Enter the Void: New Buildings, Vacant Storefronts

The empty storefront at the corner of 19th and Valencia. Photo by Daniel Hirsch.

The empty storefront at the corner of 19th and Valencia. Photo by Daniel Hirsch.

En Español.

In the Mission this past year, at least four large mixed-use developments have opened their glittering modern doors for amenity-rich housing to those who can afford it (and, in the case of about 50 out of 270 households, those who got lucky in an affordable housing lottery).

In almost every case, before a building has even finished construction, the market-rate residential units get scooped up quick—units at the 3500 19th Street development sold for a record-breaking rate of $1400 a square foot. But to say these buildings are at full capacity omits a glaring on-the-ground truth: the street level commercial spaces frequently remain vacant—for months or even a year or more.

The mixed-use building Vara on 15th Street opened in July of last year. Its 155 market-rate rental units have been steadily leased off—their leasing office says, these apartments are 90 percent occupied—yet the three commercial spaces have been vacant for more than a year. Dominating an entire corner at 15th and Mission, Vara’s windows—plastered with real estate posters and marred with frequent graffiti—are looking less than luxurious.

The same goes for the 3500 19th Street project on a prominent Valencia Street corner. Its steeply priced 17 condominiums sold steadily after going on the market in October of 2013. But for nine months the cosmetics retailer The Balm has been a lone outpost on the ground floor where three other glass-walled vacancies have endured. For passersby, the spaces are an arresting emptiness in a corridor known for its vibrant street life and lively shopping scene.

The unoccupied storefront at Vara. Photo by Daniel Hirsch.

The unoccupied storefront at Vara. Photo by Daniel Hirsch.

The reasons for these persistent vacancies are complicated and include picky developers and residential tenants, high rents and the space itself. While realtors like David Scanlon of Cushman and Wakefield who is working to find commercial tenants for 3500 19th Street say “there’s been a remarkable amount of interest,” the spaces remain empty.

“We are being particular, we want to have a nice mix of tenants,” said Scanlon, who says he gets daily calls from prospective tenants. He says he doesn’t want to do deals with just anyone, but businesses that “add to the value of the street.”

And, he might have added, he’s looking for businesses that can keep the condo’s residential tenants happy as well as pay the high rent. While Scanlon wouldn’t put an exact price on the commercial units—saying it would depend on the tenant—rents on Valencia range from $5 a square foot to $7 a square foot, more than many smaller businesses can pay.

Louis Cornejo, a longtime realtor at Urban Group, says there’s another factor for the lengthy vacancies. The focus of many developers isn’t always on the ground floor. “For some mixed-use developers, the retail space can be an afterthought,” he said. As a result, an effort to fill the commercial space comes well after the residential units have been sold.

Often, the developer that initiates the project isn’t ultimately the one that needs to find commercial tenants. Both Vara and 3500 19th Street were sold off to new owners long before anyone was trying to find commercial tenants.

For pedestrians and people on the street this imbalance means whole corners are vacant in one of the most desirable neighborhoods in the city.

Storefront vacancies are also an issue city officials are increasingly taking aim at. Most recently, the Board of Supervisors passed a law endorsed by Supervisor Katy Tang that would penalize building owners with a fee of $765 if a storefront is left vacant for more than 270 days. Although, if an owner can prove that they’re actively marketing a space and looking for a tenant, they’re exempt from paying fees.

Rents, regulations and other roadblocks

The empty commercial space at 1515 15th Street. Photo by Daniel Hirsch.

The empty commercial space at 1515 15th Street. Photo by Daniel Hirsch.

The new commercial spaces also come at a time when new vacancies are popping up around the Mission as old tenants are pushed out. Though the reasons vary in the most recent struggles of Therapy, Clothes Contact, and Valencia Printing, their soon-to-be and already-happened closures raise the often voiced complaint in the Mission: the rents are too damn high.

“The market is telling me that the demand is not there for the offering price, if it’s still vacant, that offering price is out of reach of what the market is able or willing to bear,” said longtime development guru Phil Lesser of the commercial vacancies in the Mission’s new projects.

When Mission Local examined commercial vacancies on Valencia Street in 2009, rents on the corridor were veering towards $2 to $4 a square foot. By many accounts they’ve shot up nearly 75 percent in recent years to $5 to $7 a square foot. There are still some longtime landlords who have been able to keep a mix of tenants and offer some more affordable spaces for smaller businesses, but those days may be numbered.

“Why would a landlord rent it out for two or three bucks when down the block it’s going for much more?” Scanlon said.

Sabrina Haman, a business development coach at Mission Economic Development Agency (MEDA), works to help place small businesses in retail spaces. She agrees that prices on Valencia are too high for many of her clients.

“Rents are going sky high,” Haman said. “We’ve seen landlords putting out ads for $5,000 for a 1,000 square foot space… but once a few months go by, we’ve seen them start lowering the price, though they never go under $3,500.”

Though acknowledging every business is different, Haman says MEDA’s clients often have limited startup capital, making rent payments of much more than $3 a square foot a near impossibility. Plus, she’s seen landlords ask for large sums of cash up front and stringent contracts. On more than one occasion, she’s counselled clients not to sign contracts she’s deemed unreasonable. She’s told many to seek business opportunities outside the Mission.

Kevin Chin, the commercial broker for Vara, says he’s close to deals for the commercial spaces at 15th and Mission, but there, price hasn’t been the issue. He’s asking about $3 per square foot for spaces that range from about 900 to 4000 square-feet—a good deal, he says, compared to Valencia Street prices. But 15th and Mission doesn’t have the same allure for commercial tenants.

“It has been challenging… we’re close to Valencia, but we’re not on Valencia; we don’t get the same kind of traffic,” Chin said.

Louis Cornejo, who is looking for commercial tenants at the newly-opened Stanley Saitowitz building—1515 at 15th and South Van Ness—agreed that rent is less of a factor for a business signing a lease than the location’s potential for sales.

“I think people who talk only about rent may not be experienced enough to be opening up a business,” Cornejo said. “A business is really going to decide on how much rent it can pay based on its potential sales.”

The temptation on Valencia Street is to blame the vacancies on the city’s various restrictions, particularly formula retail regulations, but even Scanlon calls the restrictions “The best and worst thing about Valencia Street.” On the one hand the restrictions limit which tenants can go into the stores, but on the other hand, Valencia has its heavy foot traffic because it is known as a place where shoppers can find something other than the well-known brands or chain stores.

But, throughout San Francisco, complying with city regulations can be expensive.

Helene Sautou, whose nonprofit Urban Solutions was contracted to create StoreFrontSF, a platform that helps place businesses in commercial vacancies throughout the city, sees issues with alcohol sale restrictions. When working with one specialty grocer that also sold wine, Sautou saw the business get turned away again and again by brokers whose listings were in alcohol moratorium areas.

The moratorium in the Mission, which runs between Guerrero and San Jose and between 14th Street and Cesar Chavez, limits how many new liquor licenses can be issued. In recent years, the Board of Supervisors passed legislation relaxing the moratorium by allowing the transfer of liquor licenses and sales in certain new types of businesses.

“I totally support regulations that try to limit liquor stores,” Sautou said. “But I am well aware that the combination of use restrictions and building code, and ADA mandates add up to a big amount of time and money for small businesses.”

So in the eyes of neighborhood realtors, what kind of business can realistically fill these newly available spaces in the Mission? They have to have a large amount of startup capital, and some existing name brand recognition helps. Bringing in a full scale restaurant that may sell alcohol or whose noise may upset the residents upstairs is most definitely a challenge.

At Valencia and 19th, the answer is juice. Scanlon reports that he just signed a deal with Project Juice, a cold-pressed organic juice company with five existing Bay Area locations and an online retail presence. The company has already started moving in.

To find out how this juicery will add to the value of the neighborhood, we’ll have to wait until its opening in the coming months. To learn what else will fill the two remaining vacancies on the corner of 19th and Valencia, it could be a much longer wait.

Graffiti mars a real estate poster at the Vara  project. Photo by Daniel Hirsch.

Graffiti mars a real estate poster at the Vara project. Photo by Daniel Hirsch.

This is the first part of a two part series. Tomorrow we’ll dig into the issue of retail vacancies again. It’s not just rent and regulation that delay tenants from landing in these spaces—design and aesthetics play a big part as well.

23 Comments

  1. godzuki

    Proof that maybe “selling everything off to the highest bidder” is not only a bad idea, it doesn’t even work.

  2. Russo

    Empty storefronts in the middle of an economic boom (swollen bubble) has also been a feature of Haight Street. Unbridled greed forces out long-time mom-&-pops, and the vacant spaces collect graffiti.

    I have a hard time believing the representatives of the hideous glass coffin that is 3500-19th Street are turning down prospective commercial tenants every day to appease residents and “add to the value of the street.”

    • BackToTheBurbs

      This is what happens when developers get their way and the cash out from selling housing is exorbitant. Clear evidence that too much money is being made on new housing … Those insane commercial lease amounts are a pittance compared to 1400$ p sq f 1brs.

  3. Lynn

    I welcome this article. I have been interested in the subject of “Ground floor Retail”, as the answer to lively streets where a new condo development us built ,for many years. It has been a failure throughout the city. I would like to see an inventory of these spaces and how many are vacant. Then I would like to see the city become pro-active in encouraging developers to rent these spaces. Or we need to change the way we design these buildings. The ground floor of the Fillmore center, vacant for many years except for Kaiser CDP offices,. is a prime example.

    • Alex740

      Ground floor businesses are definitely part of the answer to lively streets as SF’s most lively streets illustrate but in order for them to work they have to be occupied. As the article points out they are often an afterthought by developers in order to fulfill zoning requirements and the spaces are not designed well, require expensive build outs and lack the character that attracts small businesses. Add in the limitations on which kind of business are allowed with the high rent prices and you have a very small pool of potential renters than can even afford to open in these spaces. Developers are not very concerned about the commercial space, they can cover the costs for it to be there with the sales/rental price of the residential units and it can just sit for a long time, there needs to be motivation for them to rent it.

      • Runforthehills

        Absolutely. What do you expect when a city tries to micro-manage who can and cannot lease space in a dense urban corridor like Valencia? Many of businesses that can afford to lease there aren’t allowed to. How many Mom and Pop start ups can swing the rent? This basically leaves trust fund millionaire run knick knack stores selling over prced garbage and vacant storefronts. Nice job.

        • Sam

          Yes, the obvious solution here is to waive the ban on chain stores for newly built commercial space, in much the same way as we waive rent control for newly built homes.

    • Jaime

      I agree Lynne – in fact I just wrote to the Planning Department giving them a heads up with an article about online purchasing power. It explains that barely anyone is going to stores these days for various reasons. I expressed my concern about their demand for street level retail and urged them to rethink this mandate. Please can’t someone in Planning create a vision for the future of SF.

  4. 24-24

    I think Valencia needs a $0.99 store

  5. BTinSF

    I don’t even “go shopping” any more. I let my fingers do the walking over my computer keyboard and UPS bring what I want to me. We are going to need a lot less bricks and mortar retail in the future and we better figure out what to do with these spaces beyond that. Service is the obvious answer: gyms, dry cleaners, restaurants, bars, banks, doctors and dentists, combined with a few things we need immediately like pharmacies.

  6. Mister Big

    As soon as the bubble deflates, these $15 burger joints and $12 cocktail joints, along with their $8 juices joints, boutiques with maybe 8 dresses in them, and hipster retro audio shops will close up and be vacant eyesores. Only the long-time mom and pops with deep enough routes to survive the rent gouging will remain. Happened before, after Dotbomb 1.

    These glass storefronts all look like bad Apple Stores, which or iSores.

  7. TinyTim

    GREED. And we all know how that eventually ends up.

  8. two beers

    We already plenty of retail and restaurant space. Too much, actually. And the fact that rents aren’t going down fast on these spaces proves the fallacy of supply and demand in this market. Expect vacancies to increase AND commercial rents to increase, until this bubble pops.

    What we DO need is more PDR (production, distribution, repair — i.e. jobs for working people) space, and art studio space, as well. Gee, guess what that empty space at VARA used to be. PDR. Most of the condolofts in SF have gone up on former PDR or art studio workspaces. Most of these ground floors are now retail (when they aren’t merely garages). And now we have a glut of overpriced yet vacant retail.

    Our city planners should all be thrown in a bottomless pit.

    The Mission just keeps getting shittier and shittier.

  9. Chain stores are pretty much banned in SF and these are the most viable businesses around, so don’t you worry SF Nimby’s, you will not have to shop at chain stores, you will get lots of empty store fronts to not shop at……

    • two beers

      Okay, kevin smith, the only viable businesses left that can pay the exorbitant rents that you landlord pirates demand are chain stores. That’s one fucked up state of affairs. You won’t be happy until SF looks like Houston.

      • Sam

        A landlord cannot demand any rent that a tenant is unwilling or unable to pay.

        It seems you are never happy. When the asking rent is high but the unit sells or rents quickly anyway, then you complain that the Mission is gentrifying.

        But when the asking is rent is high and the units do not quickly sell or rent, then you whine that causes blight and waste.

        So either way, you’re not happy. Perhaps that is because you lack the imagination to conceive of any middle ground between Houston and a ghetto?

        There is no control of rents for commercial properties so the issue is purely a matter of negotiation between two consenting adults. If the rents really are too high and no tenants bites, then the rents will eventually decline as part of a natural price discovery. What’s wrong with that? any why do you care if a landlord is not collecting any rent?

        • Steen

          Except it sounds like the rent is not eventually declining as a part of natural price discovery. The problem, according to the article, is that the developers don’t actually care about the commercial spaces; they just throw them in there to comply with the zoning.

          They don’t actually care if any business rents their commercial space, because they make more than enough money on the residential spaces in their development. So they just let the commercial spaces go to waste, and nobody moves in.

          • Sam

            Steen, if you are correct then that points to a problem with the zoning laws that effectively force developers to build things they don’t really want to build.

            It may be that the asking rents are not being reduced. But these are early days for these developments, and commercial leases tend to be very long-term, so the agreed rent is a big deal. I suspect that actual agreed rents may fall if there is little demand, even if the headline asking rents do not.

          • Alai

            At the end of the day, a landlord can rent out all the residential, and leave the commercial empty, or they can rent out all the residential and then rent out the commercial too. Given that landlords are landlording for the purpose of making money, I don’t think they’re going to shrug and say “oh you know, I have more than enough money”. Maybe they think that by holding out right now they will get even more in the longer run, but I doubt that state of affairs can last all that long.

  10. SFrentier

    A tip of the hat to daniel for writing a very good article! One of the best here, and one of the very few where I actually learned something new.

    Looking forward to the second installment.

  11. Cynthia Gorney

    Thanks, Daniel and ML. Very strong, thoughtful, multidimensional piece!!

  12. HopefulSFRetailRenter

    I have spoken with the agents for 19th and Valencia. They are asking over $11 per SF. If I remember correctly, $10,000 for a 900SF place. Blew my mind away…

Comments are closed.