One reason we see so many ‘fast casual’ restaurants, which are basically ordinary, quick if not fast, food, but at thirty to forty percent higher prices, is due to high business rents:
When it comes to food, in too many neighborhoods there simply isn’t enough profit margin in ‘cheap eats’ to pay these kinds of rents. But a six dollar hamburger transformed by the magic phrase ‘fast casual dining’ becomes ten dollars–and has a pretentious name that causes David Brooks to freak out…
The exceptions to this phenomenon are those businesses where the business owns the building (e.g., Ben’s Chili Dogs). But if a business is renting, it’s too hard with low margins to survive. While D.C., and other cities, do have some local store and restaurant initiatives, if cities can’t figure out how to get business rents under control, we’re going to end up with a lot of overpriced stores and restaurants–which is another reason why lower-middle and middle class people are concerned about gentrification.
It only seems to getting worse (boldface mine):
“We have to be mindful of what’s happening now, the market has been so hot and a lot of people have suddenly discovered D.C. and so they’re paying extraordinary rents and they’re jacking up prices for everybody else who’s been there for a long time,” said Busboys and Poets founder and CEO Andy Shallal, speaking at Bisnow’s D.C. Metro Retail event Wednesday. “I think a day of reckoning is about to come.”
Busboys and Poets in September moved its Mount Vernon Triangle location from the City Vista building to a different space across K Street because its landlord tried to hike the rent by 30%, Shallal said. The reason Shallal was given for the rising rents, he said, was the Apple store opening two blocks away in the Carnegie Library building. He has concerns another tech giant that recently announced it’s coming to town could impact rents regionwide.
“I’m told the reason why rents are going up so high is because Apple is opening up around the corner, and now God forbid Amazon is across the river and suddenly all of these things start to become a tsunami on really good retailers,” Shallal said.
Shallal said he has heard a lot of negativity in the market about sales growth flattening while rents continue to rise. Another well-known D.C. restaurateur said he is hearing similar sentiments.
“It is the most negativity I have heard from restaurateurs ever in my career,” Founding Farmers founder Dan Simons said. “While I’m bullish on the big picture, I think D.C. has a lot of greatness ahead of it, I’m cautious with the individual growth and the business models that can make it work.”
Simons also has a recent experience in Mount Vernon Triangle that makes him concerned about the D.C. market. When he signed a deal to open Farmers & Distillers at 600 Massachusetts Ave. NW, he said everybody he spoke to was bullish on the location, in contrast with previous openings in Foggy Bototm and Tysons when people weren’t as optimistic. The restaurant opened in December 2016 and has underperformed expectations, Simons said.
The other thing to keep in mind is that, overall, incomes aren’t rising as fast as they once were: customers have relatively less money to spend. Add to that building owners and developers who have vastly overinflated expectations of what rental properties should cost–and lenders who expect these rents to be met*–and I think we’re headed for a serious downturn.
*Builders often use existing properties as collateral for new projects and purchases. They are desperate to keep rents high or their portfolios turn into houses of cards.