Nordstrom. Old Navy. Anthropologie. H
Downtown San Francisco has seen an exodus of retailers in recent months, and this week a mall owner decided to part ways with a prominent building. More worryingly, market analysts believe the city still has a long way to go before the bleeding stops.
The office vacancy rate is the highest of any major US city. Asking rents for commercial space have fallen 21% since before the pandemic. And even though tourists are visiting San Francisco again, the amount they spend in the city is 23% lower than it was in 2019.
“I don’t think we’re on the upswing yet for San Francisco,” said Vince Tibone, chief executive of real estate firm Green Street. “I would even say that we probably haven’t hit rock bottom yet. »
On Monday, Westfield, owner of the Westfield San Francisco Center, announced it was handing the mall over to its lender, who will decide who will operate the property going forward.
Westfield’s decision to exit the site it has owned since 2002 has raised a new set of questions about how long it will take for downtowns across the United States to recover and the ability of retailers and center owners traders to continue their activities in the meantime.
Downtown shopping centers have always been rare, given the limited space available in city centers for large shopping areas. But those that have been built have long relied on a steady stream of foot traffic from residents, office workers, conventioneers and tourists. This calculation has been upset by the pandemic.
San Francisco’s office market has been the hardest hit of any major city in the United States, with vacancy rates rising from 4% before the pandemic to around 30%. This situation has had a serious impact on sandwich shops, clothing stores and many other merchants.
Colin Yasukochi, an analyst at CBRE, the real estate services firm, predicted the market won’t bottom out until next year. In an interview, he said that the vacancy rate could reach 35%.
In San Francisco, the downtown situation is radically different from the previous situations. During the financial crisis, about 15 years ago, rents fell by 30%. At the turn of the century, when the dot-com market collapsed, commercial rents dropped by 70%. This time, the fall in rents was much more modest, around 15%.
Part of the reason, Yasukochi says, is what is sometimes referred to in the industry as “extend and pretend.” Banks are reluctant to foreclose on non-performing properties because of the commitment required to find tenants and because they would often repossess the property at a loss. Instead, they make deals with their borrowers and try to wait out the crisis in the hope that the market will recover.
Will these stalling tactics work? “It depends on how long you can fake it,” Yasukochi pointed out.
In many cases, retailers in urban centers are voluntarily choosing to leave. In San Francisco, Nordstrom announced that it will close its long-running store in the San Francisco Center in August, leaving the mall 45% empty. Anthropologie closed the downtown store it had run for two decades in May.
Indeed, Westfield’s move to San Francisco is part of a broader strategy by its parent company, Unibail-Rodamco-Westfield, to drastically reduce the number of malls it operates in the country.
But analysts say the retail situation in San Francisco is exacerbated by other factors such as shoplifting, slowing back-to-office plans and the heavy conference economy that hasn’t not yet recovered to pre-pandemic levels.
Crime has also become a growing concern for retailers operating in the mall, according to a report released Thursday by the San Francisco Chronicle. In emails obtained by the newspaper, Westfield executives received updates from retailers alleging violent events against workers at the mall and that tenant retailers had requested remedial action. additional security.
In its statement regarding its decision to relinquish its property, Westfield argued that San Francisco Center was an exception to its other malls. In San Francisco Center, sales fell 35% between 2019 and December 2022. At one of the group’s malls in nearby San Jose, sales increased 66% over the same period. Revenue at its 18 U.S. malls increased 23%.
When Westfield took over the mall in 2002, San Francisco was emerging from the dotcom bust. The urban mall was 1.5 million square feet, and Westfield invested $460 million in its expansion.
At the time, residential housing was being built in the city center and online shopping was still a new concept. The center’s food court has become an attraction for office workers on their lunch break and a novelty for tourists who used to shop at street-facing stores along Market Street. Inside, they discovered an establishment with large spiraling escalators that led them to several floors filled with shops.
“It was like a new attraction, because there weren’t really any malls in the city center,” recalls Gabriella Santaniello, founder of retail consultancy A Line Partners, who lived in San Francisco from 2001 to 2007. “The retail business was much more dynamic. »
It has become an integral part of the urban fabric. The town’s mayor, London Breed, could be seen shopping for clothes there. Willie Brown, the former mayor, is a regular at movie theaters. (This week, Cinemark announced the closure of its theaters in the mall.)
Many Franciscans fondly remember their purchases at the Nordstrom store, located on the top floors. Dianne Boate, a San Francisco resident who ran an underground cake business for decades, recalls shopping for household items — “anything that looked a little French.” A wealthy friend who flew in from Florida on a private jet stopped by Nordstrom to buy presents.
Ms. Boate hasn’t been to the mall in years, not because of neighborhood issues, homelessness and destitution, which she calls a “sad commentary on the times”. But at 87, she’s less interested in accumulating things.
“Maybe the disappearance of some stores is related to people realizing that they don’t need so many things,” she says of the store closings in San Francisco. “People’s interests have changed – the way they want to spend their money has changed. »