Will The Commercial Corridors In SF's Mission Recover? It May Only Be A Matter Of Time.

San Francisco CA

26 January, 2021

5:05 PM

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By Julian Mark, Mission Local January 25, 2021 Before the pandemic, the Valencia Street corridor was a jaunty stretch of high-end boutiques and small-batch eateries. Now many stores seem to be offering the same thing: Plywood. Many stores remain boarded up from last March's lockdown, offering few clues about whether they'll open again. A sign on Tokyo Futon & Tea ominously reads "Last Days" and reminds customers that everything must go. On Valencia and 25th, what was once Colleen Mauer Designs, a jewelry designer, is boarded up and empty. Mauer said she relocated to New York in August. And further north, the space that once held San Francycle, a bike apparel shop, is vacant — its shelves dismantled and floors swept clean. For a new tenant? Maybe, maybe not. If vacant storefronts were a problem in San Francisco before the pandemic, they've only propagated over the last year like the virus itself, raising the question: Will San Francisco's retail corridors ever be the same after such a tumultuous period for small business? "It's really, really, really, really bad," said Clinton Textor, a broker with Marcus and Millichap, speaking about the present moment in which businesses seem to be dropping like flies. "Some of the commercial corridors in the city might be forever changed." He said a recovery could take years. But Textor, like other business owners and real estate brokers Mission Local spoke to, said not all is doom and gloom. They all agreed that while vacancies are high, rent for commercial space is down significantly — as much as 50 percent in some cases. Such low prices, they said, can offer an on-ramp to new business owners who, before the pandemic, could only dream of landing a desirable corner storefront or prime spot on Valencia Street. Pre-pandemic, such real estate could go for $6 a square foot each month. Now, according to some estimates, it can be had for nearly half of that. Formerly Colleen Mauer Designs. Photo by Julian Mark Mark Kaplan, the managing broker at Rockwell Properties, a commercial real estate brokerage, compared the Mission's commercial space market to musical chairs. "Before there were maybe 100 chairs and 105 dancers or so — and you could just charge anything for your chair because someone would eventually sit in it," he said. "Now there's 80 dancers and 100 chairs." Kaplan said landlords do not want their ground floors to be the 20 empty chairs, so they're more willing now than ever to make a deal. The biggest difference, Kaplan said, is that business owners with bad or no credit are more likely to land a space because he, and the landlords he represents, are more focused on questions such as: "Is this business viable? Do these guys have the guts and the stamina to make it work?" "We look at what they're doing, their character. We say, okay, we trust you because there's no one else around, and we think that you're going to give it a good fight," Kaplan said. "And most of the time, we've been right." In July, for example, Krisha Militante and her two sisters opened Diosa Blooms, a flower shop at 3148 22nd St. — a corner space at the intersection of 22nd and Capp with large west- and south-facing windows. Militate, a few years out of college and saddled with student debt, initially started the business in a small spot at ActiveSpace on 18th and Treat but made the decision to upgrade this summer. Despite having a "terrible credit score," she said, she was able to secure a loan and the lease on 22nd. And since then, she said, business has been steadily good, especially as demand for indoor plants has taken off during the pandemic. "Making this transition made us take it more seriously and set it up in a way where it can grow into something a lot bigger," she said. Kaplan, who helped broker the lease, believes it paid off. "We took a little bit of a risk," he said. "And they're doing fantastic." All of that's to say, prices will go down and people will come, Kaplan said. "I don't think we're going to have the vacancies we have now." Empty space on Mission Street near 23rd. Photo by Julian Mark New types of leases Santino DeRose, the managing partner Maven, a commercial real estate brokerage, was also optimistic. "What we found at the end of last year was that, as each industry was opening, people would start calling us to start new businesses from the industry," he said. When fitness studios partially reopened in September, "the phones started to ring," he said. The same went for restaurants as the Shared Spaces program took off and indoor seating was, temporarily, allowed. "We signed about 20 or 30 restaurant deals during covid," he said. But just as important — if not more — is helping existing businesses hang on, DeRose said. Having done his work through three major downturns — the 2001 dot-com bust, the 2008 financial crisis, and the current pandemic — "I learned that the best way to rebound is to keep as many of the existing businesses in place." A large part of DeRose's business this past year has been modifying existing leases. Instead of yearly rent increases of two or three percent, he said, increases are pegged factors such as a business's monthly income. "Percentage rent," for example, is getting more popular, DeRose said. Traditionally used in places like malls and shopping centers, percentage rent typically requires a retailer to pay a base rent, plus a percentage of any income beyond a certain threshold. It can be set up in many different ways, said David Esler, a co-owner of Mission Picnic who also owns several buildings in the Mission. In the case of Mission Picnic, he said, the sandwich shop owes their landlord $4,000 in rent each month — a reduction from its pre-pandemic rent. But if 9 percent of its sales exceed $4,000, the shop will pay that 9 percent as rent. The setup, he said, has been helpful. "We're still losing money every month," he said, noting that Mission Picnic, which drew much of its income from catering before the pandemic, is still seeing sales down 75 percent. Another common arrangement, said Jaron Eliopoulos, a broker with Touchstone Commercial Partners who is marketing a space on Mission Street near 23rd, is pegging each month's rent to an establishment's occupancy or "revenue potential." As a simple example, he said, a restaurant's rent could be set at $10,000 max. But if the city required restaurants to be at 25 percent occupancy during a given month, the rent would only be $2,500. "Landlords understand the benefit of having a tenant even if it's at a discount for a period," he said, noting that this kind of arrangement could last two to three years as the pandemic and its economic fallout remain uncertain. The path forward While most real estate brokers seemed relatively upbeat, District 8 Supervisor Rafael Mandelman, who represents the Castro and parts of the Mission, was not. "We may see the light at the end of the tunnel now, but it's not clear how close it is," he said. He predicts small businesses "are going to be in a world of hurt" even after a reopening. "We know — and we have heard — that there are landlords who are expecting their rent," he said. "So when the moratorium comes off, there may be more small businesses that close because of that." And to the notion that most landlords have been overly accommodating, Mandelman responded, "We have examples of the opposite." On the other hand, Mandelman said, there is a "silver lining." Before the pandemic and its resulting lockdown orders, San Francisco was already suffering from a proliferation of empty storefronts. A deep dive by the San Francisco Chronicle in June 2019 examined empty storefronts in North Beach. Along with seismic retrofits, construction costs, and high rent, a primary culprit of the unused storefronts was the city's long and strenuous permitting system — which, in many cases, requires thousands of dollars and months of waiting for authorization to open. "The pandemic has pushed along some conversations that we're probably long overdue about ways for the city to be more supportive of small business," Mandelman said. For example, he noted Prop. H, which voters passed in November and streamlines the permitting process for some small businesses. Mandelman also called the Shared Space Program, which allows businesses to expediently set up outdoor seating in parklets outside of their businesses, a "bold move." Mandelman also said it's time to examine the necessity of certain business fees, many of which were temporarily suspended during the pandemic. "Do we really want to charge businesses for putting tables and chairs on the sidewalk when it's somewhat creating a public benefit?" he said. The forest Most business owners and real estate brokers we spoke to believe that businesses who got the most creative during the pandemic were ones to survive. "The million-dollar question is, will Valencia come back 100 percent?" asked Esler of Mission Picnic. "Do people move back to the city?" Elser believed that after an initial "culling of the herd" and recovery time, "it'll come back." Kaplan, the broker who mostly works on Mission Street, compared the present moment to a forest. "It's like these big trees have burned and it's this new forest happening — these new seedlings," he said. "There's room for these new seedlings that never had a chance before." Mission Local covers San Francisco from the vantage point of the Mission, a neighborhood with all of the promise and problems of a major city. You can support Mission Local here.