In 2013, on a windy stretch of 11th Avenue in Manhattan the Gotham Organization, an NYC developer, built a new residential high rise. Rather than installing a Duane Reade or Citibank as its first floor commercial tenant, it built something it thought might draw people westward: a 10,000-square-foot urban food bazaar, serving everything from tacos to pizza to ramen.
In modern metropolises, where rent is high and space is tight, mixed-use spaces can be community hubs as well as viable business operations. LA’s Grand Central Market, which opened in 1917, is one of the oldest still-thriving food halls; New York City’s Chelsea Market erected its retail spaces, which also rent to full-service restaurant operators, in the late 1990s; and San Francisco’s Ferry Building started renting food counter stalls to local purveyors in 2002. When Gotham West Market opened five years ago, it was following in the footsteps of these earlier markets, but added modern conveniences and targeted marketing that helped ignite a new trend.
According to a report by commercial real estate firm Cushman and Wakefield, there were about 70 food halls in the country by 2015. Within a year that number had grown to 86, and by the end of 2017, it had reached 118. At this rate, by 2020, the marketplace will have tripled in size in the span of just five years. “We are starting to see food halls at the heart of new suburban mixed-use developments, where the food hall component isn’t just at the center of the action, but it’s usually among the first things built,” says Garrick Brown, vice president of retail intelligence for Cushman Wakefield.
New York City, already home to 25 active permanent food halls, will welcome as many as 10 more either under construction or in development. Halls are under construction in San Francisco, Los Angeles, Chicago, and Philadelphia, as well as in smaller cities like Austin, Plano, Omaha, and Portland, Maine.
That rapid growth mirrors the rise of the so-called gourmet food truck trend, which kicked off just after the recession in 2008 with chef Roy Choi’s Kogi taco truck. “When consumers have wearied of giant chains but still demand food that is novel, inexpensive and fast, food trucks are the new incubators of culinary innovation,” wrote Jonathan Gold in the Smithsonian in 2012. A decade after Kogi — with gas prices on the rise, mounting truck vendor regulations, competition, and fickle diners ready for the next thing — both consumers and operators seem to be shifting their attention to food halls.
Diners are drawn to them for many of the same reasons they helped food trucks proliferate in every American city: the convenience, variety, speed, and thrill of culinary browsing. Operators, plagued by high rents and soaring labor costs, are lured in by a hall’s perks relative to a standalone restaurant: lower startup costs, shared expenses, and a community of vendors that ensures steady traffic.
That consistent foot traffic is part of what sets food hall stalls apart. Some of the fun (or inconvenience) of dining at a food truck is finding it: Diners typically follow a truck’s social media feed to see where it will park next. But that also means food truck operators don’t always know how much business they will do, or what other trucks will park in the same location. Food halls eliminate some of that uncertainty. Additionally, food hall stalls aren’t subject to the elements, are grounded to power and plumbing, and don’t need to keep their tank full. Developers and fledgling restaurateurs are capitalizing on these positives, making food hall stalls the new food truck: an enclosed space with lower risks and lower costs than a traditional restaurant — and the potential for great returns.
Variety, affordability, and a competitive real estate market mean food halls are often a more attractive investment than a full-service restaurant or single-concept space. But operators still need some business know-how and cash to cover the start-up costs before they sign on the dotted line. Here’s how a standard food hall license works (compared to a restaurant lease), and why more operators are going the food hall route: While every project is different, what follows is a common framework.
What’s the difference between a license and a lease?
Most food hall contracts between the food stall operator and landlords are called licenses, not leases. Licenses are much shorter documents, about 15 pages long, and are far less complex than full-length leases, which can be over 60 pages (and require several attorneys to decipher). Standalone restaurant leases are generally for 10-year terms; food hall licenses are much shorter, averaging one to three years, and most are structured as “at will” tenancies, giving both the tenant and the landlord a way out before the term’s end.
“Food hall licenses have shorter terms than restaurant leases because the landlord wants flexibility to rotate vendors in and out,” says Kevin Lillis, founding partner and CEO of Hospitality Alliance, who has consulted the development of a half dozen food halls, including Urbanspace, the Row Hotel, and Turnstyle. This can work in the tenant’s favor, too, in case business isn’t as bustling as initially expected. “A dark stall is like having a missing front tooth,” says Phil Colicchio, who runs Colicchio Consulting with Trip Schneck, a firm that advises owners and developers like Westfield on funding and operating food halls. “The key for a landlord is to be able to change tenants out quickly so that the whole project doesn’t suffer as a result.”
The license covers the basics like rent, length of the lease, termination provisions, dimensions of the stall, equipment included, other add ons such as shared storage space, scullery service, covenants such as operating hours and non-competes, and a list of fees such as Common Area Maintenance (CAM) charges. Depending on the deal, this can be included as part of the rent or added on as a monthly fee.
The term “license,” in New York City especially, is also significant because it means that the agreements are not subject to litigation. This is not only appealing to landlords — operators like it because it’s low risk. “Having a license and not a lease, it’s a benefit for the tenant,” says Christian Pappanicholas of the Cannibal Beer & Butcher shop, a former Gotham West Market operator. “You want something you can get out of easily, and that won’t land you in landlord tenant court.”
How is rent calculated?
In general, city storefront rents are calculated on a dollar per square (psf) foot model, which is dependent on what the market will bear. This can mean, for example, $40 per square foot for a restaurant space in Columbus, Ohio, or $200 psf for one in NYC’s West Village.
Food hall stalls are not typically rented on a per square foot basis because the footprint is too small; most are around 200 square feet. If they are rented psf, that rent is usually quite high. Regardless, food stall rents are relatively steep given the small space — around $2,000 per month in a city like Denver, and up to $8,000 per month in New York City for 200 to 300 square feet of space.
As a point of comparison, a prime West Village 2,000-square-foot New York City restaurant rents for around $30,000 per month, according to Colicchio. (For that number to make sense, the restaurant would need to do about $4 million in annual revenue, since rent should be roughly 8 percent of gross revenue.)
In addition to that base rent, food hall licenses often include “percentage rent,” meaning that a landlord is paid a percentage of sales. This is negotiated as either a percentage of sales per day, or as a percentage of sales (usually somewhere around 10 percent) above a certain total sales threshold.
Another perk unique to a food hall license is that some landlords will offer staggered rents that start off lower and increase in years two and three, assuming traffic will pick up.
Who pays for the stall’s buildout?
“Rents are much higher in a food hall if you look at it on a per square foot basis,” admits Steven Kamali, CEO of Hospitality House, a restaurant, hotel and hospitality services agency in the midst of developing six food halls across country. But he says the higher rents are offset by the upside of operating in a food hall. “You are given a turnkey operation, with much of the buildout done for you, and you have guaranteed high foot traffic, and aggregated social media.”
In a standalone restaurant, the operator pays for her own buildout, which can cost between $500,000 and several million dollars depending on the location and size of the project. Food halls require a much smaller initial investment for the buildout because the landlord provides the base level of what’s called FF&E — furniture, fixtures, and equipment. A vendor can customize it, which can cost anywhere from $10,000 to $75,000, depending on the design of each stall and the market’s common areas.
The logic behind this goes back to the nature of the food hall as a community. “An owner does not want a tenant who’s moving out to spend months tearing down a stall, and ripping out their hoods and stoves and refrigeration while people are trying to enjoy their lunch,” says Lillis. “The buildout is therefore done and owned by the landlord or developer.”
Some food halls, like Dekalb Market, located in Downtown Brooklyn’s bustling City Point retail and residential development, require each operator to build out a custom space so each stall has a different feel. This market also requires each stall to have a neon sign which can be costly — up to $10,000 for some operators with large spaces. Still, the price is lower than what it would cost for a full restaurant buildout.
Kamali also says the food hall setup saves operators the added aggravation of looking for a space for years on end. “Some people spend 12 to 24 months looking for a space, evaluating economics, running numbers, and trying to negotiate a deal. That process alone can cost $100,000 and sometimes the deals fall apart. With a food hall, you have a couple of pages to review, you negotiate rent and percentage rent, your insurance costs are scaled down, and it’s a lot more affordable and a lot easier to deal with.”
What’s more important: Good credit or a good concept?
Food hall leases are easier to come by without the best credit, says Schneck. “In the world of the food hall, there’s a saying: ‘Concept overrules credit’.”
Schneck explains that most landlords will do a comprehensive credit assessment of their potential tenants before executing a lease. “They will want to see balance sheets and income statements to understand the risk, and they will want someone or some entity to sign as an unconditional or absolute guarantor,” he says. But the food hall application process is much less about financial history and much more about the story. “For instance,” says Schneck, “the application for prospective food hall vendors at Legacy Food Hall in Plano, Texas asks, after your name and address, ‘What’s your BIG idea?’”
The importance of non-competes
Food halls may operate anywhere from a dozen to 50 stalls, and the job of curating them requires a good deal of time and thought. For a developer, the goal is to represent a variety of foods and price points for the target audience, while vendors want to ensure that no else will be peddling the same menu.
But what if a developer brings in a concept that’s eerily familiar to a current tenant? Take Chelsea Market’s latest addition, Miznon, an Israeli pita sandwich concept, very similar — and some could say, in direct competition with — Israeli pita and hummus concept Dizengoff, a pre-existing tenant. There’s no war, but the placement is curious.
Most developers and consultants say it’s in everyone’s best interest not to have a war in the food hall. But whether or not the developer will guarantee this in a writing is another story. “I’ve never given anyone a non-compete, but I’d never put a second burger shop in a food hall that already has one,” Lillis says. The exception, he says, is coffee and alcohol. “You need a couple of each, because people cannot be waiting on long lines for a beer or a coffee.”
Colicchio and Schneck, on the other hand, have negotiated non-competes and feel it’s a reasonable promise for a developer to make. “If I am a vendor and I am spending some money to come in, it is reasonable for me to want to be the only Mexican option,” Schneck says. “I can and should ask for that. And if the owner won’t put that on paper, don’t do it. A good curator knows it’s in her best interest to have a variety.”
Why management is key
Food hall veterans are in agreement that the best food halls are run by a hospitality management company, not the real estate developer. “It’s often the most overlooked aspect in the venue’s operations,” says Schneck. “A lot of times, a developer thinks they have the skill set to manage the food hall, when in fact it’s a big job that includes running health inspections, employing staff, managing receiving, as well as all the social media and marketing. This needs to be done by a seasoned restaurant manager or hospitality industry professional.”
Hiring a management company also usually means promotional costs — associated with public relations, events, or social media posting — are largely folded into the rent. But a food hall community offers something few standalone restaurants have: the power of many voices with smartphones. “With a food hall, you have social media that’s organized and executed collectively by a community of vendors, even though some will still do their own marketing,” says Lillis. The aggregate effect is a boon for most vendors whose social media is bolstered by the market’s collective voice.
That sense of structured community is part of what’s making food halls attractive investments for cities and developers. For operators, they might require a bit more paperwork and capital upfront, but offer many of the same benefits of running a business from a food truck — minus the major drawback of having to pay for gas.