A few years ago, when San Francisco's economy was in the doldrums after the collapse of the dot-com bubble and the mass devastation that wiped out huge swaths of tech companies in nearby Silicon Valley, brokers weren't envisioning retail properties in Union Square commanding $1,000 per square foot.

But things turned around more quickly than anyone could have imagined. In fact, this year, three sales listed on San Francisco's Post Street exceeded that threshold.

In just the last month the Festival Cos. paid as much as $1,680 per square foot for one of the three stores the Los Angeles-based company bought on that boulevard.

What's going on?

An influx of foreign retailers including H&M and Zara, not to mention upscale national retailers — Juicy Couture, Coach and Ann Taylor, have two or three concepts there, and the recently renovated San Francisco Centre have helped remake San Francisco into an international shopping mecca.

For now, at least, retail activity is extremely healthy throughout the Bay Area, reflecting a rebound in the region's economy marked by strong job and population growth, says Kevin Chin, senior vice president in the San Francisco office of Sperry Van Ness.

“Underlying Bay Area fundamentals have improved,” says Chin. “Jobs are being added and offices are filling up, which has pushed up rents. The mid-market area is poised for a massive redevelopment.”

Things are so good that even the 303-acre Mission Bay mixed-use project — which has gone through dozens of schemes over decades without getting off the ground — is finally becoming a reality. The site, a former railyard, is located in the China Basin, near the San Francisco Giants' AT&T Park. Several iterations over the decades have been proposed and many even got city approval. (One previous scheme even called for the site to be developed with Venice-like canals.) But all of those plans got sidetracked, leaving the site undeveloped until now.

Under the current plan, local developer Catellus is pushing forward with a biotech-themed project that will house 800,000 square feet of retail, a 500-plus-room hotel and a bio-tech medical campus in addition to 6,000 residences. The project, which is one-quarter complete will be built out over the next 20 to 30 years.

The centerpiece to the downtown renaissance is the reopening of the former Emporium department store as Westfield San Francisco Centre. The project cements San Francisco's status as a world-class shopping destination as retailers vie for space there, says Kuzuko Morgan, a retail broker in Cushman-Wakefield's San Francisco office.

The $450 million expansion and renovation of San Francisco Centre, a joint venture between Australian retail real estate giant Westfield Group and Cleveland-based Forest City Enterprises, transformed the historic Emporium department store and added one million square feet, of which 338,000 square feet is occupied by Bloomingdales' West Coast flagship store.

The Centre's focal point is its turn-of-the-century rotunda topped with a 500,000-pound glass and steel sky lit dome. It is one of the only parts of the original structure that was retained. During the renovation, the dome was literally suspended in air and eventually raised 58 feet atop an atrium in the middle of the project.

The project also married the Emporium store with a nearby site so that the combined building is now integrated on all five levels.

Forest City Commercial Group president Brian Jones credits the success of the redevelopment to the partnership and expertise brought by each company to meld the two distinct structures into one. The unique appeal of each structure was preserved even though the two sites were melded together.

New in town

Aside from San Francisco Centre, the other major retail theme is the influx of new retailers, many of whom are paying up to $250 per square foot to get sites in the city, according to Morgan.

Recent arrivals include Bristol Farms, a gourmet food market; Out-the-Door, a local Vietnamese restaurant; and women's apparel retailers Mango, Reese and Karen McMillan. Skechers Footwear is taking space across the street from H&M, DeBeers is opening a store, and Barneys New York is opening a West Coast flagship store in San Francisco this month.

While downtown San Francisco has piqued the interest of retailers, due to the limited space available, demand has also spilled over into San Francisco's outlying areas. It was the caliber of retail going into the Union Square neighborhood along Post Street that sealed the deal for the Festival Cos. Its president, Mark Schurgin, justifies the $70 million price the company paid for the three stores as a value-added opportunity for the firm.

“Chanel is going next door and Italian fashion retailer Prada is going in across the street, says Schurgin. “It's like a halo effect having tenants like that around. Values will go much higher.”

He points out that the lease on a 27,000-square-foot Ann Taylor store will expire soon, and that space will then be repositioned for a tenant looking to house a mid-size flagship store there.

The new Prada store in Union Square is being designed by internationally-acclaimed architect Rem Koolhaas. Schurgin says a Koolhaas-designed Prada on Rodeo Drive in Beverly Hills attracts visitors from around the world. He anticipates the San Francisco store will create a similar sensation.

All that makes Union Square San Francisco's equivalent of Madison Avenue in New York. But it doesn't mean that companies are going to pony up as much cash for sites elsewhere in the city, according David Lucas, associate in the national retail group of the San Francisco headquarters at Marcus & Millichap.

“Downtown San Francisco normally brings a high of $750 or low of $400,” Lucas says. “But certainly no one expected the $1,000 plus per square foot deals that went down recently. There are crazy deals going down — markets where people are behaving outside what is considered normal.”

Lucas cites a recent Walnut Creek deal in which a downtown property occupied by a piano vendor brought $750 per square foot and a capitalization rate of 3.7 percent. Caps are still relatively low and overall have remained stable between 5.25 percent and 6 percent with deals closing at 5.75 percent and 6.5 percent.

“In fact, anything around the Bay Area with credit moves,” Lucas says. Deals with credit tenants close between cap rates of 5.25 percent and 6.25 percent and noncredit mom and pops to come in at between 6.25 percent to 6.75 percent.

“It's so ridiculous how aggressive demand is in the nine-county area,” he says, referring to San Francisco, San Mateo, Santa Cara, Alameda, Contra Costa, Solano, Napa, Soma and Marin counties.

Shifting tide

Citing signs of changes ahead, including the exit of players in the security finance market, Lucas predicts prices will come down over the next couple years as this financing dries up, putting upward pressure on capitalization rates. With fewer financing options, capitalization rates should rise 25 to 50 basis points, he says, explaining that interest rates secured on Wall Street generally have been more competitive than banks and “we're seeing the 10-year Treasury down significantly, as well.”

Morgan notes, a couple projects planned for the waterfront are on hold, including a proposed $360 million cruise ship terminal with adjacent mixed-use development on the Embarcadero at Piers 30-32 and the Mills Corp.'s proposed $180 million retail and sports facilities complex located in Piers 27-31. She says, Shorenstein bought out Mills and now is trying to revive the project and put the new cruise ship terminal on the former Mills site.

Across the bay, the conversion of Oakland's Jack London Waterfront from industrial to residential and retail continues, and the far East Bay (Contra Costa County) is seeing tremendous retail growth, as residential developers push further into outlying areas to create middle-income housing.

Brentwood is where two lifestyle projects are under way. Ohio-based Continental Retail Development is building the Streets of Brentwood, a 400,000-square-foot open-air shopping and entertainment destination.

And the Festival Cos. is redeveloping and expanding a 55,000-square-foot neighborhood center to provide 110,000 square feet of retail.

The rationale for bringing upscale retail development into the area stems from the radical shift in demographics over the past few years.

Development of master-planned golf communities has transformed the former blue-collar town of 23,000 into an upper-middle-class community of 45,000 residents with median annual household incomes of about $80,000.

With nearby Oakley, Antioch and Pittsburg experiencing similar growth, the combined population of the four-city area stands at about 240,000 residents and is expected to reach 260,000 by 2008.

Meanwhile, Regency Centers is filling in the gaps for Bay Area shoppers with four community centers, totaling 1.3 million square feet around the Bay Area, costing $200 million.

As a result, “land values have gone through the roof,” says Engberg, noting Walnut Creek and San Jose dirt brings $20 to $40 per square foot and smaller markets like Santa Rosa, cost half as much. Engberg forecasts, the high land values will dictate a higher level of land use in the future. Existing centers and industrial developments will be torn down, replaced or repositioned to make way for the next wave of retail in a mixed-use development.

Sunnyvale is replacing an old two-level enclosed mall with a new town center. The project, by local developer Peter Pau, will “put the heart and soul back into Sunnyvale,” says Norman Garden, project architect in the Southern California office of architectural firm KTKL Associates.

The one-million-square-foot town center will have two levels of retail topped with residential office space. The project is scheduled to open in 2009.

Southern California-based Westrust is also redeveloping the 55-acre General Electric plant site in San Jose to create a 655,000-square-foot power center named the Plant. Scheduled to open in November, the Plant restores the old 17,000-square-foot Mediterranean-style GE headquarters, which was built in 1938, adding 638,000 square feet of retail stores styled in an art moderne replica of the historic building to create a 19th Century corporate feel.

DEMOGRAPHICS

San Francisco County

Population: 720,000

Median Income: $73,180

Unemployment: 4.4%

Sources: U.S. Census Bureau, U.S. Bureau of Labor Statistics

MARKET STATISTICS

San Francisco

Vacancy: 4.3%

Average rent: $31.16 per sq. ft.

Construction: 550,000 sq. ft.

Source: Marcus & Millichap Real Estate Investment Brokerage