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Even The 'Savior Of The Retail Industry' Is Facing New Threats

Food and beverage offerings, for years the white knight of the retail market, are grappling with tightening margins and rising costs, presenting a new challenge for retail owners.

Even The 'Savior Of The Retail Industry' Is Facing New Threats
Hudson Eats at Brookfield Place

Amid an environment of sliding asking rents and widespread vacancies, food and beverage operators have been a bright spot. Time-poor, cash-conscious consumers are flocking online, and Instagrammable experiences are taking the place of traditional retail therapy, all trends damaging traditional brick-and-mortar stores nationwide.

Bars, restaurants and food concepts — some of the last retail segments that can't be re-created online — have been a major driver of retail deals over the last few years.

But as businesses adjust to new minimum wage laws in New York, sources say it is becoming even harder for food offerings to pencil out. Landlords' willingness to view food retail deals as partnerships, rather than a stock-standard lease, has become more crucial than ever, sources said.

“For a long time [food and beverage] has been seen as the savior of the retail industry. But it's just under some serious pressure,” Lee & Associates Managing Principal Peter Braus said, pointing to minimum wage requirements, build-out costs and even community boards that don’t want to approve liquor licenses.

“I have a number of tenants in buildings that we manage coming to us for rent reductions. For the most part, landlords have been open to those discussions because they don't want a vacancy.”

Nicholas Stone, the founder of Australian coffee concept Bluestone Lane — of which Related Chairman Stephen Ross is a minority owner — said there has been an “awakening” from big national landlords that retail is a key part of supporting their core offerings.

Bluestone opened its first U.S. location in 2013 in Midtown East, and now has 40 locations across the country — with cafés in places like Brookfield’s Manhattan West rental building, the Eugene, and Related’s new Hudson Yards mall.

He said that the environment has become less business-friendly in the last few years, though he said his company is still growing and successful.

“We don’t enter into pricing wars,” said Stone, who is speaking at Bisnow’s New York Annual Retail Conference April 11. "We are a boutique, premium location. We have to do a partnership-oriented deal."

Even The 'Savior Of The Retail Industry' Is Facing New Threats
The entrance to Little Spain at Hudson Yards

Last year, New York City lost around 6,000 restaurant jobs, Crain’s New York Business reports, citing Independent Budget Office figures. Some restaurateurs say the increased minimum wage could put some operators out of business.

“It’s basically perilous to the operation,” said Alan Phillips, who owns various food operations around the city including Friedman’s, which has multiple locations, and Pastrami Queen. “It’s going to discourage a lot of growth."

Across the city, landlords and vendors continue to look for innovative ways to find attractive food offerings and dining experiences that will lure in customers.

At the brand-new Shops & Restaurants at Hudson Yards, Related has selected a mix of food and beverage offerings, including a cocktail bar with drinks made from all-natural ingredients, and Belcampo, a restaurant and retail concept from the California-based sustainable meat company. 

There are around 35 food halls operating or in development in the city — Hudson Yards’ Little Spain from chef José Andres and a 28K SF food hall run by Cipriani at Waterline Square among them.

“Food and beverage has become the single most critical component of mixed-use developments across the United States,” said Steven Kamali, the CEO of Hospitality House, a food and beverage advisory firm. “The nature of deal structure of restaurants has changed in the last five to seven years. These are now joint venture partnerships.”

Brookfield Property Partners Vice President Mark Kostic, whose company created Hudson Eats at Brookfield Place and is building a 20K SF food hall with two restaurants and six food stands at its Manhattan West development, said intense ground work and research goes into curating the right mix of vendors.

Once they find the right mix of operators they approach the deals as a partnership, to ensure success for everyone.

“Restaurants are hard deals on both sides,” he said, noting challenging infrastructure can push up build-out costs significantly. “On the tenants’ side there is a lot: food costs, labor costs, there is pressure on rents. We are aware of that … We try to back into practical rents [and figure out] how we share in the upside.”

Hear more about the city's retail market at Bisnow's New York Retail Annual Conference April 11 at the Starrett-Lehigh Building.