Taryn Brandes on 4 Things You Need to Know About NYC Restaurant Real Estate Now

By: Taryn Brandes

New York City Hospitality Group member Taryn Brandes of Brand Urban, a full- service real estate advisory and brokerage company focused on food & beverage and lifestyle retail nationwide, has been working in New York’s real estate sector for almost a decade, a period which has seen a boom in dining out — and now what is hoped to be a temporary bust, due to COVID. Across the nation, more than 110,000 restaurants have permanently closed, and New York City, arguably the restaurant capital of the world, has been hit particularly hard. As many operators continue to struggle, given the latest ban on indoor dining and the arrival of the cold winter weather, there are hospitality pros who are still planning for a brighter, vaccinated future. Brandes reveals how you can navigate the situation to best reinvigorate in the years ahead.

Be Transparent with Landlords

Operators who are locked into a lease have spent the better part of 2020 at the mercy of the local and national governments as well as their landlords — all of whom are reacting to this crisis differently. “Everything in business is different, every landlord is different, and every day is different. Landlord relationships and workout strategies should be looked at on such a case by case now,” Brandes says.

It’s a fact that although some landlords are willing and able to work with restaurateurs, not every landlord has the ability to be so flexible and give unlimited concessions. As stated previously, every situation is different. “Most landlords might have mortgage obligations. They might be in a situation where they WANT to make certain tenant concessions but their lenders will not approve the revised deal terms,” she notes. She counsels clients that while there’s no single recipe for success, “be transparent with your landlords because now more than ever before they are your partners. Show them what you are experiencing on a daily basis and what you are doing to keep your business afloat. Don’t be afraid to show them sales in certain circumstances — pre and post COVID, and don’t be afraid to over-educate them on your business, its new expenses, and its severe challenges. There is a lot they do not understand without getting a proper education on what their tenants are experiencing in real-time.”

But always be prepared before speaking with your landlords. Brandes recommends operators be ready to answer questions around take-out, delivery, and outdoor dining, and be ready to explain the cost and labor involved in running those operations. And for the operators who chose not to reopen when indoor dining was an option, you should share why your business model does not work at 25% capacity given the other expenses required to run your business.. “Being able to explain why you’re asking for relief and having an open dialogue” may help you get the kind of response you are looking for from your landlord, but regardless it should absolutely strengthen your landlord relationships going forward. 

You Can Still Dream Big

As commercial rents begin to decline in Manhattan, and as more vacant restaurant spaces start to hit the market, there will (unfortunately) be new and exciting opportunities to secure space in formerly high-barrier-to-entry markets and locations. 

“Certain restaurant groups and retail brands are beginning to be opportunistic,” says Brandes. “We’re seeing groups that are saying, ‘Okay, I couldn’t afford to be near Rockefeller Center or by the entrance to Grand Central before — and now there is a higher likelihood of finding a space and making a deal that pencils for us in those areas.’” However, the key to success is to be sure you strategically structure a deal that is sustainable in the long-run; not one that is just economically favorable for the next 12-24 months. The thinking is, “I can get in now if I design a deal that protects me long term,” Brandes notes.

For those pursuing such a deal, one of her recommendations would be to try structuring rent based on a percentage of a restaurant’s gross sales for the first year or two, depending on the type of restaurant-operation. “And then maybe you’re paying fifty percent of the contract rent by the third lease year, ramping up to a rent number still somewhere below the market rent pre-COVID.” There might be deals where the tenant is less rent sensitive but needs more help with capital and buildout costs, so it is important that the tenant and landlord approach a deal structure and strategy that meets the needs of both parties. This is how the partnership is forged.

Think Beyond the Big Apple

With COVID shutdowns and limits on everything from dining to gyms, many Manhattanites fled the city for the outer boroughs, the suburbs, and areas that were typically associated primarily with vacation homes, such as New Jersey, Connecticut, or the Hamptons. “There’s an enormous focus on residential markets right now, especially residential markets that have real density,” says Brandes. Brooklyn, in particular Williamsburg, “is a perfect example of a market that is not being impacted in the same way that Midtown East is, for instance.” 

Similarly, she says, “Markets like the Hamptons are on fire!” Retailers and restaurants have identified where their customers are moving to — and they are following. But be warned, that the tinier — and oftentimes tonier — destinations can be difficult to get into. “Destinations like the Hamptons have smaller downtowns with less retail opportunity.” While an operator may be tempted to lease a space off the beaten path, Brandes says they need to ask themselves, “Am I going to miss my customer if I am not on the main drag? Do they want a walkable experience where they can eat and shop, or is it better to be by parking and visible by car?” Also, worthy of consideration are the local rules and regulations around zoning and build-outs. “Local codes in certain municipalities are very different than they are in Manhattan,” she says. It is critical to do your due diligence with the right local experts.

And while all employers and their employees have not fully fled Manhattan, some have — and others are maintaining their Manhattan offices while opening satellite locations in regional suburbs in the surrounding Tri-State Area. These suburbs are starting to creep up on notable restaurant groups and NYC operators’ radars — especially those who rely on commercial density. Take markets like Greenwich, Connecticut, where Brandes reports seeing hedge funds and financial service companies signing short and mid-term leases, ensuring a built-in client base for that period.

Play the Long Game

Despite a lot of dreary news, independent restaurateurs and national restaurant groups are still planning on opening new restaurants in New York City. Why? Well, it may be more challenging to be a current operator, but in a year’s time, that may not be the case. Starting now on a build- out for late 2021 or even early 2022 has its benefits. “Making business decisions on real estate strategy, site selection, financing, lease negotiations, and even construction requires a lot more thought and time than ever before. Starting the process now for a restaurant opening for twelve months out is extremely reasonable.  We’ll see how things evolve, but sometimes a landlord may be willing to make more concessions for those willing to get started in the face of such current uncertainty,” says Brandes.

Further, given the rise in vacant storefronts, it may be a terrific time to align your strategy with your perfect space (a must for Brandes). This is an opportunity to pursue more viable spaces than less if there are options out there. In pre-COVID times, even, Brandes has had the search take a formidable amount of time. “I’ve had the process take way over a year; sometimes we looked for space for up to three years. The positive there is that you can really think about what you want and what types of locations resonate with the concept.”

Despite the opportunities that exist to get into one’s ideal space, “It’s paramount to have proper guidance and protections on both the legal and business side,” she notes. Any new deal that Brandes works on “requires a great deal of creativity, along with new protective language around future government-mandated shutdowns and capacity restrictions. Obviously, an “act of God” is something that is coming into play more than ever.”

Separately, while she always counsels clients to do their construction and design due diligence with a team of experts before signing a lease in normal times — now it is more important than ever. There is less margin for error. “Operators need to be sure that they can lay out the space for their design, as well as confirm that there are no defects, unknowns or hidden issues in the space preventing a tenant from performing construction or opening for business”. 

These are some of the things to think about today and tomorrow …. and there likely will be new ideas, terms, and business principles to consider in the real estate game as the world continues to evolve. The food and beverage industry has always been wrought with difficult challenges even in the best of times, and it is now an industry that must reinvent itself during a global pandemic. Brandes believes “that the creative spirit of entrepreneurs and professionals in the food and beverage world will find a way to endure. I am betting on it”.