Landlords are betting on food halls to lure shoppers and tenants

GGP Inc.’s first food hall, Flagship Commons, at the Westroads Mall in Omaha, Neb.

Late last month, GGP Inc. (GGP) opened St. Roch Market, a food hall in the Miami design district. Among the vendors in the New Orleans-themed hall is one by Chef Chloe Coscarelli, a vegan chef and winner of Food Network’s “Cupcake Wars.” The 13,000-square-foot food hall is the giant mall real estate investment trust’s third to open in the past three years.

“Food dominates our culture,” said Adam Schwegman, vice president of leasing of eat and drink for GGP. “You can’t replicate a dining, food hall experience online so if they are successful, it’s a win for operator and developer.”

The food hall, far from new, originated in Britain centuries ago and is defined as “a large section of a department store where food is sold.” It first took off in Europe and then Asia. In the U.S., Philadelphia’s Reading Terminal Market, San Francisco’s Ferry Building Marketplace, Boston’s Faneuil Hall and Los Angeles’s Grand Central Market have been around for decades.

But in recent years, the latest iteration of the food hall is all about artisanal, locally-curated food and, in some cases, celebrity chefs — take Todd English Food Hall at The Plaza Hotel in New York City. Aesthetically, they’re also hip, Edison-light-bulb illuminated spaces, featuring exposed brick, high beams and communal tables. And they’ve been popping up at traditional mall spaces and the bases of newly-constructed residential and commercial buildings across the nation.

“It’s popular with landlords because it’s popular with tenants,” said Garrick Brown, vice president of retail experiences for Cushman & Wakefield, a commercial real estate services firm. “Suddenly leasing space upstairs becomes easier because of a building amenity.”

Food makes rental tenants happy

Gotham Organization’s Gotham Market food hall at The Ashland in downtown Brooklyn. (photo credit: Eric Laignel)

Developer Gotham Organization, seen as a pioneer in the new wave of food halls, opened Gotham West Market at the base of its 53-story rental tower Ashland in downtown Brooklyn early last year, four years after debuting its first curated food hall at its 32-story luxury rental development Gotham West in the Hell’s Kitchen neighborhood of New York City.

“Gotham was ahead of the curve and brought the food hall to the next level,” Julian Hitchcock, a broker at The F+B Group, which helped Gotham execute its food halls in Manhattan and Brooklyn, told Yahoo Finance in an email.

So far, food halls have paid off for Gotham, but not in the traditional sense. Chris Jaskiewicz, COO of Gotham Organization, said its tenant retention rates are higher than the average rental building partly because of its food halls. At the end of 2017, Gotham West and the Ashland had retention rates of 65% and 81%, respectively, well above the average of about 60%. Food halls engage tenants and keep residents happy so they don’t want to leave the building, a challenge especially in a competitive rental market like New York City.

The good and bad

But setting up a food hall isn’t for every developer. It’s a huge investment that involves hands-on management and basically means developers becoming restaurateurs. Most developers partner with top chefs or hospitality groups to launch a food hall.

“It’s a tough decision to make,” said Jaskiewicz, adding that he got calls from 50 developers in the past seven years, all inquiring about the set up, of which 20% went ahead with opening a food hall. “We‘re not looking to maximize the rental rate of the retail space; if we were we would have put a bank or pharmacy in.”

From an upstart chef’s perspective, a food hall is an affordable way to test a concept. One restaurateur in San Francisco told Cushman & Wakefield that it cost $36,000 a year for a 300-foot space, compared with $120,000 a year for a 2,000-square-foot standalone space that wouldn’t have generated as much foot traffic. And entrepreneurs aren’t locked into lengthy leases—some can be as short as one or six months long, according to Hitchcock.

“Food halls are the sharing economy for restaurants,” said Brown. But like the ride sharing business, there appears to be some flaws to the system. The New Yorker magazine recently highlighted the frustrations some vendors experienced at Gotham West with lease terms and prospects to turn a profit.

Despite their drawbacks, food halls have a less than 2% failure rate, according to Brown, adding that landlords can command higher rent from their tenants upstairs.

Food attracts and retains shoppers

Shortly after Gotham opened its first food hall, GGP CEO decided to study the REITs portfolio in 2014 and determined that half of its properties could support food, according to Schwegman, who was tapped to lead GGP’s efforts in the food hall space. So, a year later GGP opened its first food hall — Flagship Commons in Omaha, Neb., in partnership with Flagship Restaurant Group, at Westroads Mall, a Class A mall. Three months ago, GGP opened a 40,000-square-foot food hall, in partnership with local chef Mike Isabella, at its luxury regional mall Tysons Galleria in Washington, D.C.

“In Omaha, we were seeing a lot of people who didn’t frequent the mall just coming for the food hall, and they’re reintroduced to their local mall,” said Schwegman, who sees GGP opening one to two food halls a year.

St. Roch Market in Miami opened at the end of February. [Photo credit: GGP]

GGP is not alone. Shopping mall owner the Westfield Group invested $1 billion over the past two years to set up a plaza at its Class A Century City mall in Los Angeles that included a Mario Batali’s Eataly.

As apparel and department stores struggle to maintain their retail presence, dining options have become a viable alternative for landlords to backfill space. It helps that Americans are reportedly dining out more. From a leasing perspective, 10 years ago mall owners leased about 10% of a space’s total square footage to food and beverage, today it’s doubled to 20%, and in the next two years it is expected to reach 30%, according to Brown.

By 2020, Brown estimates that there will be 300 food halls in the U.S. This tally is more than double the number of existing food halls in 2017 when there were 140. In 2010, there were a mere 28. Cushman & Wakefield includes all types of food halls, ranging in size from 4,000 square feet to 155,000 square feet, and include Reading Terminal to San Francisco’s Market on Market at the base of the commercial building that houses Twitter.

Next up, mall owners will likely convert traditional mall food courts, which tout national fast food chains and cookie cutter appearances, into a food halls. Currently, 80% of GGP’s portfolio includes traditional food courts, and so far Schwegman said there aren’t any immediate plans to convert them but it’s something GGP is exploring and ready to do so if it makes sense.

“It has to be a sophisticated market as far as food culture,” he said. “We have to make sure there is a food scene — gourmet grocers, enough of a food truck scene and local restaurants — to make sure customers appreciate those types of things.”

Amanda Fung is an editor at Yahoo Finance.

This story is a part of Yahoo Finance Presents: The Retail Revolution, March 5-9, 2018.

Retail Revolution (Illustration by Thomas Porostocky)