Enter the Void: New Buildings, Vacant Storefronts

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 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 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.

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.