A resurgence in retail is leading a turnaround in San Francisco's previously blah economy. While it may be years before a full recovery, according to economists, it appears the Golden Gate city has turned the corner: Tourism rose 25 percent as unemployment fell to 6.3 percent from 7.4 percent. Retail, meanwhile, is going gangbusters, after a stretch of rising vacancy rates and flat rents.
Rents are expected to grow 2 percent in 2004, according to a Marcus & Millichap report, with the average rent rising to $30.45 a square foot. Rents in the central business district are commanding a premium, says Erika Elliott, a retail broker in CBRE's San Francisco office. “The tourists are back, people are spending and the market is much better than a year ago,” she says. “Rents are vigorous, at $45 to $48 [per square foot] triple-net in downtown. Retail space goes for as much as $80 on Market Street and $170 to $180 in Union Square.”
More European and East Coast retailers are renting space, and big boxes are looking for space as well, she says. While tourism is a major economic driver, population growth and new residential development is also pushing San Francisco's retail market.
Big Splash on the Waterfront
Perhaps the most exciting developments are on the waterfront.
The Ferry Building Marketplace, on the Embarcadero at the edge of the financial district on Market Street, celebrates the city's love affair with the culinary arts. “It has been a big home run,” says Kazuko Morgan, a retail broker in Cushman-Wakefield's San Francisco office.
The 240,000-square-foot project, anchored by law firm Coblentz Patch Duffy & Bass, includes 65,000 square feet of retail that is occupied by nearly 50 tenants. “They all have something to do with what goes on the table,” says Chris Meany, a partner in Wilson, Meany, Sullivan, the local firm that renovated this turn-of-the-century building in partnership with Chicago-based Equity Office Properties Trust. Equity Office funded the project and is providing management services for The Ferry Building Marketplace.
“This is a city where chefs are more celebrated than politicians. What we've done is create a home for that culture,” Meany says, noting that a farmer's market held there every Saturday attracts 15,000 people by appealing to the locals' desire to get back to basics. “After the dot-com crash, people began focusing on comfort stuff, and places that capture that are doing very well,” says Meany.
Pivotal to the city's waterfront redevelopment initiative is The Bryant Street project, a few piers south on the Embarcadero at Piers 30-32. Located at the foot of Bryant and Spear streets, this $360-million, 26.5-acre project by San Francisco Cruise Terminal LLC is a joint venture of Australia-based Lend Lease Capital and Real Estate Services, Taiwan-based Chinese Maritime Transport Ltd. HF (USA), Inc. and Whitney Cressman LLC, a local real estate advisory and brokerage firm.
The Bryant Street project is expected to revitalize the city's underused waterfront in the South Beach neighborhood. It will replace the aging cruise ship terminal at Pier 35 with a new 100,000-square-foot cruise ship facility that includes an adjoining mixed-use project. The development will include 180,000 square feet of retail space, 360,000 square feet of office space, a 22-story condominium tower with 135 to 145 units, a 425-space parking facility and 215,000 square feet of open space. The residential component broke ground in late 2003, with completion scheduled for 2005. Most of the development will open by 2008.
Another project on the Embarcadero, Piers 27-31, would revitalize the deteriorating waterfront area between Fisherman's Wharf and The Ferry Building Marketplace. It has been slowed, however, by opposition from retail owners on Fisherman's Wharf, who are challenging the developer's agreement with the city.
Proposed by The Mills Corp., the $180-million project, which includes a new $30-million YMCA and a variety of outdoor sports facilities and open space, is aimed at providing affordable recreational opportunities for local residents. “This is an old, dilapidated pier that needs to be renovated, and what's planned would be so incredibly great,” says Morgan, noting that a stringent permitting process and very vocal groups, who “don't take well to outsiders,” make San Francisco one of the toughest places in the country to get a project built.
While this venture hit a temporary snag, David D'Onofrio, a spokesperson for the project with Storefront Public Affairs, says that the plan still lacks approval by the Bay Conservancy and Development Commission and San Francisco Board of Supervisors. “We're still in the entitlement stage, but I suspect we're about six months away from completing this,” he says, adding that if all goes well, Mills could break ground by next summer.
The largest undertaking on the waterfront is Catellus Development Corp.'s Mission Bay, a 303-acre mixed-use project, just south of downtown near Pacific Bell Park, home to the San Francisco Giants. Mission Bay's 20-year build-out plan calls for 6,000 apartment and condominium units, of which 25 percent will be affordable housing; 5 million square feet of office and commercial space, including up to 750,000 square feet of entertainment and neighborhood retail services; a 43-acre UC-San Francisco Research campus; a public school and other city service facilities; a 500-room hotel and 49 acres of parks and recreational facilities.
“Mission Bay is an extension of downtown San Francisco,” says Andrea Jones, Catellus's senior vice president for development, noting that the area formerly was an old warehouse-distribution district that evolved into dot-com alley and is now becoming a design and furniture showcase district.
Values Go North in South Market
South of downtown, near San Francisco International Airport, Wattson Breevast LLC is redeveloping and expanding the Shops at Tanforan, a $140-million retail project that calls for a total overhaul of existing space and expansion of the center from 965,000 square feet to 1.1 million square feet. Plans for the center, which is anchored by JCPenney, Sears and Target, include the construction of a parking facility on top of the structure and a 20-screen Century multiplex cinema, as well as the addition of 59 new tenants.
Noting that the retail market has outperformed other real estate sectors over the past few years, Greg Wattson, senior vice president of development for Wattson Breevast, points out that this is a very densely populated area of the city, with extremely strong retail demographics. “A lot of retailers want to move into the area,” he says, “but land is very scarce.”
Retail real estate values are at a premium throughout the city, says Kevin Chin, senior vice president in Sperry Van Ness's San Francisco office, but are extraordinarily high south of the city because of the area's great demographics. “There is so much expendable income, and nowhere to build, so there hasn't been a whole lot of development activity,” he says, noting that grocery-anchored centers — if any were available — would bring a capitalization rate in the sub-six category.
“This is a seller's market,” Chin emphasizes, saying the strength of South San Francisco market is illustrated by the recent sale of Stonestown Mall, which is about 12 miles northwest of Wattson's property. The 915,000-square-foot property, which is 92 percent occupied and has sales of $475 per square foot, went to Chicago-based General Growth Properties in mid-August for $312 million, which Chin notes is nearly $40 million more than former mall owner Chicago-based Heitman Financial was asking for it.
The most anticipated and talked about project in downtown's south market, says Cushman Wakefield's Morgan, is the $410-million expansion of Westfield San Francisco Centre. The project will triple the center's size to 1.5 million square feet from about 500,000 square feet.
The centerpiece of this project, a joint venture of Sydney, Australia-based Westfield America Trust and Cleveland-based Forest City Enterprises, Inc., is restoration of the Emporium Building's façade on Market Street and 100-foot wide glass-and-steel dome and rotunda to its original early 1900s appearance.
The Emporium Building is pivotal to the plan, connecting Bloomingdale's new 338,000-square-foot West Coast flagship store on Mission Street with a 312,000-square-foot Nordstrom store that faces Market Street. The design evolves from the historic architecture on Market Street to a contemporary style on Mission Street to blend with the city's Yerba Buena Center for the Arts.
When completed in fall 2006, the project will include 200 specialty shops, a 52,600-square-foot multiplex theater and 235,000 square feet of Class A office space overlooking the oval-shaped atrium that illuminates the existing center. Tenancy at the new center will meet the needs of both visitors and neighborhood residents, says Westfield Chairman Richard Green. “Our job is to make sure we have something for everyone,” he says, noting that plans include a fresh food market and a supermarket, as well as international specialty shops.
Acknowledging the city's recent economic woes, Green continues, “San Francisco has a very bright future. We've known for a long time that this location will attract consumers and tenants.” He notes that the existing center commands about $700 per square foot annually in rent.
This is a 100-year project,” Green says, “We're here for the long-term.”
Also in the area, Union Square, San Francisco's world-famous upscale shopping district, is undergoing a renaissance, with a number of properties being renovated and repositioned for new tenants, says Elliott.
Union Square's occupancy is up nearly 9 percent from a year ago, according to Morgan, who says that after a quiet first half, a number of retailers have signed on for space or opened stores, including Apple Computer, Williams-Sonoma, Forever XXI, Miss Sixty, Energie, Lacoste, Benetton, Longchamp, Simayof, Sephora, Anne Fontaine, Tumi, Gioia, Loro Piana, H&M (Hennes and Mauritz) and Brookstone. Burberry and Abercrombie & Fitch are among those expanding in the area. Says Morgan: “That's a positive sign.
Market Profile/San Francisco
- Vacancy Rate: 5.5%
- Avg. Rent: $30.77 per sq. ft.
- 2004 Completions: 213,000 sq. ft.
- Personal Income per capita: $55,337
- Unemployment Rate: 4.9%
Source: Marcus & Millichap
Companies located in San Francisco and Oakland cut 20,000 jobs in 2003. Employment numbers should improve by the end of 2004.
Population levels in the region will stabilize this year, but San Francisco may not recoup losses incurred between 2001 and 2003 for 10 years.
TOP BAY AREA MALLS
Mills Corp. gains an interest in the Bay area's highest-quality retail property, Stoneridge Mall, thanks to its recent $1.3 billion deal with General Motors Pension Trust. A combination of wealthy trade area, high sales figures and creditworthy tenants makes the mall a market dominator. The ranking below is based on research by Friedman Billings Ramsay. The firm evaluated sales productivity and tenant quality data to determine each property's score on its proprietary mall quality index.
|Mall||Owner||Average Household Income||Mall Quality Index||Anchors|
|1. Stoneridge Mall||Mills||$122,000||212||Nordstrom, Macy's, JCPenney, Sears|
|2. Valley Fair||Westfield||98,000||209||Macy's, Nordstrom|
|2. Stanford Shopping Center||Simon||123,000||209||Macy's, Bloomingdale's, Neiman-Marcus, Nordstrom|
|4. Village at Corte Madera||Macerich||131,000||199||Macy's, Nordstrom|
|5. Stonestown Galleria||General Growth||91,000||177||Macy's, Nordstrom, Borders|
|6. Hillsdale Shopping Center||Bohannan Development||117,000||172||Nordstrom, Macy's, Mervyn's, Sears|
|7. San Francisco Center||Westfield/Forest City||92,000||128||Nordstrom|
|8. Sunvalley||Taubman||86,000||118||Macy's, Sears, JCPenney|
|9. Broadway Plaza||Macerich||97,000||114||Nordstrom, Macy's, David M. Brian|
|10. Oakridge||Westfield||106,000||104||Macy's, Sears|
|Source: Friedman Billings Ramsey|