Remember the cupcake craze? Or when doughnuts had their major moment in Chicago? Shops popped up all around the city, and then most of them closed after a few years.
Amid the city’s steadily increasing supply of food halls, one can’t help but wonder, will that be the next food fad to fizzle out? If so, the blowback would be much worse on real estate given the large amount of space they occupy.
“Food halls are complicated. They’re difficult to design, build, curate and operate. With so many of them sprouting up, odds are that some will fail,” said a JLL report released in August.
But experts believe food halls — one of the hottest trends in retail real estate right now — are still a pretty safe bet for landlords.
Glorified food courts
At their core, food halls are a way to deal with retail vacancies and a “hedge against expected vacancies” because they distribute risk amongst multiple subcomponents, said Cushman & Wakefield retail broker Greg Kirsch. In most cases, when a vendor fails, the food hall operator can swap it out with a different vendor.
That’s the beauty of food halls: it lets real estate fail a little bit, Kirsch said. When the cupcake and doughnut vendors don’t do well, they can be replaced with yogurt, smoothies, poke bowls or another more on-trend offering.
Some retail concepts, like Sears or Toys R Us, worked well in the past and struggled to change with the times. But food halls are flexible enough to keep up with the “musical chairs type of situation” happening in retail, according to JLL commercial broker Nicholas Kanich.
Food halls essentially are glorified food courts offering a variety of more upscale fast casual options to diners. Landlords and developers have been harnessing the placemaking power of food halls and using them as amenity adds in shopping malls, office buildings and transportation hubs. Property owners can choose to self-operate or hire a third-party operator, such as a restaurant or hospitality group, to run their food hall.
Failure rate on the rise
Since the Great Recession, restaurant traffic has been pretty flat, but food hall and food court traffic is bucking the trend, with a 4 percent increase in the past year, according to Food and beverage industry analyst Darren Seifer of NPD Group.
Food halls have become wildly popular because they offer variety and ease to consumers. They fit into the fast casual restaurant space, which have been a growing area in the food industry, said Seifer.
Nationwide, food hall supply has more than quadrupled in the past four years. By the end of 2020, the number of operational food halls across the U.S. is projected to reach 450, up from roughly 120 in 2016, according to a Cushman & Wakefield report published in May.
Chicago has about a dozen operational food halls, most of which are Downtown, and several more in the works. Some are single-company operations, including Eataly and Latinicty, which tend to focus on a specific cuisine. Others feature myriad options from a diverse array of Chicago-area and out-of-town restaurants.
Most recently, Fulton Galley at 1115 West Fulton Market closed in mid-November after less than five months. Industry sources said they thought the food hall’s location was a challenge – it’s west of Downtown, and in a developing neighborhood that doesn’t have the same level of foot traffic.
Most of the notable food halls that have failed in the past four years were smaller, poorly located and underfunded, according to Cushman & Wakefield’s report.
“But it is likely that the failure rate will creep up as more projects proliferate,” the report said. “Food halls are not a solution for every property, and certainly not for every location.”
New projects flood the market
Still, that hasn’t stopped others from banking on a food hall bump. A week after Fulton Galley closed, the long-anticipated Time Out Market opened a few blocks away at 916 West Fulton Market. In fact, at least three new food halls are expected to come online in 2020 in Chicago.
Hayden Hall is set to open at 333 South Wabash Avenue in January. Urbanspace plans to open two Chicago locations: inside the Willis Tower at 233 South Wacker Drive in the third quarter, and within the Theater District at 15 West Washington Street in the first quarter.
Additionally, Cushman & Wakefield is handling the exclusive leasing for a food hall in Union Station, but it’s unclear if and when it will open.
Experts agree that location is the most important aspect, coupled with other vital elements, including design, operations and tenanting.
“It’s not just one thing,” said Kirsch, who leads Midwest retail leasing for Cushman & Wakefield. “A lousy food hall in a great location will fail.”
Location will help drive traffic, but compelling options will bring people back, Seifer said. One is an initial driver and the other encourages repeat customers, so both are needed to make a food hall sustainable, he said.
Food halls that serve as amenity adds to buildings, like Revival Food Hall at 125 S. Clark St., benefit from the built-in customer base, so it’s more likely that freestanding food halls will have issues drawing in diners when the fanfare fades, said Kanich, a senior vice president with JLL Capital Markets.
Landlords should be conscious of spacing and competition, like with any other kind of retailer, to avoid cannibalization and saturation.
“Of course, there will be a point where it doesn’t make sense,” Kirsch said. “There either won’t be the availability of real estate, or the market will determine if it doesn’t make sense to open one in a particular location.”