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Vacancy Rates Among The Lowest For San Francisco Retail

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Vacancy Rates Among The Lowest For San Francisco Retail
Union Square in San Francisco

Despite deteriorating market conditions for retail at large, San Francisco’s retail market remains strong with a healthy stock of visitors coming into the city each year and incredibly low vacancy rates. Tourism, which brings in impulse buyers, had another great year in 2016 with the number of San Francisco visitors up 2.8% to 25.3 million. These visitors spent $9.7B in 2016, about $26.5M each day.

While retail vacancy is among the lowest in the country, vacancy rose 20 basis points to 2.4% during the first quarter of 2017 compared to 2.2% in Q4 2016, according to Cushman & Wakefield. First quarters are typically marked with closures after the holiday season as brick-and-mortar retailers fix overexpansion and also shift parts of their operations to e-commerce.

Cushman & Wakefield expects food-and-beverage concepts to dominate leasing transactions in San Francisco’s retail and expects demand for neighborhood retail to remain strong. Limited availability may push rents up moderately.

Even with these market conditions, several retailers opened new locations during the quarter. Grocery Outlet opened a 20K SF store in the Mission. The first phase of a new food hall in Chinatown also opened; when it is fully completed in 2017, it will provide a three-story 30K SF eatery with tea café, restaurants, retail, bar and lounge. Other retailers to open additional locations are Cole Hardware and illy Caffe.

Union Square remains an active retail destination and several large acquisitions occurred last year. Macy’s Men store was the biggest transaction to close in Q1 2017 for $250M ($948/SF). Morgan Stanley and Blatteis & Schnur will redevelop the building into a mixed-use destination with flagship retail, art galleries, artisanal food, restaurants and office.

Vacancy Rates Among The Lowest For San Francisco Retail
6X6 in San Francisco's Mid-Market

During the first quarter, vacancy increased 70 basis points to 4.2% compared to 3.5% at the end of 2016 due to tenant expirations and relocations. Rents remained relatively unchanged at $700/SF during Q1 2017, increasing slightly from the $685/SF from the year-ago quarter.

Among Union Square closures are Bristol Farms within the Westfield San Francisco Centre, Kuleto’s Restaurant, Lefty O’Douls and BCBG. Store openings included the 21K SF Trader Joe’s in the Union Square/Yerba Buena area, Urban Tavern, which reopened in the Hilton Hotel off O’Farrell Street, and Halal Guys.

Within the next two years, about 450K SF of additional retail will be added to the market. The newly constructed 250K SF 6X6 in San Francisco’s Mid-Market is actively leasing and expected to open in 2018. Transbay Transit Center will add 100K SF of new retail and is expected to open to shoppers by the end of 2017. The Chase Center also will add 100K SF of retail with an expected completion date of 2019.