Will the craving for food halls die out in NYC?

Food halls are hotter than a dollop of artisanal ghost pepper mayonnaise in the summer. There are about 100 of the upmarket, cafeteria-style eateries operating across the country — a number that could at least double in the next four years, according to hospitality consultant Steven Kamali. With success stories in New York City, including Chelsea Market and Smorgasburg, it’s no surprise that landlords want in on the action.

Food halls can drive foot traffic to a project’s other retail components and increase property values. But the eateries can also be a high-risk investment. If the location is wrong, or a vendor is unreliable, food halls can collapse under their own weight. “There is a higher capital cost and a higher operating cost because [of everything] that a space with an intense food use has,” said Paul Travis, the founder and managing partner of Washington Square Partners, which opened a food hall at City Point in Brooklyn earlier this year. “The flip side is that if you’re doing it right, you can bring in value to a property,” he noted.

With the trendy food and beverage destinations opening left and right, The Real Deal turned to several landlords, brokers and food and beverage experts to hear their thoughts on the ingredients for success, where the food market model is going and if there are enough pieces of key lime pie to go around.

Paul Travis
Founder and Managing Partner, Washington Square Partners

Were you looking specifically for a food hall at City Point? Yes. We were really intrigued by the idea of a food hall as a part of City Point and had designated a 9,500-square-foot space on the ground floor for it. We looked at food halls all over the country and found that the most successful ones had a really wide range of vendors. We realized our space was probably too small, so we switched the concept and devoted [nearly an entire floor to it]. Now we have 59,900 square feet of food [including Trader Joe’s, Han Dynasty, Fortina,] and the Dekalb State event space]. The other part of it is that to be a successful retailer in the 21st century, you have to create an environment where people want to spend time. The food hall was one of the ways to do that, and the other was to bring in the movie theater Alamo Drafthouse.

You do a lot of consulting for developers. Has the food hall model entered your business lexicon? I would say it has, but we take a certain point of view. We’re a big advocate for food halls that are local and created by food entrepreneurs.

Paul Travis

You are essentially creating a number of restaurants in a food hall, so is there a high overhead? Yes. If you don’t have on-site cooking, you’re of limited interest to the consumer — so venting and fire protection, which are very expensive, are at the core of having a food hall. There is a higher capital cost and a higher operating cost because there’s garbage and everything else that a space with an intense food use has. The flip side is that if you’re doing it right, you can bring in value to a property. Chelsea Market has been around for a very long time, and it’s hard for me to believe the office space there would be worth what it is today without the food hall.

What sort of spaces do you think are fit for food halls? You need a good amount of easily accessible space. At least in a New York City context, it has to be near mass transit. The ones that are really working great have a lot of foot traffic. Though Chelsea Market is not near mass transit, there’s a lot of people walking around that area every day. Food halls in isolated locations will have a hard time in the long run.

What sort of risks are involved for a developer when they’re looking to establish a food hall? With a food hall, you have to accept that you’re going to start doing physical work when most of the space, if not all of it, isn’t even leased. I don’t think most food hall tenants are going to plan four years ahead of time. It’s not like renting to the Cheesecake Factory or the Gap. This is finding some great person in Red Hook who makes the best key lime pies you’ve ever had. That’s a true story [Steve’s Authentic Key Lime Pies, which operates a bakery in Red Hook, is one of the vendors at City Point’s DeKalb Market Hall].

Where do you see the food hall model going in the future? I think you’ll see more varied food halls. There’s two types of food halls happening now: one where someone is taking a model and replicating it, many times with the same tenants, but the second — which I think is the future of the industry — is a food hall that reflects the local aesthetic and feel. I think DeKalb Market is very emblematic of the Brooklyn experience. If we did one in Jamaica tomorrow, it would be totally different.

Steven Kamali
Founder, Hospitality House

There were rumors earlier this year that you were going to open a food hall on the top floor of Bloomingdale’s. What’s going on with that? We can’t comment on that, but I can say that we have developed a food platform. We have signed a lease in New York, and we have signed terms sheets in four other cities across the country to develop, manage and operate food halls. Our goal is obviously to attract the most qualified, most unique and often the most desired food and beverage vendors and concepts for each one of those markets. But to be clear, we are serving as principals in these businesses, not as consultants or brokers.

What are your thoughts on the wider food hall trend? The barrier for entry for full-service restaurateurs has become incredibly high due to the cost of construction, labor and rent. For those reasons, I think [restaurateurs are] looking towards food halls. Moreover, I think there is security in being a part of a community because it allows for built-in traffic. You’re part of a greater, larger brand. It also allows folks to not feel the burden of capitalizing their own projects and going through the lease negotiation and site selection processes themselves.

Steven Kamali

What are the key ingredients for a good location? This isn’t necessarily a destination business, so [a good location is] one that is in an incredibly dense neighborhood — often a business district. That holds true across the country. Our firm has identified 12 markets across the country we feel have the appropriate density of office space to do so. I think most food halls lend themselves to a five-day-a-week business, and if you’re fortunate, you get the weekend. I think there is a scale perspective that is important, and our sense is that no food hall should be less than 10,000 square feet.

If a client came to you and said they wanted to open a food hall at one of their properties, what’s the first thing you do? Often when landlords look to us, they’re looking to solve an amenity problem, not a retail problem. They either have an office building where they are trying to attract higher rents or better tenants, or a residential building where they are trying to provide a service for their tenants. So what they’re asking is if a food hall is actually viable. Then, what we typically do is start working on the layout to see if we can place enough kiosks and operators in the space. Then our analysts ensure it makes financial sense.

How do you see the model competing with traditional restaurants? I think full-service will always remain a big part of the restaurant business. I think if you find full-service restaurants are not opening, it will be because it’s not financially viable. It won’t be because too many food halls have opened.

How do you see the model changing over the next five or 10 years? I think we’re in the infancy. If we think 200 food halls are going to open in the next three to four years, my sense is that you could have several thousand before you reach a point of saturation. When you think about the fitness business, the market leaders in the industry who only had three locations in New York City and now have 30 locations still don’t feel as though the market is overserved. Food halls are incredibly similar and follow that parallel. And you know what? You work out maybe once a day. You eat three times a day.

Ross Kaplan
Executive Managing Director of Retail, Newmark Knight Frank

How much interest do landlords have in food halls? There is a lot of interest because food halls bring traffic and amenities to a building. They [can bring traffic to] other retail in a project. A food hall can also help a project with an office component because it’s an amenity that landlords can use to attract tenants — and they can maybe charge a higher rent on the office space if there are those types of amenities.

Are landlords filling what would have been restaurant or retail space with food halls? Most of these food hall operators are looking for 10,000 to 20,000 square feet and up, so most restaurant spaces are too small. These are either newly created or repurposed spaces. In the case of the Union Fare food hall at the Avalon West Chelsea, a 20,000 square-foot space was created not necessarily for a food hall, but for a gourmet market or something like that. The way the space was ultimately laid out, it was better for this type of operation and concept.

Ross Kaplan

What sort of alterations did the landlord need to make at the Avalon West Chelsea to prepare for a food hall? That’s happening now. [AvalonBay Communities] didn’t want to do any sort of predetermined work without knowing what a tenant may need. In this case, we provided a tenant improvement allowance because [a food hall has more infrastructure needs] than traditional retail. With a food hall, you need several areas for drainage — maybe more than a restaurant — so the cost is even higher. A lot of these food halls need assistance from their landlords.

Is the food hall tenant paying in the range of what you would see from a traditional grocery store? I would say it’s similar, but it’s important to know that in all cases where you see food halls, the owners see themselves making some, or all, of that money back because they attract tenants that they may not have gotten otherwise. They could get $2 to $5 more per square foot on office space and maybe attract another retail tenant they wouldn’t have without the traffic of a food hall.

Are there any risks that landlords should consider when creating a food hall? Yes. I think the deals do cost the landlord more money, so in that lies more of a risk. However, every food hall we’ve seen so far has been successful, and landlords are seeing the upside.

Where do you see the model going in the future? What I see happening is more combination [spaces] — so not just straight food stalls and a food hall, but combining food and dry goods in one space. How many times can you have 25 stalls of food? There’s only so many of those tenants out there.

Do you see the market becoming oversaturated at any point? Yes. I think you’re going to see spaces where landlords want a food hall and there won’t be enough operators for it.

Eric Demby
Co-founder, Brooklyn Flea and Smorgasburg

What are some of the challenges of starting up a food hall or a market like Smorgasburg? The hardest thing for us is real estate. You want to get a good location, and when we open a new market, we go into [emerging] neighborhoods. The other thing is developing a relationship with the partner, whether a real estate partner or city or state property.

Eric Demby

Do you think the model can only work in certain contexts? I feel that developers, big and small, think the food hall is what people want, so we’re going to see more of them. I think some will do well and some won’t. I don’t think having a food hall is going to guarantee success.

How do you pick tenants and what are the terms? There has to be a personal comfort level with the vendors. Most of the vendors at Berg’n [a beer hall that Demby and his Smorgasburg partner Jonathan Butler opened in Crown Heights in 2014] are from Smorgasburg, so there’s sort of a pipeline. We can see who’s doing well at Smorgasburg, but what’s more important to us is that the vendors have their act together so they can get an “A” from the Department of Health, they won’t make a mess and they’ll be able to operate in a venue with other operators. Some of the popular Smorgasburg vendors might not be brought into Berg’n — we can watch them in action at our other markets, so if see that they’re leaving buckets of oil behind, there’s no way they’re getting into Berg’n. We’re looking behind the scenes.

Do you have any major “do’s and don’t’s” for food hall operators and landlords? Generally, you’re going to do your own buildout, and you have to keep it cheap. It’s different if the vendor does their own buildout because you’ll be limited to vendors who have access to cash to take on that kind of risk themselves. A lot of vendors don’t have that money, so [if they still try to fund their own buildout, they’re put] on this path where they start off in a hole and it’s hard for them to make money. And in general, managing a food hall is like herding cats. Everybody has to pass health department inspections every year, everyone’s got to show up and open at the same time. There are things where you don’t have direct control — and ceding control over menus, personnel and branding is really hard, for any project.

Do you see the market becoming oversaturated at some point? I think there’s so many food halls in the pipeline right now that we’re probably going to get there in a couple years. Anyone in the food business will tell you that fast casual is the future. The big question is, is that true? Or are people going to go back to liking regular restaurants? It’s hard to know. I’m not young enough to know myself. I don’t love going to food halls that often. It feels overly casual to me.

Richard Coraine
Chief of Staff, Union Square Hospitality Group

What do you make of the food hall trend? Whoever is creating a food hall is trying to do something good for the neighborhood. Bringing people together in and of itself is a good thing. The other thing at play is variety. Vendors have smaller spaces, allowing there to be more variety in a destination.

Richard Coraine

Union Square Hospitality Group was close to opening a food hall at Hudson Yards, but the deal was called off. What happened? One of the big drivers of our decision to not do it was that we were just getting ready to open Union Square Cafe. We also wanted to open Daily Provisions next door to Union Square Cafe, and we just opened a pizza concept called Martina in August. We thought the magnitude of a food hall would be substantial for us, so we chose to allocate resources in another way.

There’s a lot of talk about new food halls. At what point do you see the market becoming oversaturated? It really depends on the consumer’s desire to go to a location and if there’s enough of a population there on a regular basis. Food halls are probably going to thrive, and I think businesses that are of their community and for their community will always do well. A good food hall will have sundries and food and a butcher or what have you — it has to have essentials.

Where do you see the model going in the future? It’s hard to say. I always look at what real estate trends are, and anything that will activate a community is going to be a business model that grows. All food and retail businesses thrive on repeat business, so whatever gets somebody to visit multiple times is a good idea. If a business constantly evolves, it’s a really good conceptual thing. But if it becomes stagnant and it’s the same vendors 10 years from now, then consumers will have been there and done that.

Nicholas Forelli
Director of Retail Leasing, Feil Organization

You just inked an 11,000-square-foot lease with Urbanspace at 570 Lexington Avenue. Were you seeking out a food hall for that space or did the company come to you with the idea? While marketing the space, we were focused on securing a food and beverage tenant, as we felt that was the best fit for the building and neighborhood. We had extensive interest from both traditional sit-down restaurants and food hall/market type of operators. With the proven track record and deep roots in New York City, Urbanspace was an excellent fit for the location and the area’s demographic.

Nicholas Forelli

Was there anything in particular that impressed you with Urbanspace’s plan? Urbanspace has a wide range of resources due to their existing operations throughout New York City. Broadway Bites, Mad. Sq. Eats, Holiday Shops at Bryant Park and Turnstyle provide a vast variety of new, unique and successful vendors that will keep them relevant in the future.

What kind of work went into making that space suitable for a food hall? We demolished the former tenant’s buildout, but that was the extent of our expense for the space to prepare for Urbanspace.

Are there any particular advantages to having a food hall space as opposed to a traditional eatery or retailer? There is an ample amount of office space in the area. We’re confident a sophisticated, fast-casual dining option would meet the demands of the dense worker-driven daytime population as well as the immense commuter and tourism-related foot traffic in the area. 

Do you think food halls are a sustainable retail model, or do you think interest will taper off? Urbanspace has been at the forefront of the food hall/market renaissance and created an experience unmatched by their competitors. The superior operators that have the ability to stay relevant by rotating creative and quality vendors will have a long life span.