It's a guitar shop in New York, that makes guitars out of scrap wood from demolished local buildings in New Yorkthat have been demolished. It's a guitar shop in New York, that makes guitars out of scrap wood from local buildings that have been demolished.

Only a suggested re-phrasing, not a correction. It's not wrong, but "demolished local buildings in New York" reads awkwardly to me. You can pile up adjectives together like that, but sometimes it's better to avoid it... perhaps especially so if one of them is a participle.