the end of the world to go to Brooklyn." If he were having a "midlife crisis" and getting ready to open a restaurant like the Spotted Pig, the restaurateur says only half-jokingly, "it would be really tough to do it in Manhattan. I could maybe do it in Harlem. Or the Salvation Taco neighborhood [Murray Hill]. Or Gowanus [Brooklyn]. Or a different city, which is too bad."
Another option is to assemble investors willing to purchase real estate and keep a restaurant's rent low. That model has sustained Friedman and Bloomfield at the Spotted Pig, although they fell into the situation somewhat accidentally. The partners snatched up a lease from an existing restaurant on a dark block in the West Village, intending to ride that out and then re-sign once it expired. But a year and a half after they opened, they had to contend with the possibility of being kicked out.
"The landlord who we inherited when we opened came to us and said, 'Look, I'm looking to sell this building. They want it to be vacant. If I were you, I'd try to buy the building from me,'" Friedman says. "We didn't have any money, but we had happy investors, and the Spotted Pig had been open a year and a half. So we went to Jay-Z [the rapper was an investor in the restaurant] and said, 'Will you buy the building for us and we'll work something out?'"
The scrambling saved them from having to renegotiate on vastly different terms. "We're lucky," Friedman says. "We created the market. When we opened, there was no Marrow up the street, and there weren't all those millions of restaurants on Hudson Street."
Other restaurant owners might follow Peter Hoffman's example. Hoffman opened Savoy when Soho was "a low-rent, outlier neighborhood. There was a lot of crack being smoked on the block," he says. There were a lot of artists, too, though, who were attracted by the low rents. After the artists, the art galleries came, and as Soho gentrified, Hoffman solidified a creative-class clientele. Then rents rose, the creatives fled for bargains elsewhere, and the neighborhood evolved into the shiny shopping district and tourist magnet it is today.
Savoy's lease expired in 2011, and a rent hike left Hoffman with a choice. "I could close and look for a new place and have all the time and start-up costs of taking a new lease and building a place out -- or I could look at it from the point of view of 'the neighborhood has changed, so the business model needs to change,'" he says. "I thought: I already had a lease here. I don't have to put a whole lot of money in to retool."
He opened Back Forty West in the same address in 2012. The restaurant was built to "appeal to people on the street," Hoffman says. "To cater to shoppers as opposed to fine diners. It's an easier place to fall into as opposed to making a plan to fall into. There's a lower price point and higher turnover."
Not that he's immune to nostalgia. "I still run into lots of people who say, 'I miss Savoy,'" he says. "I miss it, too. But things change. You gotta keep going."
While losing Union Square Cafe would be a loss to the neighborhood as a whole, Meyer could choose to follow Hoffman's model. As Ellis pointed out to the Times, the space might be a sensible fit for a Shake Shack, Meyer's immensely popular, high-volume, low-price-point burger joint.
At the very least, local restaurateurs may have to recalibrate their margins. "How expensive rents have become has made us rethink everything we learned -- that your rent should be a certain percent of monthly gross," Friedman says. "That's not going to work anymore. You can't open a restaurant and have that small of a percentage of the monthly gross."
The adjustment stings when a restaurateur walks past his old space and sees it sitting empty, as is the case with Bobby Flay's Mesa Grill: The location remains vacant a year after it closed in August 2013.
Will Ellis have a new tenant when Union Square Cafe goes the way of Mesa Grill?
The landlord says he's talking with several potential suitors. But when you're looking to sign a tenant to a 10- or 15-year lease, you have to be picky, Ellis says. "We don't get a lot of chances. You have to be very careful who you choose. We're out there to find a partner -- it's really like a marriage."
On Manhattan's ever-changing restaurant landscape, though, it's not "till death do us part."
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