Estimating Build-Out Costs and Rental Rates for Commercial Kitchens

Food and beverage preparation is part art and part science, with nutrition and taste vying for consideration alongside the showmanship of prepping food and plating dishes. While not all cooks aspire to "performance cuisine," most do have one thing in common: they need specialized tools and workspaces so their food concepts can be prepared efficiently and to their specifications.

To understand how much it costs to build commercial kitchens, an important factor for those considering CRE investments in the food industry but also for parties exploring CRE loans to finance such projects – LoopNet spoke with Ryan Williamson. Ryan is the director of operations in Houston at Texas Metal Equipment, a firm that specializes in food service design-build, fabrication, and equipment.

No Cookie Cutter Designs

Williamson indicated that commercial kitchens are highly specialized, noting, "we work with the chef and the restaurant menu and place the correct equipment that's needed to make their concept successful." Kitchen designs for chain brands may be similar across markets, but in either case, making sure the kitchen staff has the space, flow and tools necessary to produce high-quality meals under pressure is the goal when designing and building a commercial kitchen.

He noted that costs vary based largely on the quality of the materials used, the level of customization and the number of specialized pieces of equipment in the kitchen. One of the most expensive pieces of equipment is the chef's counter, which firms like his fabricate to meet the specifications of the cooking line. In some cases, these counters are behind-the-scenes, visible only to employees. But in other cases, the counter is visible or even accessible to the public so customers can enjoy the showmanship of the food prep or even sit at the counter and dine.

"There's a whole lot going on at the chef's counter," said Williamson, explaining that there are dedicated locations for managing raw and cooked proteins, applying sauces, warming side dishes, refrigerating select items and keeping plates hot before meals are served to customers. Many chef's counters are also digitally automated so cooks along the line can take orders and time their prepping and cooking, enabling multiple orders for a single table to be completed in sync.

Paradoxically, kitchens today are both more and less complex than they were in the past, Williamson noted. "The equipment is easy to use, however, it's extremely complex in its engineering," he noted. He gave the example of a "combi" or combinaiton oven that enables three methods of cooking on one appliance: cooking with heat, steam or a combination of heat and steam. Programming these ovens is as easy as using an iPad but the engineering behind the equipment is complex, which makes them expensive. They can cost upwards of $20,000 for a "double stack," or two ovens with six shelves each.

Williamson mentioned that there are also important base building considerations and costs involving exhaust and fresh air intake that, depending on the location of the kitchen inside the building, can be very expensive to construct. The water, sewer, electricity and gas capacity required for kitchens is often higher than those required for typical retail tenants. This makes it crucial to set aside funds to expand capacity and ensure these utilities reach the building.

For landlords and investors, including those considering a 1031 exchange, understanding the capitalization rate is vital when considering these highly customized build-outs that can be costly in terms of tenant improvement dollars and concessions. The depth of kitchen customization contributes significantly to the landlord's risk. If the food concept or restaurant doesn't succeed, repurposing the kitchen for a different user could involve substantial demolition and new construction to create a space that suits a completely different food concept.

Additionally, kitchens can be tricky when it comes to CRE appraisals. If real equipment that is affixed to the property, like an aging walk-in refrigerator, is deemed obsolete, it could reduce the asset's overall value.

Baking in Costs, Timelines and Rents

Because kitchens are so highly customized and vary significantly in size and quality, generating broad cost estimates is very difficult. Williamson, however, provided a range of costs for a typical 3,000-square-foot kitchen, ranging in quality from good to better to best. His estimates exclude base building modifications to systems such as HVAC or construction to accommodate plumbing, gas and electric.

The figures he provided are for a build-out that includes equipment, fabrication and installation in the Houston and Dallas markets. Based on these parameters, a kitchen with basic appliances and materials will cost about $350,000. Standard elements include storage shelves and equipment, freezers and refrigerators, ovens, ranges, deep fryers, warming cabinets, heat lights and worktables.

A high-quality kitchen will cost upwards of $650,000 and some of the additional items that will contribute to that higher cost include the addition and installation of more specialized equipment such as a smoker or pizza oven. More specialized freezers and refrigerators and highly customized chef's tables, as mentioned above, will also add to expenditures.

In terms of timing, "we've designed kitchens that have taken as long as four to six months to finally get past the [design stage] so we can start building," Williamson said. "For other clients, we simply make tweaks here and there, and we can get a drawing done and approved in less than a month." Next, they prepare submittals that show the sides, dimensions and overall look of a piece of equipment. Once those specifications are finalized, it takes four to six weeks to build equipment. Then, "when the general contractor is ready for us, we need two weeks to install."

According to CoStar, the publisher of LoopNet, current median asking rents for restaurants and food vendors in retail buildings can range from $20.70 per square foot in a Class A retail building to $14.50 per square foot in a Class C property. Median asking rents in light industrial or flex buildings that house catering businesses are currently $10.79 per square foot. These figures are for the U.S. and quoted on an annual basis. These rents are typically paid on a triple net basis, meaning all or most utilities, as well as a share of real estate taxes and insurance, are paid for by the tenant.

This article was updated on 12/12/2024