It turns out that no matter how much money a cloud is worth, ultimately it’s still a cloud. Such is the thinking behind a new era in tech entrepreneurship that is, in some respects, moving away from intangible fairy-dust-like apps and software development to betting on one of the oldest and surest ways to make a fortune: real estate.
First there was WeWork, a tech startup that boasted shared workspaces for other tech startups and enterprises. In a 2017 article titled “The Digital Hippies Want to Integrate Life and Work — But Not in a Good Way,” the Guardian reported on how the WeWork business model was attempting to soften the line between the intangible and the tangible. “WeWork’s pitch is simple: As a technology company, its main asset is its data, not its properties and its rapidly expanding size allows it to extract and analyze data related to their use and under-use (‘buildings are giant computers’, says its blog),” the British paper wrote. “Armed with the data, it can then offer tenants flexibility on space, furniture and leasing.”
The hope was that the WeWork model could “dominate the business of services related to space in general — for example, by using data to help clients redesign and manage their own offices,” per the same report. The bet being that even the real-estate business would soon be dominated by big data.
For a moment, WeWork’s gamble was right. Last year, even if only for a moment, newly rebranded as “The We Company,” the brand was valued at $47 billion before it crashed and burned due to mismanagement, obscure finances and strange behavior on the part of its founder. As a result, late last year the company filed for bankruptcy.
Today, reaching for that same successful marriage of real estate and data-driven analytics is the nascent concept of ghost kitchens. Following in WeWork’s footsteps of buying up distressed real estate, ghost kitchens — sometimes referred to as cloud kitchens — are, according to QSR Magazine, “stripped-down commercial cooking spaces with no dine-in option.” The concept, which is popping up in cities all across the country, is banking on the meteoric growth of the online food delivery market, which is set to reach $24 billion by 2023, per the same QSR report.
That figure is all you need to know to understand why Silicon Valley entrepreneurs/vultures have taken notice. Last year, Uber co-founder Travis Kalanick invested $150 million in a startup called City Storage Systems, owner of CloudKitchens, which, according to TechCrunch, “invites food chains — as well as independent restaurant and food truck owners — to lease space in one of its facilities for a monthly fee, charging additional fees for data analytics.” In January, Kalanick raised an additional $400 million from Saudi Arabia’s sovereign-wealth fund, “in a deal that could value CloudKitchens at $5 billion,” per Business Insider. Which should put to bed any doubt that ghost kitchens are the next billion dollar frontier in tech and real estate.
Similar to food trucks, the appeal of ghost kitchens is simple: They’re a way for people who have dreams of starting a restaurant, but are worried about the overhead costs, to do so without risking losing the entirety of their investment. The idea is that a ghost kitchen, which allows for multiple “restaurants” to produce food using the same physical space while also sharing equipment and ingredients, will cost a fraction of opening up a brick-and-mortar restaurant. “With a ghost kitchen, you rent from a landlord at a facility like Kitchens United or CloudKitchens, usually located in densely populated areas,” reports Roaming Hunger. “From there, you get your brand onto an app like Uber Eats or DoorDash, and (hopefully) start getting customers. Then you send out orders from the rented kitchen space. Ghost kitchens can be used to launch an entirely new business, or to expand the delivery range for an existing brand.”
Which is great, if you’re a small but potent brand that’s looking to expand or even get started without having to worry about overextending yourself. But of course, no capitalistic endeavor — particularly one served up by an industry whose motto is, notoriously, “move fast and break things” — disrupts without also poisoning the well or, in this case, several wells. Because while conceptually, ghost kitchens are built to help proliferate the number of small-restaurant owners, they’re simultaneously threatening the existence of existing small restaurant owners.
Per a recent CBS New York report, “a recent Ohio State study shows 80 percent of restaurants don’t make it past year five in business,” and there’s concern that ghost kitchens will only exacerbate that problem. “I’m fearful of the future for the traditional mom-and-pop restaurant,” New York City Councilman Mark Gjonaj told the news broadcast. “These models could threaten their very existence.”
He’s not the only one who thinks so either. In an article from late last year, the New York Times reported that in addition to putting the mom-and-pop brick-and-mortar restaurants out of business, ghost kitchens — which boast a business model that does away with communal eating places in favor of delivery — will help further diminish the already disappearing social aspect of dining out. “My question is where are people who actually come from different backgrounds, where will they have to interact?” Mireya Loza, a professor of food studies at New York University, told the Times.
In the same article, Marcia Chatelain, a professor at Georgetown University and the author of Franchise: The Golden Arches in Black America, notes, “This structure [ghost kitchens] of putting the preparation of food behind closed doors, it really disadvantages people who need the brick-and-mortar experience — or who really need to access the internet, warm up between shifts at a job, have a meeting point for them and their kids.”
All of which gets to the even greater threat posed by real-estate developers, who see a run-down space and visualize all the money they can make by turning a ramshackled exterior into something new, cool and hipster-ish. As per UnderPinned, “The definition of gentrification, as coined by academic Ruth Glass in the 1960s, is that the housing opportunities for poorer communities recede, while housing opportunities for the middle-classes increase — leading the former to be forced to move out of their homes.”
In that regard, urbanist Brigham Yen tells me that if ghost kitchens are buying distressed real estate in commercial areas that have all but been abandoned, “the term gentrification is probably not an accurate way to describe what’s happened with the revitalization process.” In other words, technically speaking, in order for an area to be considered truly gentrified, there has to be some degree of displacement involved. To his point, Karen Chapple, the faculty director and professor of city and regional planning at the University of California, Berkeley, tells me that, by this definition, very few neighborhoods actually get gentrified. “There’s just not enough capital in the world to gentrify these places,” she says. “New York, San Francisco and Los Angeles will be exceptions, and even they’ll only get to 20 percent gentrified.”
But what this technical accuracy fails to take into account is that surrounding, poorer neighborhoods typically get affected by the revitalization efforts in industrial areas, too: Development never takes place in a vacuum. Chapple tells me that her fear with pseudo-real-estate companies backed by the seemingly inexhaustible monopoly money of big tech, is that they could displace viable industrial businesses. “Auto repair shops, that are usually a part of the informal economy supporting hundreds of thousands of people in minority groups, may appear like distressed real estate, but they’re not,” she says. “Sometimes a space that looks abandoned is actually a viable economic space.”
Jason Richardson, the director of research and evaluation for the National Community Reinvestment Coalition, says that for the reasons Chapple mentions, early on his research, he recognized that you couldn’t really measure gentrification quantitatively. “You’ve got to put it in context of local experiences and talk to people on the ground about what they consider gentrification to be, and what they consider to be economic development, which are two different things,” he explains. “Generally, gentrification includes an element of displacement, where the incumbent population — and it can be the residential population or existing businesses — are pushed out in one way or another and they’re not able to get the benefits of the development that we’re talking about.”
To be clear, there is no evidence as of yet that the emergence of ghost kitchens has led to the displacement of residential populations in the “distressed areas” in which they’ve popped up. Richardson believes that generally speaking, there’s really no issue with any of these activities, as long as they’re not displacing incumbent residents involuntarily: “We know that when you see investment in the community and you see an increase in incomes or an increase in property values, you also see an increase in positive outcomes for everything from childhood school attainment and school scores, to decreases in crime and so forth and so on,” he says. If the incumbent population is able to stay and enjoy all the benefits from said investment, then, it’s considered positive economic development. “And I don’t think anybody’s going to have a problem with that,” he adds.
But the problem arises when real-estate companies like City Storage Systems are displacing existing businesses that don’t have any place to go, rather than reusing existing spaces that are truly abandoned. “Investment itself isn’t a problem,” says Richardson. “The greater investment in these distressed communities is great, but who benefits from it? Is it going to be new people coming in? Are they the only ones that benefit, or are the people who live there and work there now going to get to share in that benefit and hang on?”
As mentioned briefly earlier, the other potential problem with the proliferation of ghost kitchens is that, even if they don’t immediately displace any residents or business owners, they could trigger an increase in rent for businesses and housing in the surrounding areas. “They might go into an area in San Francisco and buy some sort of empty building, and it may have no impact because San Francisco’s got so much crazy shit going on already,” says Richardson. “But they might buy a place in Fresno where, all of a sudden, their moving into the community triggers rapid rent increases for all the businesses nearby. That’s the difficulty here — you’ve got to understand, in context, what individual investments mean.” Unfortunately, Richardson says, there’s not a lot that you can really do about that. “That’s just how property values work,” he tells me.
Another way property value works is through land banking, which is essentially hoarding pieces of land that will either be sold or developed in the future (as is often the case with parking lots). “For example, St. Louis has one investor that bought 1,500 houses and they’re not doing anything with them,” says Richardson. “They bought them simply as investments and they’re waiting for the value of the properties to increase before they sell them. In the meantime, though, it leaves a sizable portion of several neighborhoods off the market.” Which Richardson says is especially problematic when tech companies are the people doing the land banking, because they tend to buy up a lot of stuff and quickly identify the profitable properties and the loss leaders. “So you might be looking at neighborhoods that deal with months or years of vacant properties that nothing’s ever going to happen with.”
This seemingly endless cycle of gentrification (however loosely you want to use the term) comes down to the fact that when tech companies move into other non-tech fields, like property ownership and landlording, they tend to approach it as if there’s a single solution that they can apply universally. “My experience with a couple [tech companies] that I’ve talked to is that they tend to not really understand the nonfinancial roles that property plays in a lot of communities,” says Richardson. “The social and the political aspect of property ownership and housing and business locations. And that often gets them into trouble. If you come in and buy up tons of properties in different cities and you’re not engaging with those communities, you run the risk of incurring a backlash from the communities themselves.”
It remains to be seen what approach ghost kitchens will take. But as history has shown, the tech industry has rarely, if ever, considered the damage they inflict on individuals and communities on their way toward their next billion dollar evaluation. Only time will tell if anything will be left of the old neighborhoods these businesses have taken over but the ghosts.