In September 2019, RXR Realty, which had $18.8 billion in assets, made what looked like one of the smartest bets in commercial real estate at the time: a $40 million investment in Kitchen United, a ghost kitchen operator filling vacant retail space with delivery-only restaurants. Four years later, Kitchen United closed every single location and sold off all of its assets.
In This Article
The Rise and Fall of Ghost Kitchens
VC Time Horizons vs Real Estate Time Horizons
So what did one of New York's most sophisticated real estate investors miss? And more importantly, how do you avoid making the same mistake when the next billion-dollar real estate trend hits the market?
In This Article
How ghost kitchens raised billions and collapsed • The math nobody ran: 30% delivery fees on 10% margins • VC time horizons vs real estate time horizons • The WeWork comparison • How I tested the trend at The Wash without going all in • Plan A through Z flexibility
The Rise and Fall of Ghost Kitchens
Ghost kitchens offered property owners a solution to a rapidly growing problem. Converting struggling retail and vacant mall space into delivery-focused commercial kitchens. Lower buildout costs than traditional restaurants. No need for prime locations with foot traffic. Retail was already struggling, and then COVID hit, really accelerating those struggles.
CBRE predicted ghost kitchens would grow to 21% of the restaurant market by 2025. That's one out of every five restaurants being online only. Euromonitor predicted a $1 trillion global market by 2030. Major operators backed this with serious capital.
$40M
RXR invested in Kitchen United
$100M
Kroger-led funding round
200
Simon Property Group locations announced
When the country's largest grocery store invests $100 million into ghost kitchens, that signals to the entire commercial real estate industry that this thing is real. But by late 2022, the cracks were already starting to show.
The Math Nobody Ran
Among all the startups, the VCs, the real estate investors, there seemed to be one calculation that almost nobody ran. Can restaurants actually be profitable paying these exorbitant delivery fees?
Typical Restaurant Cost Structure
30%
Labor
30%
Food
6-12%
Occupancy
10%
Marketing
10%
Profit
Now add a 30% delivery app commission. That comes straight out of the 10% profit margin.
That explains everything. Why Kitchen United's top-performing restaurants were still struggling to cover rent. Why Cloud Kitchens, backed by $1.3 billion in funding from Uber's Travis Kalanick, experienced a 65% annual tenant churn rate. Think about that from a real estate perspective. If you're running an apartment building with 65% annual turnover, you're in crisis mode.
And this wasn't hidden information. Delivery app commission rates were public. Restaurant margins were well known. Any commercial real estate investor could have run these numbers before converting their property. But everybody was looking at the wrong metrics: capital raised, partnerships announced, and market predictions. Not whether a restaurant could feasibly pay rent while giving up 30% of every sale to Uber Eats and DoorDash.
VC Time Horizons vs Real Estate Time Horizons
VCs had given ghost kitchen operators permission to fail fast, like a tech startup. Try it for 2 years and if it doesn't work, pivot to software or shut it down. But real estate and landlords don't operate on 2-year timelines. When Simon Property Group announced 200 locations, they were thinking decades into the future. That gap between venture capital time horizons and real estate time horizons is what turned losses into disasters.
In November 2023, Kitchen United closed all of its physical locations. All eight Kitchen United locations inside Kroger stores went too. The partnerships with RXR properties in New York were over. The company pivoted to software. Same story as WeWork. Expanded to hundreds of locations before truly proving the business model. A business reliant entirely on subleasing smaller office space. When the economics failed, the entire thing collapsed. Same pattern, different industry.
How I Tested the Trend Without Going All In
That's exactly what we did with The Wash. We converted an old abandoned car wash in Nashville to five micro restaurants and a bar. This was back in 2020.
When we first looked at The Wash in 2019, the original owner was looking to convert the six car wash bays into Airbnb micro suites. Then COVID hit and we put that on pause. But I still really liked the creative repurposing of an existing car wash.
At the time, I was still big in brokerage and we were working with a bunch of restaurants looking for locations even at the height of COVID. They wanted space with minimal indoor seating, basically a kitchen for to-go and delivery. I had to keep telling them, "Sorry, that doesn't exist." And that list just kept growing.
But then an idea hit me: what if we turned those car wash bays into ghost kitchens? The Wash is on a major corridor in East Nashville. So I started thinking, what if we turn the drive aisle into outdoor seating and do a retail-facing ghost kitchen where people could walk up and hang out, but it's still primarily focused on to-go and delivery.
It was a hybrid for a post-COVID world that still worked in a COVID world. No indoor dining. Just a kitchen with a walk-up window. If any of this stuff ever happens again, that project is prepared for it. But if not, we've got 80 seats outside on the patio.
We bought it for $412,000, and the rest is history. We won the Urban Land Institute's Excellence in Development Award and the People's Choice Award for the project.
What I did with The Wash, which many high-profile ghost kitchen investors and operators did not, was test the water without diving head first. We leaned into the ghost kitchen opportunity, but we didn't go all in on a completely new, untested business model. We just did smaller restaurant units with outdoor seating and parking spots for to-go and delivery. We hedged our bets so that if to-go and delivery disappeared tomorrow, those bays would still be successful.
Plan A Through Z: The Real Lesson
Those other ghost kitchens failed because they had both feet firmly planted in an untested business model. If the ground beneath them is unstable, which it certainly proved to be, you'll get knocked over. We had one foot planted in the traditional model, the ability to actually eat at a restaurant, and the other foot free to pivot into the new model.
What is your Plan A through Z? Because if I build out a ghost kitchen underneath a shopping mall where there's no retail traffic, who else is going to be successful in that space? You can't really change it to anything else. The Wash can be any number of different types of restaurants, retail, or office space. This is a principle for real estate in general. Test the waters first. If this next trend is real, it's not going anywhere. You don't need to be first to market.
Key Takeaways
Always run the unit economics. Ghost kitchens failed because a 30% delivery commission on a 10% margin restaurant is mathematically impossible. The numbers were public the entire time.
VC timelines and real estate timelines don't mix. Venture capital wants 2-year experiments. Real estate operates on decades. That mismatch destroyed billions in value.
Test the water, don't dive in. One foot in the proven model, one foot in the new one. If the new trend dies, you're still standing.
Plan A through Z. Always ask: if this concept fails, what else can this space become? Flexibility is your insurance policy in commercial real estate.
This article is adapted from a video on the Tyler Cauble YouTube channel.
This article is adapted from a video on the Tyler Cauble YouTube channel.
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