By Robert Sammons, Regional Director – Northwest U.S. Research
With the holidays quickly approaching, I thought it an opportune time for a few quick highlights of the retail sector as it stands today in San Francisco. After all, it’s time to shop, shop, shop, right?! Now my esteemed colleague, Garrick Brown, is THE retail research KING, covering this property type like no-one else in the business. In addition, we have local retail research blanketing the Bay Area. So in addition to all that retail talent, I thought I’d add two cents as well!
The modes of shopping – whether globally, nationally or locally – continue to react to disruptive consumer behavior thus predictability has become a challenge for bricks-and-mortar. At this point in time there just happens to be a lot going on within the bricks-and-mortar side of the business right here in the capital of tech. Somewhat ironic, perhaps? Well not necessarily as this city expands with more and more locals (city population up 12.0% over the past 10 years and expected to climb another 10.0% over the next 10 years) as well as a tourism and convention business that is booming (annual visitors to San Francisco at almost 25 million in 2015). It is true, however, that the high cost of living in the city along with our weak transportation infrastructure have made it difficult and more expensive to staff within the retail world.
Has ecommerce affected retail here? Absolutely and, for the sake of brevity, I won’t get into how the Bay Area real estate market is coping with the influx of warehouses and “last mile” delivery. Additionally, I’ll save the topic of retailers with a major tech presence in the Bay Area for a later Rant as well.
Is there some department store consolidation on Union Square, the heart of retail for San Francisco? Yes indeed just like much of the rest of the country (as we’ll see). But there continue to be mid-sized and smaller tenants leasing space in Union Square and out into the neighborhoods. New retail frontiers continue to emerge – Jackson Square, Mission Bay, Dogpatch and Candlestick Point.
Meanwhile, entertainment venues and restaurants (including many new concepts) are growing by leaps and bounds. San Francisco, in fact, has become a breeding ground of culinary talent.
Beyond that, there are new retail developments the likes of which this City hasn’t seen since the rebirth of San Francisco Centre (a 1.5 million-square-foot regional mall in the heart of the City) back in 2006 and the 350,000 square foot Metreon mixed-use project re-opened in 2011 and anchored by Target, movie theaters and eateries.
I’ll focus on a few big picture retail issues taking place now in the center of San Francisco. But for more detail, please visit our website for all our retail reports including our wide coverage of the Bay Area.
The San Francisco retail world continues to revolve around Union Square with its myriad department and mid-priced stores as well as upscale global and local boutiques. In fact, while parts of the world have seen slowing retail demand, this area continues to have bidding wars for prime corner locations. Several significant sales transactions have occurred over the past few months that will affect this submarket for years to come. All of the properties mentioned below are “anchored” by retail with office above the lower floors. And if pricing is any indication, there are several new owners that strongly believe in the future of Union Square.
Early in the fourth quarter, the Macy’s Men’s Store at the corner of Stockton Street and O’Farrell Street was sold to Morgan Stanley. Macy’s intends to consolidate this division into its main store across the street within the next two years. With multiple floors (including office layouts up top) and over 250,000 square feet, it’s likely that the property will be more of a mixed-use of retail and office going forward. (See a great story in the San Francisco Chronicle speaking to this at the link below).
Another consolidation on Union Square concerns Saks Fifth Avenue which has relocated its men’s store out of 220 Post Street and into its main location at 384 Post Street. Meanwhile, the 220 Post Street building, a smaller property with multiple floors, was sold in the third quarter for just under $2,000 per square foot.
The Tiffany Building at 360 Post Street also changed hands in the third quarter with no changes in the retail tenancy expected.
Anchored by Gucci, 240 Stockton Street sold for $2,000 per square foot again in the third quarter.
Slightly off Union Square but still very relevant, the almost 300,000 square foot Phelan Building at 760 Market Street (at the corner of O’Farrell Street) recently changed hands; though a large office component, it also contains 52,000 square feet of retail primarily occupied by Marshalls.
Meanwhile, several new retail developments are on the horizon. First up is “6X6” which will be a 250,000 square foot multi-level retail experience opening in 2017 on Market Street (so-named because of its six floors at Sixth Street). One big plus here is the two floors of underground parking. Additionally, there are numerous housing and hotel developments just to its south and west which should drive traffic as well. Two other significant projects in earlier stages are the 100,000 square feet of retail to be included in the Transbay Transit Center opening in late 2017/early 2018 south of Market Street in a somewhat retail deprived portion of the CBD and another 100,000 square feet of retail expected to be included as part of the Golden State Warriors Arena (otherwise known as Chase Center) in Mission Bay and opening in 2019. And also, down at Candlestick Point, a 500,000 square foot urban retail outlet center is expected to break ground in 2017 as part of a massive mixed-use development.
Though the above projects are all large additions to the retail inventory of San Francisco, they are all driven by the wants and desires of local residents, office workers and visitors. Union Square vacancy currently stands at just under 3.0%, yet this could tick up thanks to the aforementioned department store consolidation. Innovative “outside the box” thinking is what will drive the occupancy of such space. That will likely include a significant influx of entertainment and food – from high-end to middle-of-the-road to food halls. Meanwhile, neighborhood vacancy remains rather low despite formula retail constraints (though there are exceptions primarily due to changing demographics). Stay tuned as there will be a lot of interesting changes going on throughout the retail world in San Francisco over the next few years.
By the way, also check out our Main Streets Across the World 2016/2017 global retail report that was just released. This is a special report that tracks 462 of the top retail streets around the globe, ranking the most expensive in each country by their prime rental value and thus enabling analysis of headline trends in retail real estate performance. San Francisco’s Union Square was among the top most expensive in the Americas.
This post is guest commentary from the latest weekly edition of our Bay Area Research Rant, which you can subscribe to for free by e-mailing email@example.com.
Robert Sammons is a Research Director for Cushman & Wakefield. Based in San Francisco, Robert’s principal roles include working closely with the C&W research teams across the Northwest – including Northern California, Portland and Denver. Robert is author of numerous documents that delve into a wide variety of real estate and economic trends. He has been a quoted source for all manner of real estate and related economic information in many widely known media outlets across the country. Robert has 29 years of real estate experience as both an appraiser and researcher. He earned a BBA in Real Estate from The University of Georgia and an MS in Real Estate from Georgia State University. Robert is a member of the Urban Land Institute.