Food Hall Fever: Business & Legal Considerations for Owners, Operators & Vendors
In the last decade, however, food halls have exploded in popularity and forecasts call for continued fast-paced growth. There are now well over 300 food halls across the country. As of early 2023, 145 food halls are in development across the US, with developers betting big that people are eager for places to gather and socialize post-pandemic. Below we explore this culinary trend in more detail, including a review of business and legal considerations for owners, operators and vendors.
Not to be confused with mall food courts, food halls usually substitute national chains with a collection of local food vendors in an appealing setting, inviting customers to gather and enjoy high quality food at a relatively reasonable price. Attractions such as a bar, live music, artisanal shops and other activities are often present but food is the main draw.
There is no set blueprint for what makes a successful food hall. However, there are several considerations that potential developers and operators should keep in mind. Sites should have the potential for foot traffic at all times of the day, and the space should be attractive and allow for the efficient replacement of vendors. These elements have led developers to tend to seek out “industrial-inspired, mixed-use developments in urban areas.” Old warehouses and other similar buildings are thus a common target for redevelopment, but new construction buildings are not unheard of either. The number of vendors will depend on the building size and layout, but the typical range is between 10–25 vendors.
Proponents argue that vendors, municipalities, and owners can all benefit from food halls. For vendors, initial startup costs can be lower than with a traditional restaurant because owners will often provide base FF&E (furniture, fixtures, and equipment), which vendors can then further customize. Vendors also typically experience better profit margins than standalone restaurants. Food hall vendors generally achieve between 15-20% profit, while most restaurants fail to reach 10%. Advocates further tout the increased exposure that vendors enjoy in these heavily trafficked environments. Additionally, owners and operators tend to care more about a vendor’s concept than its financial history, which can help open the door for new vendors (although having a proven track record is a plus).
Municipalities see the benefit in this food hall model as well. They recognize that food halls are important incubators for small businesses that do not have access to significant capital, as well as drivers of foot traffic and economic activity in growing districts within a city.
For developers and building owners, the resiliency of food halls is an important hallmark. Food halls were experiencing a surge in popularity when the COVID pandemic hit in 2020, and after weathering the pandemic better than traditional restaurants, industry specialists insist that food halls are becoming “the safest investment in restaurant real estate.” One reason, they claim, is the flexibility inherent in most food hall models. By using licenses, rather than leases (discussed in further detail below), food hall operators can quickly transition between vendors should one concept not succeed.
A key difference between food halls and stand-alone restaurants is that the former tend to operate on a license model, whereas in the latter restaurateurs typically enter into leases with landlords. Proponents argue that a license model gives both food hall owners and vendors flexibility in terms of cost, time, and management, and also reduces the risk of litigation.
Food hall advocates claim a license model is cost-saving for both owners and vendors. A restaurant that has around 50 seats usually requires about 1,500 square feet of space, with rent determined by square footage. Restaurant leases often have a term of 10 years, and landlords typically request one-to-three months of rent as a security deposit. Tenants are also responsible for most property repairs and maintenance during the lease term. Accordingly, starting a restaurant generally requires a substantial capital investment upfront from the restaurateur.
By contrast, food hall vendors usually enter into licenses for around 200 square feet of space and with a much shorter term, averaging 1 to 3 years. Vendors do not typically pay rent on a per-square-foot basis because the footprint is too small; instead, a food hall license often includes a base rent plus percentage rent, meaning the owner is also entitled to a percentage of sales. Owners and vendors negotiate this percentage rent, which typically falls between 10-30%, and in some instances replaces the base rent entirely. Further, some owners offer staggered rents that start off lower and increase in the following years, assuming the business will pick up. Other owners adopt an all-inclusive percentage rent, collecting and distributing the total revenue generated by the vendors to resolve operating expenses.
Owners also typically build the overall food hall space, pre-construct the individual stalls, and provide a point-of-sale system, as well as take care of items like certificates of occupancy and marketing for the food hall. Observers note the reduced upfront cost for vendors is attractive as it makes for a low barrier to entry.
The ability to efficiently install and remove concepts is another key attribute of the food hall license model cited by promoters. A restaurant lease is usually hard to break as it is a contract protected by more stringent landlord-tenant law. A license, on the other hand, is shorter in duration and often provides all parties the right to revoke it at will, giving both the vendor (licensee) and owner/operator (licensor) a way out before the term’s end. Thus, a license allows owners to rotate vendors quickly if one is struggling and thereby keep the vacancy rate low, while at the same time making it easier for the vendor to walk away. Owners can also set up a minimum sales threshold in the license as an additional basis to trigger termination.
Advocates also assert that a license gives owners flexibility in managing a food hall. Since a license does not give vendors a leasehold interest in the whole property, owners have the exclusive right to use the space not covered by the license, keeping the shared space flexible and transformable. This flexibility allows owners to use common food hall spaces in novel ways, such as for retail pop-ups, art shows and farmers markets.
Additionally, many food hall owners engage an experienced third-party operator to manage the food hall. In such cases, the operator would likely be the party to the license with the vendor. Food hall veterans believe a quality operator, such as a hospitality management company, can help curate a favorable tenant mix, quickly resolve issues onsite and best promote the food hall on social media.
A license has fewer legal formalities compared to a lease, and food hall supporters argue that this generates less litigation. Whereas a lease gives tenants exclusive possession and a vested interest in a property, which makes the eviction process more burdensome, a license merely provides the vendor with a temporary privilege to use the licensed space for a certain purpose. Therefore, some contend a license gives both owners and vendors less litigation risk.
Despite the perceived advantages of the license model for food halls, the business remains a complicated one. Food hall owners and operators need to ensure that the food hall complies with stringent government regulations and guidelines, including with respect to food safety. Owners and operators may be required to provide mandatory food safety training to the vendors to avoid liability for the vendors’ operations.
Alcohol is also a key consideration as a large, central bar is often at the heart of food halls. Some owners hold a single on-premises liquor license that covers all alcohol to be sold in the food hall. In that case, vendors cannot sell or serve alcohol at their stalls and rules must be clearly defined regarding where alcohol can be consumed. Where owners allow vendors to sell alcohol, they usually require vendors to acquire liquor liability insurance at a higher-than-normal limit and strictly comply with related governmental regulations.
Other common elements of food hall license agreements bear mentioning, namely permitted use and noncompete provisions. A well-implemented permitted use clause allows owners to approve or deny vendors’ proposed changes of use, ensuring the food hall offerings remain in the owner’s control. For vendors, noncompete provisions – which restrict the ability of owners to bring in another vendor with a similar concept – are a simple way to protect vendors’ businesses from direct competition with other vendors. Owners, however, are not always willing to grant this limitation on other vendors, although most agree it is in a food hall’s best interest to provide a variety of foods and price points.
Are food halls a retail model with staying power or merely a passing fad? As food halls have continued to expand rapidly in recent years, they have gained large numbers of supporters but also critics. Some admirers are bullish on the concept and see continued growth, in part because the traditional restaurant model (especially for independent restauranteurs) has been under threat for some time due to rising labor costs and low profit margins. These supporters contend that food halls, with their ability to quickly turn an unsuccessful or worn concept into a new idea, lower the risks for owners, operators and vendors alike. Moreover, they argue pent-up demand for social experiences coming out of the COVID pandemic and the rise of foodie culture and the farm-to-table movement dovetail with food halls’ communal, chef-driven approach.
Detractors insist the outlook for food halls is much cloudier. They point to, among other things, food offerings that can be lacking in quality; crowded spaces and long lines; noisiness and lack of ambience; and bombardment with too many options and overall sensory overload. Plus, in some cities – particularly along the coasts – food halls seem to have reached a saturation point where they are no longer an exciting concept. Others fundamentally question whether the new economic model of food halls actually works for restaurateurs.
What’s clear is that food halls are on a growth trajectory over the next few years, and it will be fascinating to see where this retail trend goes in the long term. We’ll continue to stay on top of developments in this space affecting municipalities, developers, operators and restaurateurs.