Restaurant News

Is That A Restaurant Bubble on Seventh Street in Phoenix?

The Yard is a popular dining and hangout space on Seventh Street in Phoenix.
The Yard is a popular dining and hangout space on Seventh Street in Phoenix. Jacob Tyler Dunn

(Editor's note: This story has been expanded since its original publication.)

It’s Thursday night at the Yard in uptown Phoenix, although at first glance you might guess it’s a Saturday night.

The dining and hangout space on Seventh Street, anchored by the mega-popular gastropub Culinary Dropout, is packed to near capacity.

“Is it always this busy on a weeknight?” I ask the hostess.

“Yes!” she says, dodging huddles of sports fans gathered around TVs, watching the Wildcats overpower the Sun Devils on the basketball court. It’s a little slower on Sundays, she adds, but otherwise, it’s always this busy.

The Yard, home to Fox Restaurant Concepts’ restaurants Culinary Dropout and Little Cleo’s Seafood Legend, along with chef Silvana Salcido Esparza’s Barrio Urbano restaurant, is probably the most popular food and drink destination on Seventh Street.

But it’s certainly not the only one.

The stretch of Seventh Street between Camelback Road and Glendale Avenue has become one of the fastest-growing dining districts in Phoenix in recent years. Since the Yard opened on Seventh Street in 2013, more than a dozen stylish new restaurants and bars have opened along this stretch of Seventh Street, including cocktail/comfort food-centric Okra.

On my recent Thursday visit to Seventh Street, the outdoor patios at places like Joe’s Midnight Run and Stock & Stable, and at the nearby Orchard PHX food and drink compound (home to Pomelo’s), are also lively and crowded. And despite rumors that business is starting to suffer even at critically acclaimed restaurants like Okra, the restaurant appeared to be doing brisk business on a recent weeknight.

The competition on this street is getting more pronounced, though. The whole city is abuzz, it seems, over Scott Conant’s Mora Italian, which debuted on Seventh Street earlier this month.

Cold Beers & Cheeseburgers, the mega-popular burger and beer restaurant from Scottsdale-based Square Ones Concepts, is expected to open up across the street from the Yard (and next door to Mora Italian) next month. And later this year, a new breakfast-focused restaurant called French Toast, from the team behind Surprise’s French-inspired Amuse Bouche, is expected to open nearby (no exact location has been determined yet).

Many of these are large, adaptive reuse projects, bringing food and drink spots to redeveloped buildings brimming with midcentury style. It’s been a lot of growth in a relatively short span of time, which raises the question:

Is Seventh Street now oversaturated?

click to enlarge Acclaimed chef Scott Conant opened his first Arizona restaurant, Mora Italian, on Seventh Street earlier this month. - JACOB TYLER DUNN
Acclaimed chef Scott Conant opened his first Arizona restaurant, Mora Italian, on Seventh Street earlier this month.
Jacob Tyler Dunn
Close observers of the Phoenix dining scene worry under their breath — most interviewed for this story requested anonymity — that things are close to bursting. That Seventh Street stretch in uptown Phoenix, and other fast-growing dining districts like Old Town Gilbert in the East Valley — are clear examples of a looming and gloomy national trend: a restaurant bubble that’s getting ready to burst.

“The Seventh Street area has a bubble problem,” one local restaurateur says emphatically.

The popularity of uptown Phoenix has led to increased competition, a packed central Phoenix market, and rising rent costs — and these things all point to a slew of restaurant closures, he says.

Talk about a nationwide “restaurant bubble” whirled around food circles last month after Kevin Alexander, a food reporter for the food, drink, and travel website Thrillist, wrote a piece with the very straightforward title, “There’s a Massive Restaurant Industry Bubble, And It’s About to Burst.”

Alexander enumerated the many factors facing an industry that’s already notorious for razor-thin margins: the rising minimum wage, rising rent and food costs, a cook shortage that’s making it harder than ever to retain talent, and a glut of stylish, full-service, mid-range American restaurants.

It’s a perfect storm, Alexander says. The center cannot hold. Pick your preferred metaphor.

Bottom line: If the predictions are correct, many mid-range restaurants will be forced to close their doors in coming years.

Seventh Street, with a growing number of big, sit-down restaurants, seems especially vulnerable.

Sam Fox, whose Yard complex kicked off the redevelopment boom on Seventh Street in 2013, says business has only gone up in recent years.

“This is an incredibly strong neighborhood,” says Fox, who says his team picked the location of the Yard specifically because of the “amazing building” they found on the street (the Yard is situated on the former site of a Ducati motorcycle and car dealership).

Seventh Street has become a regional draw, Fox says, attracting diners from across the Valley.

On the question of a potential restaurant bubble, Fox says that well-operated restaurants will survive amid an increasingly competitive local market.

“I think that there’s always room for great restaurants. What it does, it makes you work harder,” he says.

“It kind of flushes out the people that aren’t good operators, and people who maybe don’t have great execution of what they want to do. Our focus is on being great every single day, and we’re seeing our business continue to be strong.”

Also like Fox, Craig DeMarco and Lauren Bailey of Upward Projects have restaurants in some of the most highly trafficked dining hotspots in the Valley, including the Windsor neighborhood in central Phoenix, not far from Seventh Street. Upward Projects’ signature restaurant, Postino Wine Café, has locations in other dining hotspots too, including downtown Scottsdale and Gilbert’s Heritage District.

“Yes, there are challenges to standing out in a crowded marketplace, especially if you don’t have established name recognition. But we tend to see the positive side of things,” DeMarco and Bailey wrote in a recent e-mail to New Times.

“It’s actually a lot easier to get noticed when you’re surrounded by hungry diners looking for a place to eat. Then, it’s up to you to keep them coming back.”

According to DeMarco and Bailey, the trouble comes when “people rush to open a business in a neighborhood, not because they are passionate about a project or the area, but because it’s a trendy place to be.”

Although he doesn’t operate a restaurant in uptown Phoenix, Joe Johnston also knows what it’s like to run a restaurant in the heart of one of the Valley’s fastest-growing dining districts.

Johnston, the “ideas guy” behind concepts like the original Coffee Plantation coffeehouse, Gilbert’s master-planned “agrihood” Agritopia, and the recently opened Barnone craftsman marketplace at Agritopia, operates two restaurants in the booming Gilbert Heritage District: Joe’s Real BBQ and Liberty Market. (A third Johnston family restaurant, Joe’s Farm Grill, is located nearby in Agritopia).

Johnston opened Joe’s Real BBQ in 1995, back when downtown Gilbert was still a sleepy strip with a boarded-up gas station.

Today, the three central blocks that make up the Heritage District are a city booster’s dream, a walkable, family-friendly strip populated with dozens of restaurants, including satellite locations of popular local eateries like Barrio Queen, Joyride Taco House, Zinburger, and the Clever Koi.

“I don’t really expect a downturn,” Johnston says, when asked about the possibility of a restaurant bubble in downtown Gilbert.

Johnston says that the dining boom in downtown Gilbert has so far given his restaurants a modest “bump” in sales. It’s one of the big perks of being part of a thriving dining core, he says.

“People drive there knowing they are getting something to eat. And they might not decide until they get there what it’s going to be. And that’s good, because they are bypassing a bunch of other corners and shopping centers to do it,” Johnston says.

“Not dramatically, like doubled. But there’s been a little bump. … Yes there’s more competition, but there’s also more people.”

Trying to predict the future is like looking in a crystal ball, he adds.

It’s ultimately about what the local market wants, he says.

Dining cores are not curated in the manner that a shopping mall, for example, can pick and choose high-low price points and different styles of retail businesses, he says.

Like Seventh Street, the downtown Gilbert dining scene is still very young. It will take some time to see whether there is a healthy, sustainable balance of restaurants in the neighborhood.

That said, Johnston believes restaurant industry growth overall is bound to slow down.

“On a national basis, it’s probably going to be — over the next couple of years — flat. Restaurant sales will be flat,” he says.

Arizona is a little different, though — it has consistently seen above-average restaurant sales growth in recent years. And it’s still generally a good place to open a restaurant, Johnston says.
“I don’t know if it’s going to be flat in Arizona, or it’s just going to be growing less fast than it might have,” he says.

“The restaurant business is not a super high-margin business. We’re not like Apple computer,” Johnston adds. “What’s going to happen is stronger operators, stronger restaurant concepts, ones that are in tune to what the public is looking for … those will survive.”

click to enlarge Managing partner Ken Jacoby (left) and chef Doug Robson (right) of Otro Café, which has become a destination for Mexican cuisine on Seventh Street. - JACOB TYLER DUNN
Managing partner Ken Jacoby (left) and chef Doug Robson (right) of Otro Café, which has become a destination for Mexican cuisine on Seventh Street.
Jacob Tyler Dunn

Restaurant groups like Fox Restaurant Concepts, Upward Projects, and the Johnston family restaurants have money, though. What about smaller operations?

Even in the best economy and best markets, opening and running a successful restaurant is one of the hardest thing an entrepreneur will ever do. And, according to most restaurant insiders, it’s only getting harder.

Higher operations costs, including an increased Arizona minimum wage that went into effect at the beginning of the year (the minimum wage in Arizona went from $8.05 an hour to $10, and will climb up to $12 by 2020), will obviously hurt smaller operations more, says Ken Jacoby, managing partner at Otro Café, chef Doug Robson’s popular Mexican restaurant on Seventh Street.

“When you’re a larger restaurant group, you can absorb a lot of those costs. You’ve got a bigger pool to pull from. But a lot of the smaller places, they just don’t have it,” he says.

“You just can’t raise your prices to offset that increase in pay, because you’re going to price yourself out of the market. There’s only so much — we were just talking about this this morning — there’s only so much you can charge for a taco, and there’s only so much you can charge for a burrito. The peril is definitely there. It’s real and it exists.”

Jacoby, though, believes there are more than enough customers to go around on Seventh Street.

Like Fox, Jacoby says Otro Café doesn’t depend solely on neighborhood clientele for its business. People come from as far away as Gilbert and Sun City, he says.

“I don’t really see it as a problem, as far as a bubble,” he says. “Unfortunately, restaurants close, and it is a highly competitive market. It certainly keeps us on our toes. We’re constantly innovating. We’re constantly developing new menu items.”

click to enlarge Chef Silvana Salcido Esparza, who operates Barrio Urbano on Seventh Street, says the street doesn’t get enough business to support the “overinflated rent.” - JACOB TYLER DUNN
Chef Silvana Salcido Esparza, who operates Barrio Urbano on Seventh Street, says the street doesn’t get enough business to support the “overinflated rent.”
Jacob Tyler Dunn
Not every restauranteur on Seventh Street believes the trendy neighborhood is ideal for doing business, though.

Chef Silvana Salcido Esparza operates Barrio Urbano at the Yard, an ultra-stylish, art-filled space with oversize murals and an eye-catching bright pink neon sign. Before it was Barrio Urbano, the long, sleek space briefly housed a coffeehouse, Lola at the Yard.

“I am there because the restaurant before me failed, and I stepped into a sweet deal after finding myself without a second restaurant,” the chef wrote in a recent e-mail to New Times.

“Even at a sweet deal, Seventh Street does not have enough business to carry the overinflated rent. Both Gilbert and Seventh Street are ‘high-rent’ districts — in my humble opinion, not worth it. Too much competition and not enough customers. No one is saying it, but I am sure the folks over at Heritage Square are already asking for rent reductions — which is what is going to happen to Seventh Street next,” Esparza says.

New Times reached out to other restaurant operators on Seventh Street for comment, but received no response.

One local economist doesn’t see a clear restaurant industry bubble in metro Phoenix. Lee McPheters, a research professor of economics at ASU’s W.P. Carey School of Business, regularly provides economic forecasts of the greater Phoenix economy.

“The way we would look at this is to see how many jobs are in food services compared to all private jobs, and if that number is high, then there might be a bubble,” he says.

By this measure, there is no obvious restaurant bubble in Phoenix — although “there might be bubbles in Phoenix areas where lots of restaurants are trying to compete,” he says.

McPheters says Phoenix is slightly under the national average when it comes to the number of private-sector restaurant jobs — even if it might not look that way.

“As long as the Phoenix population and employment continue to grow, there will be new restaurants starting up in Phoenix, because there is a tendency to move to the national average,” he says.

“Since Arizona is one of the fastest-growing states, this creates the appearance of an over-building of new restaurants, but that restaurant growth is just necessary to keep pace with population and job growth.”

click to enlarge Gilbert’s Joe Johnston: “The restaurant business is not a super high-margin business. We’re not like Apple computer.” - JACOB TYLER DUNN
Gilbert’s Joe Johnston: “The restaurant business is not a super high-margin business. We’re not like Apple computer.”
Jacob Tyler Dunn

So which is it — bubble or no bubble? Are areas like Seventh Street and the Heritage District in Gilbert examples of oversaturation, or the future of Phoenix dining — permanent new dining hubs?

One close observer of the Phoenix food scene (who also asked not to be identified for this piece) believes part of the problem with the Seventh Street scene in particular is not just oversaturation, but the quality of restaurants found on the street.

Seventh Street is full of restaurants with “a lot of style and not a lot of substance,” she says. “I just don’t see a lot of staying power in places like that.”

Another anonymous restaurateur echoes the sentiments in Kevin Alexander’s piece for Thrillist: It’s not just that there are too many restaurants on one street, but too many of the same kind of mid-range restaurants — places that are not priced like fast food, but not as expensive as formal fine dining. This kind of restaurant doesn’t seem ultra-luxurious, but it’s expensive to operate.

“When I was a kid, there were two kinds of restaurants: expensive — for rich people or special occasions — and fast food. Now the middle ground has taken over with $20 entrees, but those really should be $45. Forty-five dollar entrees in fancy places should be $100. If you consider that the average restaurant margins are less than 10 percent, prices are way too low,” he says.

With consumers’ attention split in so many directions, one thing is clear: Even the best restaurants are vulnerable.

That’s one of the cruelest aspects about a restaurant bubble. Both great and not-so-great restaurants must grapple with the same basic constellation of challenges.

Joe Johnston, for instance, remembers a time when timing and circumstance threatened one of his most popular restaurants.

He opened Liberty Market, now a mainstay for weekend brunch in downtown Gilbert, during the great recession in 2008.

“We lost money for a good year and a half,” he says. “It’s a difficult business even when it’s super successful. And it’s certainly a grind, and disheartening and dispiriting if you’re just barely breaking even.”

Being an able operator, he says, is not always a “panacea” for every challenge that comes along.

“The bubble is about to burst,” insists another local restaurateur. “I have friends who work a ton and make almost no money … There is a point where it’s just a waste of time and effort, and it’s really close for a lot of people.”

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Patricia Escárcega was Phoenix New Times' food critic.