The cost of renting restaurant space in Atlanta has risen to the point that one major Atlanta operator says he is forgoing opening any new dining establishments in the city.

“We’re not doing anything in Atlanta unless it’s seriously below market,” Fred Castellucci, the CEO of Castellucci Hospitality Group, said at Bisnow’s West Midtown event Thursday. “Those are the only kinds of deals we’re going to do at this point in Atlanta because I don’t see the sales there to justify the top end of the market.”

Atlanta's retail market is historically tight, with vacancy plummeting to the lowest level on record by the end of last year, and the construction of new space hasn't recovered to bring more balance to the market.

The dwindling number of viable retail spaces in Atlanta’s top submarkets has led to a spike in rents and increasingly desperate tenants, panelists said at the event, held at The Interlock.

“It is absolutely insane from what we are seeing,” Bridger Properties Senior Vice President Shelbi Bodner said, adding that some restaurant tenants are taking spaces without asking for tenant improvement allowances to tamp down high rents. “It’s just due to the limited amount of availability.”

With the retail vacancy rate at 3.8% across the metro, rents rose to a record $19.64 per SF in the second quarter, according to Partners Real Estate. At the end of 2019, the average retail rent in Atlanta was just under $13 per SF, according to Avison Young.

Higher asking rents are coming at a tough time for the restaurant industry. While eateries are expected to see sales increase this year by 3.8%, higher food prices and fewer visits caused food industry data firm Technomic to revise the projection down from an original prediction of 5.3% growth, Restaurant Business reported. At that level, restaurateurs will barely keep up with increases in costs.

While it has become easier for restaurateurs to find staff over the past year, wages are still elevated, having doubled over the past four years, said Castellucci, whose firm runs Cooks & Soldiers, Sugo and West Midtown's Mujo, which last year was awarded a Michelin star.

“I do think there’s kind of a bubble. There is pain,” he said. “Most restaurants are struggling to pay bills even in good times, so they’re cutting corners. If there was a material decline in sales, it would be very challenging.”

Ford Fry, the CEO of Rocket Farm Restaurants, said that before the pandemic, restaurateurs expected the total percent of revenues that go toward occupancy costs to be around 6%. Today, 8% to 9% is the new normal, said Fry, whose company owns 14 restaurants in Atlanta and Nashville. Those increases have spilled over to the customers who are paying more for what’s on the menu.

Fry, who runs The Optimist, Bar Blanc and Little Sparrow in Atlanta, said he is planning a major makeover of The Optimist beginning in October.

“We are starting to rethink a lot of our stuff,” Fry said.

West Midtown, which has become one of the hottest submarkets in Atlanta over the past decade, began its rebirth from a warehouse district to a chef-driven eatery destination beginning with Bacchanalia in 2007, Fry said.

Panelists say developers who flocked to West Midtown in the past decade have been critical to keeping the area's restaurant scene among the strongest in Atlanta. Westbridge Development Co. Managing Partner Chris Faussemagne, who redeveloped Westside Provisions District in 2005, said he turned away 75% of the prospects because they weren’t a fit for the area.

“They were hard decisions at the time, but it helped instead of fire-selling everything,” Faussemagne said. “We turned down extremely high-credit tenants, and people thought we were nuts.”