Why San Francisco Needs to Reset its Understanding of Retail

By Hans Hansson

San Francisco’s Board of Supervisors recently heard the results of a long-anticipated report from Strategic Economics for the OEWD (Office of Economic and Workforce Development), on the current and future state of retail in San Francisco. The report found that although the overall vacancy of retail is low, at under seven percent in most districts, many are buildings that have been vacant for a long time. Brick and mortar retailers nationwide often struggle to keep up with changes in consumer buying habits and the increase in online spending.

In San Francisco, the OEWD found that these struggles have been compounded by landlords and real estate brokers. In addition to raising rental rates, the report found that landlords often aren’t San Francisco residents, so they have little desire to rent their properties or aren’t in touch with the market. On the other side, real estate brokers are holding back from presenting deals to landlords because they want to maximize the rent so they can earn more.

The report offered two major conclusions to San Francisco’s Board of Supervisors:
• The city should enforce and increase the vacancy tax on landlords that do not lease their vacant retail spaces.
• San Francisco needs to assist retailers with technology adoption so they can effectively compete with online retailers.

As part of my role at Starboard, I am in close contact with landlords and brokers across the city, and none reported being contacted to participate in this study. The report also indicated that the city should consider varying retail uses that combine food, entertainment and social activities, such as gyms. While this suggestion is sound, current zoning laws and retail restrictions would make this impossible in the short-term and difficult in the long-term.

During the same meeting where the results of this study were presented, Supervisor Norman Yee asked a member of the Planning Department why existing vacancy taxes are not being enforced. The planner responded that San Francisco doesn’t currently have a database to track vacant retail spaces, so they don’t know which spaces are vacant and how long they’ve been vacant. The city also doesn’t have the staff to enforce this vacancy tax.

It became painfully clear from this meeting that San Francisco is locked in a political direction that is not supporting brick and mortar businesses. Retail is in serious trouble in our city.

Yes, rents are rising for retailers. This isn’t due to greedy landlords but to the economic realities of the cost of owning real estate in San Francisco. While the city may blame greedy landlords, it also takes in higher property taxes every time a property sells at a higher price. Brokers, too, are not the problem. It is a license violation for brokers not to present any offer to a landlord, and one that brokers do not, as the report suggested, take lightly or abuse. It’s in a broker’s best interest to speak to any retailer that is interested in leasing spaces—they don’t make money without a deal, so they are incentivized to work with any interested party.

And while the city itself does not have a database to track vacancies, one of the major suggestions was that the city should embark on presenting new technological tools to local retailers.

San Francisco needs to recognize that it is passing laws to protect retailers and communities—yet it lacks the resources to enforce them. For example, formula retail was developed to allow for public input so that local retailers are protected against an influx of larger, national retailers. Yet, San Francisco’s Planning Department doesn’t have the resources to review and make a decision in some cases for more than year after an application has been submitted. This has a huge impact on landlords and on retailers.

There are a couple of simple changes that San Francisco can make that will have a tremendous impact on improving retail. If a retailer is a formula retailer or a retailer that is changing the prior use of the space, and no public opposition is filed after a 30-day posting to the neighborhood, that retailer should be allowed to have the right to permit. If opposition does occur, then a decision should be made within 90 days, or the permit will be allowed to move forward. Second, the ground floor of commercial spaces should be zoned to allow for uses not considered traditional retail—like professional services—to reduce vacancy rates as brick and mortar retail continues to diminish.

The concern that the Board of Supervisors will voice here is that there is no funding to expand planning. However, we do not need to do so—a number of retailers will get approved quickly because there is usually no opposition to the majority of the retailers that apply. Today, over 75 percent of all formula retailers that go through the process are approved. A majority of these retailers have little or no opposition when they initially file. The 30-day approval process I am suggesting will not add to the Planning Department’s workload, rather it will actually take part of the work away.

In the event of a 90-day approval, San Francisco will see returns on any added costs because businesses will open more quickly and pay taxes sooner, which will in turn also help to increase traffic flow to other retailers.

San Francisco needs to change its policies from being anti-business to pro-business. If we lose retailers, the vacant stores they leave behind will be a blight in our communities and before long will lead to decline in our overall quality of life.

Hans Hansson is the president, principal and founding partner at Starboard Commercial Real Estate—the independent, local, entrepreneurial commercial real estate firm in San Francisco.

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