It's disquieting, and more than a bit depressing, to see so many empty storefronts in a growing, dynamic, and wealthy city like San Francisco. Members of the Board of Supervisors think the retail vacancy rate in their neighborhoods is too high, and suspect that landlords may be intentionally keeping their spaces vacant so they can wait for higher rents.
One solution they've put forward so far is a retail vacancy tax, which could run as high as $1000 per foot of street frontage. "When you have commercial property owners holding multiple storefronts vacant for long periods of time, that hurts all the other small businesses in the area who rely on a vibrant commercial corridor to attract customers," Supervisor Sandra Lee Fewer recently said in a statement. There are roughly 150 vacancies in Fewer's district. A vacancy tax, however, isn't going to reduce retail vacancies measurably. It's meant to make the Supervisors appear like they're doing something while avoiding the hard work and negotiations with neighborhood groups required to actually make a difference.
The first thing to know about S.F.'s citywide average retail vacancy rate is that it's likely lower than that of comparable cities. The second thing: there's precious little evidence that retail landlords are holding out for high-paying tenants. Third, even if they were, the most efficient way to lower vacancies is to ensure the available spaces can meet the shrinking and shifting needs of today's retail sector.
The unfortunate fact is that our city's bureaucracy and zoning rules prevent growing retail segments from being able to use the spaces we have available. Supervisors like Fewer have reached for a stick to hurt landlords when they should be hacking away at the impediments to finding, renting, and modifying the square footage retailers need.
The fact remains that whether they're high or low, retail vacancies are still unaesthetic and inefficient. So, what's behind our retail vacancies? Elected officials say greedy landlords are sitting on empty storefronts and waiting for high rents.
Let's examine this claim.
Landlords typically look for the highest return on their properties. Sometimes that means they let properties sit vacant, as they did on New York City's Bleecker Street. But in that case, rents fell precipitously from $600 per square foot at their late-2000s highs to $200 to $300 in 2018. Landlords sat on the properties hoping to regain some of what was lost. Unlike Manhattan, San Francisco hasn't seen dramatic drops in retail rents.
In S.F., only disinterested or disengaged landlords leave storefronts empty, because there's no rent jackpot coming for retail. Industry analysts predict that retail rents will stay relatively flat in the near future. Unlike the housing market, demand for retail space isn't growing. In fact, retail space is in oversupply. And real estate professionals point out that average rents don't vary between neighborhoods, while vacancy rates vary widely.
The evidence is much stronger around the idea that retail vacancies are mostly due to that old supply and demand thing. Fewer retailers and the same number of spaces equals flat rents and empty storefronts. Why the decline in demand? Today's shoppers, particularly millennials, tend to prefer to spend money on experiences over things. And of the things they do purchase, they tend to buy online. As a result, U.S. retail sales growth has slowed, more brick-and-mortar retailers are filing for bankruptcy, and retail vacancies are increasing across the country.
At this point, retail needs all the help it can get. But San Francisco's local government just adds pain. "It's really hard to do business in San Francisco," Mayor London Breed told the Chronicle recently. "When there's too many layers of process and requirements and fines and permits and all of that, it can be quite discouraging. I think in some instances, it goes much too far."
Restrictions make changes difficult and spaces inflexible
It's worth digging into the "State of the Retail Sector" report put together by the city's Office of Economic and Workforce Development for more context here. The authors find that retailers that offer services you can't buy online are most profitable in S.F. We're talking about restaurants, bars, clubs, venues, and service providers such as gyms and nail salons. Restaurants and bar sales grew an average of 7 percent per year from 2009 to 2016 nationwide, much faster and steadier than the rest of the retail sector. In San Francisco, the gulf between "stuff" and "experience" retail profitability even greater.
Breed, for her part, says she wants to reduce city approval requirements and allow more pop-up stores and events. The problem? Nearly 80 percent of S.F.'s vacant commercial properties are not zoned for restaurant use. Many San Francisco retailers, according to the State of the Retail Sector report, want to offer food and drinks and events and entertainment to bring in new customers and revenue streams. However, every change a retailer needs to make to a storefront must be approved by the Department of Building Inspection and potentially the departments of Planning, Public Health, Fire, and Public Works as well.
For example, retail store operators seeking to serve food and beverages must get a change of use permit to reclassify their space as a restaurant. That takes time and money. Permitting processes and delays like this cost restaurateur Salome Buelow nearly $20,000. "I'm never opening another business in San Francisco," she told the same reporter who Breed spoke to last year about how hard it was to do business here. "It has made it incredibly illuminating why there are empty storefronts along every street."
When the Sunset's San Franpsycho sought to combine sales of apparel with a pie and ice cream café and also hold product launch parties at its store, the owners learned they had to undertake a bureaucratic process with the added torture of public input and comment. S.F. requires retailers to notify every neighbor within 150 feet of upcoming changes—and anyone who chimes in with opposition to the change, for any reason, can gum up the works by demanding a hearing at the Planning Commission called a discretionary review. In the end, they were able to open the café, but the process was "pretty expensive and pretty painful," according to an employee who didn't want to be named I spoke with in early August.
This is the leverage that overinvolved neighbors, including now-Supervisor Aaron Peskin, used in North Beach to stop a Rite Aid drugstore from opening in an empty theater in 1998. That building, known to locals and flocks of pigeons as the Pagoda Palace, remained vacant for nearly 20 years. Today it's a condo building with a restaurant space that's hard to rent.
The other kind of retail that's still growing besides restaurants and services, the city's retail report says, is discount stores such as Ross, TJ Maxx/Marshalls, and Dollar General. Unfortunately, these types of businesses aren't very welcome in S.F.
In 2014, the Board of Supervisors expanded the city's ban on chain stores. Nearly all S.F. neighborhoods are not permitted to usher in the retail companies that are expanding their footprints. There are few areas where they're allowed, like downtown, South of Market, and most of Bayview-Hunter's Point; along commercial corridors like Geary or Mission, chain stores must run through a gauntlet before they're approved or denied. By gauntlet, I mean more regulations — starting with a form known as the Affidavit for Formula Retail Establishments, which will determine if the retailer is then required to apply for a full-on conditional use permit and notify neighbors. Basically, it's a mounting set of hurdles that can disincentivize merchants from opening.
Peskin, who was District 3's supervisor from 2001 to 2009 and resumed that office in 2015, recently contended there's no statistical evidence showing S.F.'s formula retail ban is causing vacancies. Yet that's contradicted by a 2014 economic impact report from the city's Office of Economic Analysis, which found that "formula retail controls primarily affect the economy by changing ... commercial rents and vacancy rates." Since 2015, under Peskin's watch, retail vacancies in North Beach have more than doubled, according to Hoodline.
Better options for retail occupancy
This is usually the point in the discussion where someone pipes up with what seems to be the easy, straightforward fix: "Just slap on a vacancy tax!" But are such mechanisms consistently effective? Consider what happened in Washington, D.C., where such a tax took nearly $10 million from poorly connected landowners in 2016 but didn't do much to reduce rents or lower vacancy rates.
In San Francisco, a new vacancy tax will task the Department of Building Inspection, notorious for its backlogs, with determining whether storefronts are vacant due to speculation or for legitimate reasons, like mandatory seismic retrofitting.
Even if some landlords were indeed found to be hunkering down, no amount of taxation could get restaurants, entertainment spaces, or formula retailers into buildings that aren't zoned for them. Rezoning vacant properties for a wider array of uses and streamlining the permitting process would make empty spaces easier to rent out, while diversifying the types of amenities and services available to residents.
District 5 supervisor Vallie Brown has sponsored legislation to increase retail space flexibility, allowing multiple retailers to share one larger space. It passed the Board of Supervisors and was signed by the Mayor in September.
Other zoning changes could include allowing a restaurant to operate as a co-working space during the day, or allowing short-term uses at empty buildings before they're demolished for new projects. Or having empty spaces be activated as art galleries.
Even if landlords were, counter to the prevailing evidence, waiting for rents to go up, building more is still a better solution than a vacancy tax. In a high-demand market, property owners look to rent their properties before developers build competing spaces. But in a city where property owners can count on the scarcity of no new buildings, it makes sense to let them sit idle.
During declining retail demand, though, you don't build more retail space. It's a much better idea to provide retailers with more customers through dense housing, with reliable and efficient transit that connects our commercial corridors with one another. S.F.'s Planning Department hints at this in its 2014 Commission Guide for Formula Retail:
"San Francisco is a city of surprises. Its diverse and distinct neighborhoods are identified in large part by the character of their commercial areas. This feeling of surprise invites both residents and visitors alike to explore the city. Urban neighborhood streets should invite walking and bicycling. ... Many formula retail concepts are developed and refined in suburban locations. Standard store design that primarily accommodates automobile traffic may not work in dense, transit-oriented cities."
Note the line about walking and bicycling in a report about guidelines for brand-name retailers. Planners are accounting for the fact that foot traffic won't come from people driving and parking their cars to stores, but from folks shopping and taking care of their business by other means. This is the antithesis of sprawl and suburban development. And yet: More than 70 percent of San Francisco is zoned exclusively for single-family homes.
Corey Smith, deputy director of the San Francisco Housing Action Coalition, made this point himself. Zoning for dense, multifamily, affordable housing along commercial corridors would expand the pool of customers for merchants, providing a more effective, at-hand solution to retail vacancies. To give a real-world example, Hayes Valley has a lower retail vacancy rate than Chinatown or North Beach despite having similar zoning not only because of its central location, but also from new housing developments that have added residents.
Nevertheless, in the thick of a years-long housing crisis and now retail space glut, the city's supervisors have not undertaken any rezoning for dense housing or streamlining the permitting process. An overwhelming majority of them voted for a resolution opposing state Senator Scott Wiener's pro-housing legislation, S.B. 50, which has been subjected to misrepresentations and distortions.
There's no question that the city, facing a shifting economy along with a complicated social and political landscape, has to figure out how it's going to deal with lingering retail vacancies. Its regulations are counterproductive. Its permitting process is costly, time-consuming, and often arbitrary. It's not taking broad strides toward changing neighborhoods and rezoning so that more people can live in our city. So far, there is some talk about doing things differently and a few tweaks around the edges, but that's about it. A retail vacancy tax may be helpful, at some point. But it makes zero sense to start there. Unless, of course, you want just to look like you're doing something.
Streamlining the permitting process, lifting the formula retail ban, and rezoning for residential won't be easy or politically popular among people who benefit from the status quo. But they're the right thing to do, and the only solutions likely to make a dent in the vacancy rate. The supervisors need to step up to the challenge instead of proposing politically expedient red herrings.
Cathy Reisenwitz writes about software for a living, sex on the side, and policy for fun. Her column “Unintended Consequences” appears regularly in the Bay City Beacon. She’s pro-sex, pro-feminism, and pro-market. Sign up for her newsletter and follow her on Twitter.
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