Butcher, baker, business maker: Why food halls are popping up all over Silicon Valley

More than a spot to find dining  options, food halls are hot. But are they a fad, a trend or an evolution of traditional retail? Experts say they’re a little of everything.

When it comes to traffic and revenue, many traditional retailers are limping along compared to online giants like Amazon, but there’s one sector of brick-and-mortar retail that real estate experts say has snuck ahead and isn’t slowing down: food halls.

“This is the hottest thing in retail – period,” said Garrick Brown, vice president of retail research at Cushman & Wakefield.

But that endorsement comes with a caveat: Despite the concept’s popularity, it’s not easy to make a successful food hall,  Brown said.

The trend, which shows no  signs of winding down in the coming years, comes with unique considerations for landlords looking to jump on  the bandwagon. Among them, short-term leases and subleases, added build-out costs, finding the magical tenant mix and courting investors for a new – and therefore potentially riskier – type of retail.

Even so, food halls, which have traditionally popped up in large, superdense metropolises such as New York, San Francisco and Los Angeles, are starting to expand to smaller cities across the country, including those in Silicon Valley.

Food halls are still evolving, but the ones emerging today lean hard on  chef-inspired concepts and fast- casual dining, as opposed to fast food, which had previously dominated retail centers. Landlords can opt to rent individual spaces on  a plug-and-play basis, or lease the whole space to an operator with their own themed food hall vision, like Eataly, an N.Y.C.-based, Italian-themed food hall and market.

San Jose alone has four standalone food hall concepts in various stages of development.

Two local malls — Eastridge Shopping Center and Westfield Valley Fair — have announced they will revamp their traditional food courts to attract more local and chef-inspired fare, a move many malls around the country are also making, according to Cushman & Wakefield data.

At Eastridge, the food court update comes with a multimillion-dollar effort to improve the entire shopping center. Later this year, property owner Pacific Retail Capital Partners will host a contest to choose a local food concept to fill a space in the mall  for free.

It’s the first step in a long-term vision for the mall,  said Najla Kayyem, vice president of marketing for Pacific Retail.

“I don’t think it is a trend — I think it is an evolution,” she said, referring to the food court upgrades. “Retail is constantly evolving itself.”

Other cities in the Valley are also starting to get attention from developers, including Santa Cruz, where a new food hall concept is set to open next month.

Food halls are evolving with traditional retail as brick-and-mortar stores try to find a foothold in an increasingly competitive marketplace. Concepts with diverse, fast-casual offerings aren’t just popping up in retail centers, but also office parks and as commercial anchors underneath apartment projects, Brown said.

Google’s planned 595,000-square-foot Mountain View campus will have a retail component with local chef-inspired restaurants on  the ground level, company representatives told the Mountain View City Council earlier this month. City leaders have told Google they’d like to see its on-site offerings also be open to the public.

The trend is moving so fast that it has become a disruptor in traditional retail. Last year, for the first time ever, the amount that Americans spent on  eating out surpassed what they spent at the grocery store, according to a recent Cushman & Wakefield report.

In the first two quarters of 2016, the real estate firm tallied more than $388 billion spent on  grocery store food expenses nationwide, but more than $393 billion spent on  food away from home in that timeframe.

Brown has tracked food hall expansion across the U.S. and in a report released in December, he estimated that by the end of 2019 the number of food-centric retail centers in America would double.

Only  a few months later, he’s rethinking his estimates.

“Already, all my projections are way  too conservative and way  too low.  … It’s probably more like 2018,” he said in a late-February interview. “Everyone is jumping on  it; they see the opportunity.”

That opportunity has been spurred by the rise of foodie culture and millennials who are ditching fast food in favor of chef-inspired concepts and farm-to-fork restaurants.

The right retail mix

As a group, those consumers are looking not just for good food, but a place that has a comfortable, hip

space and a diverse mix of food options. That is the biggest challenge to opening a new food hall,  Brown said.

“Now  that [food halls have] become hot, I’m seeing people rush to market with new plans and many of them are nailing it,” he said. “But some don’t get it; it’s not just about plugging in a bunch of people. You have to create real experience.”

That’s become an easier task as the food hall trend grows.

In 2010, San Pedro Square Market officially opened in San Jose. It was an early adopter of the trend in the city and John McEnery, the project’s developer and owner, said finding investors and tenants was a challenge.

“It was a foreign concept,” he said in an interview. “We lost a lot of great users because they just didn’t believe in what we were putting forth – in the concept.”

But the climate has changed. Today, McEnery and other food hall developers in the area can be choosy about their tenants.

McEnery is working on  opening a second food hall,  called Abbott Square Market, in Santa Cruz. That

8,500-square-foot shop with a 10,000-square-foot patio will open sometime in May and has nine vendors locked in, making it one concept short of being completely leased, he said.

The SoFA Market at 387  S. First St. in San Jose has been open for more than a year, but recently filled its last two leases, said David Ma, who manages the hall.

In the meantime, the two newest tenants are Toasted, Craft Sandwiches, and Pizzetta 408, which just opened. The group has been particular about its vendors, Ma said.

“You want a mix,  so a pizza place and a sandwich place,” he said. “But certainly not just any  pizza or sandwich place.”

The SoFA Market is creating a space and looking for tenants that will mesh well with its arts-district appeal and embrace events with artists, performers and writers.

That choosiness has paid off, because with each new restaurant opening, foot traffic has grown by around 20 percent, Ma said.

San Jose’s newest food hall concept, called The Forager at 420 S. First St., opened in early March with just a coffee shop, bar area and one kitchen.

The Forager aims to be an incubator for restaurants and is currently curating its tenant mix,  which the group hopes will complement the early 1900s building’s exposed brick, lofted ceilings and skylights.

Creating a successful food hall “does have to do with what chefs we are bringing in, but more importantly I think it is creating an ambiance,” Jones said. “Honestly, 90 percent of what makes that place cool right now is the bones of the building.”

The ‘wild west’ of leasing

Finding tenants has gotten easier, but investors can still be standoffish, said Cushman & Wakefield’s Brown, though he expects that to change as more food halls open.

“If there is anything that will slow development, it is that private investors … aren’t sure what to make of it yet,” he said.” It’s just coming on  their radar.”

For McEnery’s part, having a successful food hall has helped with his newest effort at 725 Front St. in Santa Cruz.

“Once you  have proof of concept … they can go down there and see how its running, they can talk to the vendors,” he said. “That helps tremendously.”

But on  paper, he admits that food halls don’t pencil out. At San Pedro Square Market, less than half  of the building space is leaseable and the rest is common area, making the lease rate per square foot seem low.

So how do food halls make a profit?

SoFA Market combats that issue in part by charging tenants for some of the space directly outside of their nook – the space the shops’ customers will use while waiting in line to order, for instance.

But that’s just one option for making the per-square-foot lease rate work  out. All four food halls in San Jose handle leasing slightly differently, which seems par for the course, according to Brown.

“It’s the wild, wild west,” he said.

Most food halls work  in short-term leases and tend to take a percentage of the profits from the restaurants, which is common in retail.

Essentially, if the food hall attracts visitors and the restaurants do well, so does the property owner. But the model relies heavily on  attracting a lot of foot traffic to keep the whole thing running.

The Forager is a unique example because of its goal as an incubator. Instead of charging per square foot, like many food halls, Jones said the group plans to only  take a percentage of each company’s revenue.

But most food halls can charge more than the average rent for the area because it offers a smaller space and a built-in kitchen compared to if a restaurateur struck out on  their own, Brown said. That means restaurateurs may pay more per square foot, but less overall than if they rented and outfitted their own brick-and-mortar site, Cushman & Wakefield’s report shows.

McEnery said he’s been able to charge a little more per square foot than traditional retail space, in addition to the profits-sharing.

In return, the restaurants get close to a million people passing by their counters during a good year, he said.

At the SoFA Market, where tenants are also charged for the space directly outside their counter, rents are roughly in line with other retail options, Ma said. The food hall also takes a portion of the revenue each concept brings in.

The perks

Despite the many unknowns, challenges and risks around food halls, it can still be a fruitful business model.

Though managing a larger number of tenants can take up more resources and time, it also means that if one concept fails or moves away, landlords aren’t stuck with an empty building to fill, McEnery said. “I don’t think you  feel the impact [as much] when one business doesn’t make it,” he said.

Plus, if Silicon Valley food halls – each fully leased or with a list of interested restaurateurs – are any indication, there’s no  shortage of restaurant concepts looking for a way  to strike out in small, visible spaces when an opening does come up.

San Jose in particular has plenty of room for growth, but not enough space, said The Forager’s Jones. Finally,  and perhaps most importantly, the food hall trend is still going strong, Brown said.

“Will we eventually get to a point where we’ve done this to death? Yes, we will,” he said. “But we aren’t even close right now.”