Mark Scharnitz was sick of doing all the work.
He built a small café, The Corner Muse, that helped breathe new life into Miami’s Edgewater district at a time when drug dealers and street walkers worked openly. But when the neighborhood came up, so did his rent. And at the end of his five-year lease, after he had renovated the space into a thriving restaurant, his landlord tried to nearly triple his rent — and forced him out when he couldn’t pay.
The upscale seafood restaurant Mignonette now stands where Scharnitz’s dream once did.
“You bring people there. You build up the neighborhood. And when your lease is up, they don’t care — you’re out,” Scharnitz said.
Restaurants, like artists, move into depressed neighborhoods where rents are cheap, hoping their fans will follow. And when they do, they are often the first ones priced out.
It’s happening across Miami.
In May, Michelle Bernstein’s signature restaurant in the Mimo neighborhood, CENA by Michy, closed after a 10-year run. So did Mimo’s The Federal, even after a drastic, last-ditch makeover.
A key culprit in both cases? Rising rents.
You bring people there. You build up the neighborhood. And when your lease is up, they don’t care — you’re out.
South Florida’s smoking-hot commercial real estate market is pricing restaurants out. Rents have quadrupled in popular areas such as Brickell, Wynwood and the Upper East Side over the last few years, brokers and developers say. (Renters are feeling the same heat on the residential side, too.)
“It’s almost like New York real estate right now,” said Ivo Tsinev, a broker at Colliers International South Florida who represents both national chains and chef-driven restaurants.
The region’s appetite for restaurants is insatiable, research shows. People are eating out more and shopping at grocery stores less.
To wit: In Miami’s greater downtown, restaurant sales hit nearly $735 million in 2014, according to the Downtown Development Authority. That was up 78 percent over 2013.
And South Florida diners are dropping more cash than ever: Consumer restaurant spending in the region is growing at the second-fastest rate in the country, new statistics from brokerage CBRE say.
Landlords see that success and are asking chefs to pay up — or get out.
The perks of being a landlord
Scharnitz decided it wasn’t going to happen to him again.
Five years ago, he bought a building “for a song” ($280,000 for 3,490 square feet of space) on Northeast 54th Street in the heart of Little Haiti. That was before speculators decided it could be the next Wynwood, when he still had to worry about getting robbed like one of his managers did.
He ran his catering business out of the back. In February, when he thought the neighborhood was ready, he opened Philly Grub, making authentic cheesesteaks with shaved sirloin and housemade cheese “whiz.”
The restaurant is part of Little Haiti’s gentrification, bringing with it adventurous new customers — as well as rapidly rising rents. It’s the same old story — even in neighborhoods that have yet to prove themselves, rising rents push out restaurants that blazed a trail.
“People told me I was crazy,” Scharnitz said. “And the crazier they told me I was, the more I knew I had to do it. If you don’t buy your building, there’s just no way you can do it.”
Bernstein, an international award-winning chef raised in Miami, knows all about the dangers of not owning your own space.
She grew up in Mimo — the Miami Modern district along North Biscayne Boulevard south of 80th Street — and led the neighborhood’s revival by using her name to draw fans to a desolate part of town. She and chef/husband David Martinez even bought a house there. They still live there, but their restaurant is no longer part of the neighborhood it helped build.
“It’s devastating,” Bernstein said at the time. “We totally vested ourselves in that neighborhood.”
The issue? The building was sold before they signed a lease extension and the new owners asked nearly three times the rent, almost $60 a square foot. Bernstein had even renovated the restaurant a year ago, thinking she’d be there long term.
For her fans, it was like Emeril Lagasse being priced out of New Orleans.
“It’s indicative of what’s going on and what is going to continue going on in Miami,” said CENA co-owner Steven Perricone, a former New York restaurateur and developer who bought the property for Italian restaurant and market Perricone’s in 1994, when Brickell was a fine-dining wasteland.
It’s indicative of what’s going on and what is going to continue going on in Miami.
Finding an area like Brickell or, perhaps, Little Haiti or Little River, before it blows up is hard.
If a chef wants to open up in an already established neighborhood, owning just isn’t realistic, said Andreas Schreiner, who owns the Pubbelly restaurant group, with locations in Sunset Harbor and downtown Miami.
“It’s a nice dream to do it, but the way real estate prices are now, it’s a little prohibitive, especially on the Beach,” Schreiner said. “We’re looking to expand on the mainland, but even in places like Wynwood or the Midtown corridor, prices have really gone up. So to be able to purchase … it’s just too much.”
At the mercy of the market
Owning a restaurant is a risky business.
The industry is rife with turnover. Some spots close before people even know they are open, even excellent ones such as Bazi, which folded after less than six months in ultra-competitive South Beach, despite a 3 1/2-star Miami Herald review.
But what’s happening in South Florida’s restaurant scene now is different, experts say.
It took Tsinev, the broker, two years to find the perfect space for one client in downtown Miami. He’s even given up using commercial real estate databases to find locations, because there’s too much competition for not enough space. Instead, he cold-calls landlords, from Miami’s Parks and Recreation Department to the Dominican consulate, to see if they’re interested in leasing to a restaurant. (It’s working, he says.)
“The gap is getting wider and wider between what landlords need to recover and what the chefs and all of these restaurants can afford to pay,” Tsinev said. “I’m not saying we’re in a bubble. But I hope it starts slowing down soon.”
I’m not saying we’re in a bubble. But I hope it starts slowing down soon.
The debacle at CENA wasn’t the first time rents have displaced Martinez and Bernstein. Their Sra. Martinez in the Design District folded after their rents went from $15 a square foot to nearly $50, from one lease to the next.
Martinez is stunned at the rents landlords are asking today. In Little Haiti, prices are nearly $40 a square foot. Even in Allapattah, he is seeing landlords asking $30 a square foot compared to less than $10 a year ago.
“Rents go up before a neighborhood proves itself in Miami,” Martinez said. “Rents are going to have to come down unless landlords don’t mind seeing their buildings empty.”
More and more restaurants are opening outside the traditional hotspots of Brickell and South Beach. Some chefs are looking to suburbs, such as Kendall and Doral, said CREC broker Rafael Romero.
“It creates a bidding war,” he said.
Drew Schaul of leasing firm RKF agreed. “The market is as tight as it’s ever been,” he said. “There’s a limited supply of great restaurant space, especially for the higher-end, chef-driven restaurant concept.”
Not all the new competition is up to snuff.
Many wealthy foreigners see opening a restaurant in Miami as a better investment than leaving their cash in struggling Latin American and European economies, said Emran Ally, a broker at CBRE. Some of the investors don’t know how to run a restaurant or play the real estate market.
“A lot of those tenants overpay [for space] and then landlords start charging more and the menu prices rise and it’s a slippery slope,” Ally said.
And there’s another way Miami’s hot real estate market hurts restaurants.
Most retail leases require tenants to pay property taxes, maintenance and insurance, on top of monthly rent.
If a buyer comes in and scoops up a building for a big price, Miami-Dade County will likely assess the property at a higher value — raising the taxes and leaving the restaurant tenant on the hook for the higher bill. That’s in addition to the new owner asking more rent once the original lease expires.
Despite rising rents, some longtime restaurants are finding a way to stick around.
The French cafe Buena Vista Bistro became a Design District favorite nine years ago, before the boom, and the owner, Claude Postel, recently doubled down: He signed a 3-year extension in January and renovated his beloved 600 square-foot restaurant to appeal to the high-end retail store shoppers.
“I’m taking a gamble,” Postel said. “The market makes the rules.”
But he’s diversifying. He is relocating his adjoining chocolate and wine shop into another full-service restaurant, opening next month at 750 NE 125th St. near the Museum of Contemporary Art in North Miami where he has a 15-year lease at “a very reasonable price.” And he’s opening a wine garden and cafe at 6010 NE 2nd Ave. in Little Haiti.
There are signs South Florida’s commercial real estate market could slow down — but they’re still far off.
For one, Miami’s residential building boom is cooling as sales plummet, meaning retail developers will face less competition from condo projects. The threat of Zika could also hinder tourism in the region, depressing restaurant sales.
‘Feed the neighborhood and it will feed you’
Restaurants can only run so far. Eventually, rents catch up.
Fiorito Argentine restaurant was a pioneer when it moved into Little Haiti, a block north of the famous Churchill’s music venue, four years ago. Most of its customers are from outside the area. The restaurant is drawing people from Miami Shores and El Portal and helping build interest in Little Haiti.
But Fiorito has seen its rent triple since it moved in. The owners, brothers Maximiliano and Cristian Álvarez, hope to grow with the neighborhood, but they already suspect one day they might have to relocate.
“Rents have gone way up,” Maximiliano Álvarez said. “People are running from higher rents, but eventually they all go up.”
When rents go up, chefs can’t just charge more for mac ‘n’ cheese, the way a boutique might mark up yoga pants.
“People feel we’re trying to take advantage of them,” Álvarez said.
People are running from higher rents but eventually they all go up.
Several chefs said the best-run restaurants make about a quarter on every dollar. An average one gets eight to 10 cents.
“Our bread is expensive enough,” jokes Zak Stern, who has developed a cult following in Wynwood as Zak the Baker. “High-quality food shouldn’t just be for the very wealthy.”
But good neighborhoods need good restaurants. A restaurant like Zak the Baker can build a community in ways an Old Navy or Banana Republic can’t.
“You feed the neighborhood and it will feed you,” says Goldman Properties managing partner Joe Furst, quoting his former boss, the late real estate developer Tony Goldman.
When Zak the Baker was looking to open in Wynwood, Furst made it happen. Goldman — which owns more than 30 properties in the neighborhood — designed and built a space for him and financed the deal.
When it came time to open a full production bakery in the heart of Wynwood (set to open in September), Goldman offered Stern a 10-year lease and favorable terms to keep him from moving to Doral or Medley.
“It’s in their interest not to kill the goose that laid the golden egg,” Stern said.
Triple net leases require tenants to pay property taxes, insurance and maintenance. They are standard but risky for restaurants in a market where property values are soaring.
Some landlords see the logic in cutting restaurants a bit of slack.
“The restaurants, they bring people every day,” said Craig Robins, the developer who owns roughly three-quarters of properties in the Design District.
Robins said he generally charges restaurants about 25 percent of what his retailers pay.
Although he makes more money renting to Louis Vuitton, Hermès and Gucci, he says restaurants are crucial to the success of the luxury shopping mecca.
“People go out to eat much more than they shop,” said Robins, who is planning to open 10 restaurants by fall 2017.
The restaurants, they bring people every day.
Major property owners like Goldman and Robins are the exception. Because they own so many properties, they can afford to rent to restaurants at a lower rate. Smaller landlords can’t always do that, if they’re thinking about the bottom line.
But focusing only on the bottom line can kill a neighborhood.
Just ask Coconut Grove. Landlords brought in retailers and national chains with no connection to the community in the 1990s and the crowds lost interest. Only now that more independent eateries are opening — 33 Kitchen, Ariete, Glass and Vine, Lokal, Panther Coffee and Strada, just to name a few — is Coconut Grove experiencing a revival.
It’s a lesson for Mimo, Little River, Little Haiti — and the chefs taking a chance on the next up-and-coming neighborhood. Your success could be your undoing, unless you buy in on the ground floor.
“Nobody’s going to tell me I have to leave,” said Philly Grub’s owner, Scharnitz. “I’m here for the long haul.”