no. 43: too good to refuse
This issue is about the connection between restaurants and real estate development in the United States. I’ve wanted to write something like this for a while, and was finally nudged off the cliff by Brian Potter’s excellent discussion of the unusual nature of real estate property rights.
One central idea in Brian’s piece is this:
“In real estate, the property rights get spread around in a number of different ways; purchasing a piece of land doesn’t grant you complete control over it… The property rights of real estate are distributed like this because unlike typical property [meaning things like tables or books], where the benefits and costs are assumed to accrue entirely to the owner, the value of land is almost entirely determined by what’s around it.”
Every home or business built alters the value of every property nearby – which means the property market acts as an engine, converting cultural capital into real capital in bank accounts. Crucially, the cultural capital is usually generated by tenants, but the actual financial benefit accrues almost entirely to owners.
We see this play out in the classic pattern of a gentrifying neighborhood – there is a clear correlation between the number of cafes, bars, and restaurants and the perceived desirability of a neighborhood, and the same paper observes that “business changes predict future as well as contemporaneous gentrification.” Eater, working with a sociologist, provided a similar take on the issue.
It’s not hard to see how incentives align for developers, especially in dense urban areas with mixed-use zoning. If a developer has to have retail on the ground floor,* a restaurant or other eatery isn’t just going to pay rent, it’s going to increase the value of the property as a whole (and as a second order effect, decrease the cost of financing for the developer, because now their collateral is worth more). Restaurants are also increasingly seen as a better bet than retailers after the retail massacre of the last 15 years. Finally, restaurants provide branding for a neighborhood or development in ways that medical offices and daycares don’t.
Increasing the amount of restaurant space on the market is essentially risk-neutral for the property owner, because they own physical plant of the restaurant tenant. If the restaurant tenant fails (whether or not the glut of restaurant space contributed to its failure), the developer’s downside is just rent lost while they find a new tenant – which is the baseline risk of being in the commercial real estate business anyway. If the restaurant tenant proves to be a hit, the value of the property, and the neighborhood around it, just rose substantially. The downside of there being much more restaurant space on the market falls almost entirely on the restaurant team.
As a result, developers will often provide incentives for restaurants to move in: they might discount starting rents, or pay for part of the buildout (the cost of renovating a space into a restaurant), knowing that they as landlords will wind up owning the buildout anyway.
But another result is a constant hunger for new restaurants, not just from diners, but from the suppliers of a crucial resource – space – as well. I’m not saying this was the only factor driving the restaurant glut in the urban US, but I would guess (there are no statistics about this) that it’s been a major contributor. More on this next time.
*An increasingly common requirement for building multi-unit infill housing in dense coastal cities, imposed by zoning boards inspired by Jane Jacobs.
This is let them eat cake, a frankly irregular essay about food systems (and also, food). I write about these things because I’ve worked in food for over a decade, mostly as a chef, and am writing a book about how deeply fucked up, and how deeply worthwhile, this whole enterprise of feeding people is. Also, writing is cheaper than therapy.
Once again, this newsletter is free and a labor of love. If you like it, the best way to show your support is to share this with someone who’ll like it too.
If you’d like to give it a shout out on social media, you can find me @briocheactually on both twitter and instagram.
best,
tw