Richard Zaro always wanted to open a chicken cutlet joint inspired by the deli sandwiches served across northern New Jersey, but the challenge was coming up with the required capital. The pandemic finally gave him an opportunity.
Mr. Zaro’s family has a long history in the restaurant business. In 1927, his great-grandfather Joseph Zarobchik founded the Zaro’s Bakery chain, which today is a fixture for New York commuters with storefronts at Pennsylvania Station and Grand Central Terminal and across the city.
But he wanted to start a concept of his own, and in the pandemic, he found a solution: the hotel industry, which, after months of hanging by a financial thread, was renting its empty kitchens and banquet spaces to restaurateurs hunting for cut-rate space.
Ghost kitchens, also called digital kitchens, are cooking facilities that produce food only for delivery or takeout. And as U.S. cities bounce from one lockdown to another, keeping restaurant dining rooms shuttered, demand for the concept is booming. Euromonitor, a market research firm in London, predicts ghost kitchens will be a $1 trillion industry in the next 10 years.
So it’s perhaps unsurprising that the hotel industry, where occupancy rates are still down 30 percent from a year ago, is getting in on the trend. Hotels have become adept at repurposing their spaces throughout the pandemic. They’ve offered their empty rooms as housing for the homeless and temporary offices for executives; they’ve even turned their conference rooms into classrooms for children learning remotely.
The concept isn’t entirely new: Butler Hospitality, founded in 2016, was one of the first companies to streamline in-room dining by funneling food and beverage service for multiple hotels through a single neighborhood kitchen. Analysts now estimate that fewer than 5 percent of hotels in the United States are operating ghost kitchens from within their properties, but the number is expected to grow.
“Hotels see this as a profit center,” said Frederick DeMicco, executive director of Northern Arizona University’s School of Hotel and Restaurant Management. Name-brand restaurants, in particular, can bring added value to a struggling hotel.
“It supplements the existing menu options at the hotel, and extends well-respected restaurant brands as partners in the hotel,” he said. “Consumers recognize and approve of that.”
The pandemic has opened the business model to more entrepreneurs. To turn his sandwich concept into a business, Mr. Zaro started renting space in July at the Four Points by Sheraton Midtown near Times Square, paying $6,000 a month for a fully outfitted catering kitchen. Average restaurant start-up costs for brick-and-mortar locations, in comparison, can run from $200,000 to more than $1 million.
Within four months, he had generated enough revenue — and created a large enough base of loyal customers — to move to a stand-alone location. His new business, Cutlets, opened in a former Tender Greens restaurant near Gramercy Park on Dec. 1, and has plans to expand.
Testing from a base at a Times Square hotel was the ultimate risk reduction, Mr. Zaro said, adding that the hotel benefited, too: “It was nice for them to have incoming revenue.”
And the situation removed many of the stumbling blocks that new restaurateurs face. “We were able to do decent business on Day 1, get open for next to nothing and test the market,” he said.
Mr. Zaro found his rented kitchen space through Use Kitch, an online commercial kitchen marketplace that likens itself to an Airbnb for the restaurant industry. Dan Unter and Aaron Nevin started the platform last January; they estimate that half of their rental kitchens, nearly all in New York, are inside hotels.
They plan to lower that share, but relying heavily on kitchen space in hotels was ideal for the company’s rollout, Mr. Nevin said.
“Hotels are already accustomed to having third-party operators in their spaces, so it’s not that foreign of a concept for them,” he said. “The larger restaurant industry still needs to wrap their heads around it.”
The marriage of ghost kitchens and hotels has potential as a long-term business model, said Sam Nazarian, the founder and chief executive of SBE Entertainment, a hotel and restaurant management company. Its brands include the Mondrian and Hyde hotels, as well as restaurants from chefs like Wolfgang Puck, José Andrés and Katsuya Uechi.
In 2019, Mr. Nazarian started C3, a food hall platform with a focus on delivery and a hybrid of ghost and brick-and-mortar kitchens. C3 has eight virtual brands, including Umami Burger and Krispy Rice. Using the hotel model, it is beginning a partnership this month with Graduate Hotels, a collection of more than 30 millennial-focused boutique hotels in college towns across the United States.
“Nobody was looking to unlock the power of dormant real estate,” said Mr. Nazarian, who estimates that many hotels are using their kitchens only 15 percent of the time and losing valuable revenue as a result. “Now we can utilize that kitchen at 80 or 90 percent effectiveness and deliver our brand to that millennial generation.”
The joint venture will start first at the Graduate Berkeley, near the University of California, Berkeley, and then expand to campuses in Minnesota, Arizona and Iowa before being folded into the entire chain. Graduate Hotels will provide the banquet and catering spaces; C3’s restaurant brands will offer in-room dining as well as delivery and takeout for the community.
“When you think about the distribution angle of targeting how many millions of college kids who are there forming their appetites and their brand loyalty, it made sense, both for Sam and for us,” said Ben Weprin, the founder and chief executive of AJ Capital Partners, the Chicago real estate company behind Graduate Hotels. “I think this will be profitable. It’s a great differentiator.”
The right partnership is crucial to making the business model a success, said Kim Stein, a principal at KLNB, a commercial real estate services firm in Washington.
“If you are trying to make your business survive, you need to find a partner to help you do that right now,” she said. Among her clients, she said, are buyers who are looking for a full kitchen for delivery and carryout but don’t want to pay for more than 1,000 square feet. (Restaurants tend to run 1,200 to 10,000 square feet, including the kitchen and dining room.)
“From a real estate perspective, it is nearly impossible to find a thousand square feet with a full kitchen,” Ms. Stein said.
Hyatt, which has more than 900 properties, sees another benefit to installing ghost kitchens in several of its hotels: a support system for small businesses.
In November, the company started Hyatt Loves Local, a partnership program that offers resources — including kitchen space — to local businesses that have struggled during the pandemic. Sixty Hyatt hotels have participated so far.
Hyatt is offering its spaces to small business for free. The program adds to the hotels’ appeal by expanding their food options and supporting the neighborhood, said Amy Weinberg, a Hyatt senior vice president.
“Our hotels are part of the community in which they operate,” she said. “If the neighborhood is struggling, that’s not good for anyone.”
Through the program, the Hyatt Regency Atlanta gave a kitchen to Anna Bell’s Mac; a Hyatt Regency in Dubai offered both a kitchen and a storefront to Fables UAE, a confectionary; and after foot traffic at the Hana Farmers Market in Hawaii slowed considerably, it moved to the Hyatt Hana-Maui Resort, which provides kitchen and refrigerator space to vendors for food prep.
The union of hotels and local allies is a trend that is likely to stay, Ms. Stein said.
“Hotels are able to keep the amenity of having some kind of food service, and the restaurant is able to reach new customers through delivery and carryout,” she said. “It’s really a win-win.”