Urban Restaurants Struggle with Out-Of-Control Rent Costs

Cities generate attractive environments for living and working, but urban rent increases are pricing restaurants out of the equation.

Gentrification and displacement are common effects when upper-income people return to revitalized neighborhoods in cities. Unfortunately, urban restaurants are suffering because they need for lots of space in some of the world’s most expensive neighborhoods. Urban rents often increases by 500 percent or more when leases are renewed, and many restaurants in these areas are closing their doors due to out-of-control rent increases.

Victims of Urban Gentrification

The 2008 real estate crisis put a temporary hold on escalating rents, but recovery means that restaurateurs face even higher rent increases to make up for the delays. Rents in New York, Boston, Los Angeles, Chicago and San Francisco have become untenable even for celebrity chefs and classic institutions that have weathered decades of crises.

Critics of escalating commercial rents and gentrification are quick to point out the unthinkable—the closing of Danny Meyer’s Union Square Cafe in Manhattan, which was one of the country’s most acclaimed restaurants. The irony of the closing is that the restaurant’s opening was one of the primary forces that helped to revitalize the decaying neighborhood. If the Union Square Cafe can fail, then no restaurant is safe.

Manhattan Institutions

New York City’s Manhattan real estate ranks as some of the most expensive in the world. Starting a restaurant in the borough is incredibly risky because of out-of-control rents, high urban overhead costs and the logistical challenges of running an urban operation where thousands of competitors are always within a few steps.

Union Square Cafe is just the latest high-profile restaurant to shutter its doors. Favorite eateries like August, Bereket Kebab House and Sorella have recently closed, and other revered restaurants are sure to follow. Real estate companies usually negotiate rents in 10-year cycles, and many companies signed leases in the new millennium. These contracts are up for renegotiation, and Manhattan’s landlords are hitting hard to compensate for rent-controlled properties and losses incurred during the economic meltdown of 2008.

San Francisco’s Restaurant Destinations

San Francisco’s gentrification of the Mission District, Latino neighborhoods and Chinatown cause aging residents to move away from the neighborhoods that they helped to establish. Losing loyal customers while paying higher rents makes it impossible for classic neighborhood and ethnic restaurants in San Francisco to stay afloat in their gentrified neighborhoods.

Celebrity Chefs Take Hits

Having a celebrity chef no longer guarantees success in competitive urban environments where restaurants are forced to ply ever-increasing creative strategies to stay in business. Bobby Flay’s Mesa Grill in Manhattan, Patrick and Gina Neely’s Neely’s Bar-B-Que in Memphis, Graham Elliott’s Grahamwich in Chicago and even Gordon Ramsay’s Claridge’s of London are all victims of escalating urban costs. If the trend continues, the world’s best restaurants and celebrity chefs will be practicing their arts in exclusive enclaves in Appalachia, Bug Tussle, Humptulips and the Pennsylvania Dutch countryside where Mennonite culture flourishes.

Possible Solutions for Escalating Urban Rents

Possible solutions for the urban rent increases include creating alternative income streams, using kiosks for marketing a restaurant’s products and services, streamlining operations by using technology and negotiating with groups of tenants for more reasonable rents. Restaurants face variable food and labor costs that usually total between 62- and 68-percent of sales. Rent and other fixed costs must fall within the 24- to 32-percent margin, or restaurants can’t survive.

Aggressive negotiation might help, but restaurants can consider other options like opening restaurants that don’t have street footage, using food trucks to penetrate urban neighborhoods from areas with more affordable rents or finding investors to buy buildings or groups of urban buildings. Other solutions to reduce operating expenses include:

• Creating alternative revenue steams
• Using urban locations as flagship operations for Internet marketing empires
• Sharing kitchen and dining space with other restaurants and food services
• Generating greater sustainability through best practices like retrofitting water and energy systems and minimizing waste
• Renegotiating leases from positions of strength
• Considering co-tenancy
• Negotiating temporary rent abatements while streamlining operations, finding co-tenants or adding new revenue streams

Skyrocketing urban rents for commercial space will continue to plague the food industry because there are no easy answers. Creative entrepreneurs find work-around solutions that serve as stopgap measures, but ultimately, a more permanent type of relief is necessary.

Rent control, tax incentives and restaurant-investment companies are possible long-term solutions. Neighborhoods depend on their food destinations, or they risk losing value and falling into decline. Restaurants generate remarkable influence on an area’s desirability for homeowners, commercial investors and tourists, so the problem of escalating urban rents must be solved.