By Taylor Williams
The fervent desire that many Americans have to make up for lost eating, drinking and socializing time has New York City’s food and beverage (F&B) market roaring back to life, prompting tenants to revisit growth plans, landlords to aggressively market their spaces and the brokers who represent the two sides to sharpen their pencils.
In mid-August, New York City Mayor Bill de Blasio announced that residents wishing to eat or drink inside a restaurant or bar would have to show proof of receipt of at least one dose of a COVID-19 vaccine. Yet after two months of seeing this policy enforced, local brokers say the mandate has had a minimally adverse impact on business. Consequently, leasing activity, which began rebounding a year ago, is now accelerating in the F&B space.
According to data from CBRE, F&B deals accounted for 30 percent of all new retail leases executed in New York City between March 2020 and August 2021. The company’s research team also identified 65 F&B leases throughout New York City in 2021 alone, representing about 33 percent of the total deal volume.
Specifically within Manhattan, there were 24 leases executed for F&B concepts in the third quarter totaling approximately 76,000 square feet, per CBRE. In their analysis, the report’s authors noted that the data proved that the market was not yet at pre-pandemic levels, but that it suggested that “operators remain optimistic about the city’s return to normalcy.”
Much of this activity centers on new-to-market concepts. Many of these operators have observed the various practices — promotion of curbside pickup, conversion of outdoor dining space, use of igloos, opening of ghost kitchens — that existing restaurants have used to survive throughout the pandemic.
Among the largest F&B deals to close in recent months are 16 on Center, a Chicago-based food hall concept that leased 13,024 square feet in Chelsea; Mexican chain Pink Taco, which committed to 10,519 square feet in Times Square; Mezeh Mediterranean Grill, which inked a deal for 7,800 square feet in the Flatiron District; and Kyu, an Asian concept that signed a deal for 6,600 square feet in NoHo.
Richard Skulnik, vice chairman and partner at locally based brokerage firm RIPCO Real Estate, represented Miami-based Kyu in its lease negotiations. In his view, that deal reflects the kind of opportunities that currently exist for new-to-market concepts in New York City: low rents are incentivizing these operators to throw their growth plans into action — if they can find quality space.
“The perfect 3,000- to 5,000-square-foot restaurant space that was vacated during COVID that has utilities hooked up and vents that meet code — it doesn’t exist,” says Skulnik. “It’s all been leased, mostly by restaurateurs and groups that didn’t buy into the fact that Manhattan was dead, but rather saw this as a good time to expand.”
This image shows a rendering of the interior of Floraison, a new restaurant concept by chef Matthew Kenney that is under construction at 1245 Broadway in Manhattan’s NoMad District. CBRE represented the tenant and the landlord in the negotiations for the 10-year lease, which was signed in February.
“When deal volume started to recover, restaurants looking for second-generation spaces were at the forefront of that activity,” adds Karen Bellantoni, vice chair of retail at Newmark’s New York City office. “A lot of those food and beverage deals have been in the making for the last 12 months, around when tenants could start to look at spaces again.”
Bellantoni is not particularly surprised by this activity, as F&B users are usually among the first segments of the retail market to recover after economic downturns. In a market in which rents are depressed, restaurants and bar operators can compete for spaces on more equal footing than their soft goods counterparts, she explains.
And rents are indeed depressed, despite the uptick in tenant demand. The average asking rate in the third quarter across Manhattan’s retail corridors declined for the 16th consecutive quarter to $605 per square foot, according to CBRE’s third-quarter market report. That figure represents a decline of 1.6 percent from the previous quarter and a decrease of 8.3 percent year over year.
Given these conditions, F&B users are competing for spaces that would normally be occupied by soft goods retailers. And because demand for food and drink from both tenants and consumers is so strong, sources say that many landlords are willing to invest in renovating their spaces to be marketable to F&B tenants, either on their own initiative or as part of an expanded tenant improvement package.
Location Matters
The table is clearly set for tenants to be aggressive. But landlords must wrestle with the question of whether market rents have truly bottomed out and decide if they should lease their spaces now or wait a few more months for rents to increase.
Much of this decision is tied to the location of the space and its dependence on office usage and tourism as opposed to being a nucleus of residential buildings and customers. Sources generally expect companies within the city’s office hubs to maintain off-on/hybrid work schedules — Tuesdays, Wednesdays and Thursdays tend to be the busiest in terms of coming into the office — into the early stages of 2022. Among such office users, smaller firms typically have more flexibility with work routines and are better positioned to bring
employees back into the buildings and, subsequently into the streets to eat, drink and shop.
“We are seeing retail markets in residential neighborhoods rebound significantly faster than in areas like Midtown Manhattan that are office-oriented,” says Brian Katz, CEO of New Jersey-based brokerage firm Katz & Associates. “Those areas will have a slower comeback, but you should see more vacant storefronts light up over the next six months.”
Some brokers whose firms’ offices are in the Midtown office hub have a front-row seat in watching this discrepancy between residential and office-driven retail unfold. Steve Soutendijk, executive managing director at Cushman & Wakefield, is one such broker. He says that while rent declines have undoubtedly been more pronounced in office-heavy submarkets like Midtown, the depressed rates are starting to lure tenants
back in.
“Landlords in CBDs or office-heavy submarkets are willing to do ramp-ups in which the rent is 20 percent less in year one and 10 percent in year two and then stabilized in year three — that’s how a lot of retail deals in Midtown are structured right now,” he says. “The return to the office has been more of a dimmer than the flipping of a switch, but we’ve seen a lot of deals for fast casual restaurants that expect office occupancy to stabilize in coming years.”
Some retail owners in office districts may want to do short-term deals to get some quick cash flows and then reset in 2022 when, presumably, office occupancy and daytime traffic levels will be higher. But sources say that just isn’t feasible for most F&B users.
“Food and beverage operators are never going to be fine with five-year deals because the capital expenditure to build out one of those spaces is always going to be much more substantial than that of a dry goods user,” Soutendijk explains. “So we’re seeing shorter five-year deals from traditional retailers — athleisure, home furnishings, sporting goods — because those are turnkey spaces that don’t need much work. But that’s not the case with F&B.”
Soutendijk’s team recently negotiated a 2,700-square-foot lease for Carrot Express, a culinary concept originally launched in South Florida in the 1990s, at 18 W. 23rd St. in the Flatiron District. Construction of the space is underway, and the tenant expects to open before the end of the year. The deal speaks to the fact that for the right F&B concept, which includes healthy foods and other distinctly unique ideas, landlords are willing to make heavier capital investments in their spaces.
Most restaurant and bar operators looking for space are pushing for a minimum lease term of 10 years, notes Skulnik of RIPCO. Not only is this a function of high capital expenditures needed to successfully build out the physical storefront and interior dining space, but also of the extensive process required to develop and market the brand, he says.
“Most restaurants that we get proposals from have been asking for 15 years because they want to lock in lower starting base rent, but none will do less than 10 because the upfront costs are too great, even with landlord contributions,” he says. “But some soft goods retailers are requesting shorter terms with options for more years.”
“Others want those 10-year deals because no matter what concessions they get — free rent, more tenant allowance or improvement dollars — the investment they’re making in the space is more than just the soft and hard costs,” he continues. “That investment also includes marketing, inventory stockpiling and training of staff — all at that location.”
As a result of these conflicting approaches and needs between tenants and landlords, New York City is seeing retail and restaurant deals with tremendous variance in the lease terms. This variance may be a bit unusual, but then so is most of what’s defined shopping, dining and entertainment over the last 18 months. If anything, the discrepancies in lease terms speaks to the fact that tenants and landlords understand the need for flexibility in order to get deals done.
“We’re seeing deals inked at two years and 10 to 15 years and everything in between, including some pop-ups for less than a year,” says Bellantoni of Newmark, who also works out of Midtown Manhattan. “We’ve also seen some serious competition on spaces with three or four proposals, with multiple parties vying for the lease. In some neighborhoods, the leasing velocity is as strong as it was pre-pandemic.”
— This article originally appeared in the November/December 2021 issue of Northeast Real Estate Business magazine.