Food Halls Could Serve as Urban Opportunity
Market rents are high everywhere, but in trophy markets such as New York or San Francisco, it's almost impossible to find a lease that makes sense.
Instead of fighting over the same box everyone else wants, many brands are looking seriously at shared spaces such as food halls. While the line between a food hall and the typical food court is certainly blurred as they both keep consumers in the trade area or close to home, food halls are increasingly being positioned as higher-end establishments, said Andrew Moger, founder of BCD, an outsourced real estate and construction management firm.
"It is essentially a marketing effort to build a better mousetrap," said Moger during the 2016 Restaurant Finance & Development Conference in Las Vegas.
Landlords see food halls as a unique amenity, allowing them to charge higher rents to neighboring retail and in residential developments. They also give restaurants a captive audience, much like a food court but with more regular traffic. They're especially well suited for food-sparse areas where that traffic is amplified, even if the restaurant is two feet from the next counter.
"Even if you don't get that guest four or five days a week, if you get them once a week, that's a great customer," said Moger.
As far as ownership, unlike food courts, which generally have an experienced multi-unit operator in the mall hierarchy running the restaurants, a third party such as Urban Spaces, which operates food halls across New York, generally handles operations instead of the landlord. Also unlike a typical food court, given the amenity bargaining chip of such spaces, landlords are happy to contribute more in buildout and development for smaller fees than a typical construction firm.
There are some considerations for brands looking to get into a food hall. Given the positioning as "boutique" or "curated," the McDonald's or Taco Bells of the world are generally not going to grab a lot of the traffic coming through. Smaller, on-trend brands fare much better. Franchised frozen yogurt and smoothie brand Red Mango, for instance, has a location inside Food Gallery 32 in New York's Koreatown and draws market share from surrounding national yogurt or smoothie players—pays just a fraction of the rent of an inline location.
Apart from being on trend, there are some business risks with food halls. Brands are generally licensed, not franchised, in food halls. That means it's easier to get a deal done, but it's also easier for the operating party to get rid of a brand. It's also best to be well differentiated from the other concepts in the hall to guard against a race to the bottom in price to capture value conscious consumers. Another risk is the inevitability of a recession that will bring rents down, opening nearby spaces that can operate fully on-brand without other direct competition for food dollars.
Still, food halls are a lower-risk option for growing franchise brands. And as developers pour more capital into developments, food halls could be long-lasting destinations in their own right as malls continue to struggle in the era of Amazon.
"If you can make a dining destination an evening destination by way of entertainment or music, there's a much better chance they'll succeed," said Moger.