Calls Mount for Balanced Formula Retail Leasing Rules in San Francisco

Union Square San Francisco retail real estate

By Nancy Amdur

San Francisco’s Planning Commission will soon begin deciding on 11 proposed changes to the existing controls on chain stores looking to open in the city.

The city’s planning department spent $75,000 for Berkeley, Calif.-based consultant Strategic Economics to study the economic impact that chain stores—also known as formula retail—have on the city. Initial data will be presented to the commission this month, with the study expected to be complete by February or March, said Sophie Hayward, a legislative planner at the department.

Commercial real estate brokers are keeping an eye out for the results as the current controls can make it difficult to lease retail space.

“I’ve been battling this for years,” said Matt Holmes, a principal with San Francisco-based Retail West, Inc., a retail real estate brokerage.

Although 75 percent of the chain stores that applied for conditional use permits since 2004 were approved by the planning commission, Holmes has seen chains from Urban Outfitters to Borders to Bay Area-based Pet Food Express be rejected due to various formula retail controls.

“Blocking someone from doing business in San Francisco is mind boggling to me,” adds Scott Turner, a broker with Retail West, which also offers advisory services and consulting.

The lengthy permitting process—which can take nine months and include a contentious public hearing—deters many retailers from attempting to open in the city, Holmes said. Retailers who do sign a lease often wait months for a permit to open, which independent retailers and even some chain stores might not be able to afford.

“If the burden was lifted, more people would be working more quickly,” Holmes said.

Chain stores have been a hot-button topic in the city for more than two decades. While many residents want to keep the city’s shopping districts distinct with an eclectic mix of stores, others want consumers to have choices and argue that chain stores also bring jobs and taxes to the city.

“It is a prejudgment that [chain stores] are all bad, and it is making a decision for consumers to deprive choice,” said Brett Gladstone, a land use attorney with Hanson Bridgett LLP in San Francisco.

One pending proposal calls for changing the definition of formula retail. It is now defined as a retailer with 11 or more stores nationwide with features such as the same décor, merchandise and signage. The Hayes-Gough Neighborhood Commercial Transit District—located near the Civic Center—would like to amend the definition to retailers having 11 or more stores worldwide and to include stores majority-owned by a parent company with a formula retail brand.

Opponents to broadening the definition argue that 11 stores nationwide already seems too few.

“We need to be realistic and up that more,” said Ken Cleaveland, vice president of public policy at the city’s Building Owners and Managers Association, which represents the commercial real estate industry.

But small business owners worry that chain stores might drive up rents and sell goods for lower prices, potentially hindering their business.

“No doubt, I would say the majority of small businesses are opposed to formula retail,” said Henry Karnilowicz, president of the city’s Council of District Merchants Associations, an advocate for small businesses.

However, Karnilowicz and Holmes agree that the Internet also is drawing price-conscious consumers away from retail stores. Holmes also finds that formula retailers do not affect rents.

“In neighborhoods that are 100 percent restrictive [on formula retailers], like Hayes Valley and Valencia, they’re seeing greater rent acceleration and competition than any street in San Francisco,” Holmes said.

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