REAL ESTATE NEWS

THE FUTURE OF GHOST KITCHENS

Published on Tuesday, May 4, 2021

Ghost kitchens can help activate restaurant space, but there are questions about what situations are best.

 

Before the pandemic, Washington, DC-based real estate company Calvin Cafritz Enterprises had two culinary spaces totaling 8,500 square feet open at its mixed-use The Station at Riverdale Park property.

The property, which sits in the Washington, DC suburb of Prince George’s County, MD, is home to a Whole Foods, apartments, townhomes and a slew of retailers, including a local brewery. It is near The University of Maryland, the four-mile hiking and biking trail and the Rhode Island Avenue Trolley Trail, which begins north of College Park and runs parallel alongside Rhode Island Avenue to The District.

Calvin Cafritz Enterprises was exploring a number of different options for its culinary spaces at the project. Then the COVID lockdowns started. With people unable or unwilling to eat in restaurants and delivery services taking off, the calculus changed.

“When the pandemic hit, it quickly became clear that delivery and variety was a priority for consumers, at least in terms of the dining space,” says Katie Gantt, marketing director at Calvin Cafritz Enterprises.

So, the company decided to partner with Hospitality HQ, which operates five food halls around the country, to serve as the operator of a new food hall and ghost kitchen concept that will open in late summer 2021. The culinary spaces will house nine independent culinary vendors between the food hall and ghost kitchen spaces. It will also include a wrap-around bar and indoor and outdoor seating for more than 175 guests.

“It should be able to provide, in a post-pandemic world, a great space for people to relax and enjoy that sense of space and community,” she says.

While the new space features an in-person dining experience, it also highlights the importance delivery has assumed in this emerging post-pandemic life. Ghost kitchens were a niche strategy for certain eateries before the pandemic, but when in-door dining became limited during the health crisis, they became the backbone for many restaurants.

Restaurant digital orders, which were growing before COVID, skyrocketed during the pandemic, going from 19% year-over-year in January 2019 to 145% YOY in December, according to NPD’s daily tracking of consumers’ use of restaurants and other foodservice outlets.

Once the world opens back up, ghost kitchens will remain a growing part of the food service mix. But there are questions about the durability of the strategy, where they’ll work best and what they need to be successful.

Food Halls Make Sense



Traditionally, ghost kitchens made more sense in industrial areas, according to Jonathan Needell, president and chief investment officer of KIMC. In Southern California, where Needell is located, he mentions a family-owned Mexican restaurant chain with multiple locations. An industrial kitchen provides some food to supplement the locations with in-store dining.

But as industrial rents creep up and retail rents creep down. Needell thinks we’ll see more hybrid ghost kitchen-food hall situations. “The food hall and ghost kitchen concept may start to merge a little bit in some locations,” he says.

Food halls and ghost kitchens can offer the best of both worlds. If people are still shy about dining, delivery services can provide revenue. When people want to come back out, there will be plenty of outdoor spaces for eating.

“While the experience of dining in a restaurant can’t ever really be replaced, the ability to have great food from the comfort of their home is absolutely a necessity,” Gantt says.

There are other reasons that food halls make a lot of sense for ghost kitchens. Namely, they have parking for the squads of delivery drivers that need to stop in and pick-up food.

“Usually, the zoning for industrial parking is about one per 1,000 square feet,” Needell says. “Then retail is more like four or five parking spots per 1,000 square feet. So retail, by definition, has much greater parking for the traffic coming in and picking up and driving away.”

While food halls seem like a good home for ghost kitchens, Matt Vannini, a fourth-generation restaurateur and president of Restaurant Solutions Inc., warns that there is a disparity in performance in food halls. Some perform exceptionally well, while others struggle.

“The ones that are doing really well have a central bar,” Vannini says. “That is the one commonality.”

A Way to Revitalize Existing Restaurant Space



It’s no secret that restaurants have struggled throughout the pandemic. NPD reports that 110,000 eating and drinking places closing long term or for good. The majority of those permanently closed restaurants had been in operation for 16 years, while 16% had been open for at least 30 years.

But Andrea Grigg, managing director, strategic advisory and asset management at JLL, says restaurants were an issue in hotels long before the pandemic. Traditionally, Grigg says hotels have taken a financial hit from their restaurant and room service operations. “They were losing money before the pandemic,” she says.

But recently, outside operators have begun to come in and lease kitchen space in hotels. In some cases, they may just run the kitchens. In others, they may staff both the kitchens. In the process, they can also run ghost kitchens that service other hotels.

“The model is here to stay,” Grigg says.

From the restaurateur’s perspective, hotels also make a lot of sense. “Hotels have space,” Vannini says. “They have separate storage, which creates separate inventory. They have fully serviced areas that they can allow somebody to utilize.”

Peter Klamka, CEO of Cordia, thinks ghost kitchens can also be an option for landlords or restaurateurs with standalone restaurants. Last year, Klamka, who owns a restaurant and is involved in the nightclub industry in Las Vegas and Los Angeles, launched a division called Virtual Dining Brands to activate vacant restaurant space around the country with ghost kitchens. Cordia will generate revenue through the sale of ingredients to its licensees in addition to potential royalties.

“There’s more vacant restaurant space than can be absorbed in a couple of lifetimes,” Klamka says.

Ideally, Klamka thinks a 2,000-square-foot commercial kitchen with a converted dining area for prep and pickup is ideal. His company is looking at former restaurant spaces—whether they’re old Subways, strip center Chinese restaurants or spaces inside office buildings, which can be catering hubs.

“We can steal some of the dining area for prep and pickup,” Klamka says. “Parking is also an issue. Drivers need space. If there’s no parking, even if you have a great kitchen, it doesn’t work.”

Where Klamka differs from others is that he doesn’t think that in-person dining is necessary for success. He argues that there are enough consumers who don’t want to leave their home to eat. “Our focus is younger, and I don’t think the kids are going to go to a food hall,” he says. “Our customer sits on the couch, smokes legal weed and plays video games. I don’t think that they’re getting off the couch to go to a food hall.”

The Dangers in Delivery Only



While Klamka is bullish on delivery-only ghost kitchens, others doubt the durability of the model. Once the world gets back to some semblance of normalcy, Needell for instance, expects food delivery volume to shrink as people go out to eat or get takeout.

“There is definitely a portion of the population that is getting food delivery but would otherwise save that money and drive and pick it up if we weren’t in COVID,” he says. “They just don’t feel safe right now. So there will be a lower volume of food delivery after this.”

When that happens, Needell expects delivery-only models to lose some business potentially. “I think some bloom will come off of the rose,” he says. “It will dip a little.”

Restaurants that rely on delivery apps can also face challenges. “We have to be cautious about the third-party apps and how we use them because it cuts into the revenue for the vendors in the food hall a little bit aggressively,” says Akhtar Nawab, co-chief executive officer and founding partner of Hospitality HQ. “So we just need to be kind of mindful on how we approach that. The third-party platforms are not incentivized to give you a break because they’re doing so well right now.”

The Challenges Ahead



Despite questions about food delivery volume falling off and the fees that delivery services charge, Needell doesn’t see delivery going away. “More people are comfortable with delivery that weren’t ,” Needell says. “There are some people that have never used DoorDash or GrubHub.”

Still, he doesn’t know how durable some of the businesses that started during the pandemic will be. “I’d rather start that concept after COVID to make sure that I’m not depending on double volume ,” he says.

Needell thinks lenders will also be wary of ghost kitchen projects. “The lenders don’t want to fund over improvement of space and have it go away if the concept doesn’t work,” he says. “I’m not saying that people don’t take the risk. It’s just going to be the equity holders and not the lender.”

Klamka agrees that many ghost kitchen concepts are challenged. Once improvements to the space, employees, marketing and equipment are figured in, things can get pricey. “There’s a lot of money required to open up these kitchens,” Klamka says.

But if you add you add some dining, things may just work out.

While the food hall at The Station at Riverdale Park is Calvin Cafritz’s first venture into the space, the company is keeping an open mind about others down the road. Gantt says the pandemic allowed restaurants to develop effective processes that will continue to be implemented after the health crisis.

“We really believe that they will continue to be popular,” Gantt says. “Even before the pandemic, the trend toward flexible dining was well underway, and the pandemic just quickened it.”