Why Successful N.Y.C. Branch of Israeli Café Aroma Closed Shop

If you’ve been to New York lately, and to Manhattan in particular, you must have noticed that a lot of storefronts are standing empty.

In Soho branch of Aroma, during better times, August 9, 2006.
Bebeto Matthews, AP

The Aroma branch in New York’s Soho neighborhood was an early example of Israeli restaurants making inroads in America. When it opened 11 years ago, the café quickly drew a student and hipster crowd. More Aroma branches followed. The Soho branch was owned by the mother company in Israel, and the others were opened as franchises. All offered the same attractive design and pleasant atmosphere.

The first Aroma branch closed a few months ago. The landlords, Ashkenazy Acquisition Corporation, which is owned by Ben Ashkenazi, an Israeli, and Daniel Levy (Hebrew-speaking son of Israeli parents), had reportedly decided to start charging triple the rent.

Levy says Aroma decided it was getting too complicated for the company in Israel to operate the Soho branch, and that they preferred to work with franchisees. But others say that the real reason for the closing was the astronomical rent. “The old contract was for $150 per square foot, and the landlords wanted to raise it to $450. Aroma couldn’t afford that,” said one source.

Is it a classic case of one Israeli “screwing” another, as one person it? Hard to say. Ashkenazy Acquisition Corporation purchased the building in which Aroma was located a few months ago for investment purposes. Manhattan property prices are sky-high, and only expected to rise. But small-business owners struggle to pay the high costs, so when their rental contracts expire they often leave the premises while the landlords hope to find new renters at the higher prices. The situation frequently devolves into a contest of nerves between tenants who aren’t willing or able to pay the higher prices, and landlords who’ve invested a lot of money to buy the buildings and refuse to come down on the price until a tenant appears.

Everybody wants Apple

At first glance, New York appears to be booming. With more than 8 million residents and tens of millions of visitors, it is of course a world capital in culture, finance, media, academe, food and more. Still, something strange seems to be going on. If you’ve been to New York lately, and to Manhattan in particular, you must have noticed that a lot of storefronts are standing empty.

Cashiers at the Soho branch of Aroma, August 9, 2016.
Bebeto Matthews, AP

The reason is simple: What property owners are looking for is a tenant like Apple. Everyone would like to have a big bank for a tenant, or why not Prada or Gucci? Bulgari, the luxury jeweler, just rented a 3,000-square-foot space for $16 million, which translates into the highest price ever paid for retail space – $5,500 per square foot. The shop is located not far from Trump Tower, which is surrounded by round-the-clock chaos now. But anyway, what’s a landlord to do when these luxury retailers don’t need that many stores?

Starbucks used to have a thriving branch on Columbus Avenue and 67th Street, but it closed a few months ago. The company, which has cafes practically every few blocks in New York, opened another branch at a less expensive location. The old location is still waiting for a new tenant. An excellent restaurant not far from there, Telepan, also closed down recently. Rising rents and the increase in the minimum wage have killed many small businesses. Even Danny Meyer’s flagship restaurant, Union Square Café, had to close its doors after 16 years because of a rent hike. Meyer now plans to reopen the restaurant in a new location.

Yoav Oelsner, executive vice president of JLL Capital Markets, knows the situation well. “In Manhattan there are several important retail corridors,” he says. “On Fifth Avenue, from 49th-60th Streets, the most expensive commercial real estate in America, 16 percent of the retail space is closed. Around Times Square, another hot area, 23 percent of the shops are closed. And it’s even worse in the Broadway area of Soho, where the rate is 33 percent. The situation is similar on Fifth Avenue between 42nd and 49th.”

In a word: Amazon

Besides high rents, Oelsner sums up the other reasons why so many shops are closing: Amazon. “In 2016, online sales totaled $400 billion, a 16-percent rise over the previous year,” he notes. “It’s more convenient for people to buy things on Amazon than to go to a store. The shift from traditional shopping to online shopping means less stores are needed.” Amazon may be the largest online retailer, but ironically it is soon going to open a number of physical stores in several American cities. Is this the start of a new trend? Time will tell.

Another problem is that tourism to New York is somewhat down, and the tourists who come are buying less. They shop online too. And the stronger dollar means the United States isn’t the same bargain it once was. “Basically, when we emerged from the financial crisis, the public’s buying power didn’t keep up with the rise in real estate prices,” says Oelsner.

An Israeli woman holds a drink at the Soho branch of Aroma, August 9, 2016.
Bebeto Matthews, AP

Initially, the higher rents led to the stronger stores and chains taking over Midtown. The smaller businesses that could still afford it moved farther afield to Ninth, Tenth and Eleventh Avenues. As a result, this has become a more interesting area to browse around in. But the rising rents are starting to reach these areas now too.

While retail stores are closing at a dizzying pace, another sector is still thriving – banks. People are doing more and more of their daily banking online, but the number of bank branches in Manhattan keeps going up. What’s the explanation? Very simple: The banks have a lot of money. They need branches to attract customers to open new accounts with them. The branch serves as a kind of advertisement for the bank.

Another sector that is currently prospering is pharmacies-supermarkets. Suddenly, on every other block in Manhattan you can find a big pharmacy like Walgreens, Duane Reade or CVS. And many now have a food section as well. While it’s not immediately clear why so many of them are necessary, with the way they’ve been sprouting up all over, someone must have a need for them.

So what does the future hold?

Oelsner believes that, ultimately, landlords will have to lower prices. There’s a limit to how long they can let their commercial space remain empty. Eventually, rents will drop to adjust to the market. The question is how long it will take, and just how low they will go.