A hole in the wall, in current American English at least, usually refers to a small restaurant that may be dark, not well decorated, and otherwise not fancy. Most people use it in an affectionate way to refer to a place that is small and may not look nice, but has tasty food.
When I search for the phrase “hole in the wall” on Yelp.com, a reviewing website, I get restaurant reviews like “a great hole-in-the-wall kind of place” and “a hole-in-the-wall gem.” As you can see, most people use it positively. At Chowhound, a very popular international food discussion website, there are countless posts looking for good “holes in the wall” all over the world. This is probably because many people think of a hole-in-the-wall restaurant as being authentic, not very crowded, and inexpensive.
If you want to take your friend to your favorite restaurant but you’re afraid it’s a little too old and small, you can say something like “The food is good, but the place is really a hole in the wall. Is that okay?” If your friend loves food, he or she should be happy to go. (But it might not be a good choice for a first date…)
In addition, it’s not a good phrase to use when you talk to a hole-in-the-wall restaurant’s owner. After all, no restaurant owner likes to think of his or her place as small or shabby, even if you mean it as a compliment.
What’s your favorite hole-in-the-wall restaurant? Mine might be the Chinese deli near my apartment. My husband likes the bittermelon, and I like the sesame balls.