Can Free Rent Revive
Downtown San Francisco?
The
city, which is among those most devastated in the country after the pandemic,
is trying to lure businesses back with a free-rent period.
·
City
and business leaders provide free rent for up to six months, as well as other
funding for business expenses and incentives like technical and business permit
assistance, to entrepreneurs who want to set up shop in empty spaces.
·
17
businesses were chosen to occupy nine storefront spaces last fall.
·
The
city’s office vacancy rate hit 33.7 percent, a record high.
There’s
a buzz of energy in downtown San Francisco from a source that has been missing
for years: occupied storefronts.
One
of those shops is Paper Son Coffee, a roaster with flavors
popular among Latin and Asian American communities that has been operating in
the South of Market neighborhood since June. Before
that, the space had been empty for nearly three years.
“People
who work or live in the neighborhood stop in and are
like, ‘Wow, there is something here!’” said Alexander Pong, an owner of Paper
Son. “They’re excited.”
Paper
Son is part of an initiative to help San Francisco return to the days before it
became a devastating example of what could go wrong with U.S. cities during the
pandemic. The company was chosen to participate in Vacant to Vibrant, a program
initiated last year by the city’s mayor, London Breed, to fill empty space
downtown, which largely makes up several blocks straddling Market Street in the
Financial District and South of Market neighborhoods.
Downtown San Francisco has the highest concentration of vacant storefronts in
the city.
“Retail
rents have historically been very high in the Financial District,” said Santino
DeRose, a principal at Maven Commercial, a real estate brokerage with offices
in San Francisco and Chicago. “But now these businesses have the ability to get
their feet wet and determine whether their concepts are viable in those
locations.”
Under
the program, city and business leaders provide free
rent for up to six months, as well as other funding for business expenses and
incentives like technical and business permit assistance, to entrepreneurs who
want to set up shop in empty spaces, many of which are on the ground floor
of office buildings.
The
hope is that these pop-up operations will pay rent and sign longer leases after
the free-rent period is over, and that their presence will regenerate foot
traffic in the area.
Some
850 entrepreneurs initially applied for a slot, and 17
businesses were chosen to occupy nine storefront spaces last fall. Out of
those businesses, seven extended their leases and now pay rent. Eleven
businesses were selected in May for the program’s second cohort, which started
operating their storefronts this summer.
For
Hilary Passman, the owner of Devil’s Teeth Baking Co., a breakfast and lunch
cafe known for its bacon, egg and cheese sandwiches made with buttermilk
biscuits, Vacant to Vibrant represented a rare opportunity: to open a store at
One Embarcadero Center, a sprawling four-building
office complex in the Financial District that includes shops, restaurants and
entertainment venues.
It
is the third Devil’s Teeth location in the city, and Ms. Passman went on to
sign a five-year lease with the building’s landlord, BXP, a large office
building owner formerly known as Boston Properties.
“I
always wanted to be downtown — prepandemic, it was
busy, vibrant and energetic,” said Ms. Passman, who worked downtown as a lawyer
before starting Devil’s Teeth in the city’s Outer Sunset district in 2011. “But
back then, superbig landlords didn’t want to talk to
a tiny little bakery.”
Those
same landlords are talking now. San Francisco leaders had hoped that a wave of
investment in artificial intelligence start-ups would help revitalize the
office market, but storefronts on the ground floor remained quiet. The city’s office vacancy rate hit 33.7 percent, a record
high, in the second quarter this year, according to JLL, a commercial real
estate brokerage. That’s one of the bleakest office markets in the nation, which
has an average vacancy rate of about 22 percent.
Beyond
free rent, which is typically given for three months with a possibility for
another three months, Vacant to Vibrant provides up to $12,000 to the
businesses to help cover insurance and other expenses. The program also offers
grants up to $5,000 for building owners to cover costs for tenant improvements
in the spaces, as well as for other expenses like utilities.
Most
of the selected businesses are small operators that already have a following
online or whose products and services can lure shoppers out of their homes.
For
the first group, program officials selected equal numbers of food and beverage,
retail and arts, and nightlife and entertainment endeavors.
But food and beverage operations responded better to market conditions, officials
said, and the second group is weighted toward those tenants. Going forward, the
program will bring in new pop-ups on a one-off basis.
While
the program has ushered in new excitement for the city’s economic recovery,
some businesses say that foot traffic isn’t up enough to sign a long-term
lease.
Preethi
Narayanan, who with her partner, opened Koolfi
Creamery, an Indian-inspired ice cream shop, in South of Market in June, said
“the jury is still out” on whether she would extend her lease after the free-rent
period.
“It’s
not as crowded as before the pandemic,” said Ms. Narayanan, who previously
worked downtown as a transportation planner. Still, she said she was hopeful
that more businesses opening nearby would attract more people.
To
help the tenants who signed long-term leases succeed, BXP is initially charging
rent based on revenues instead of a fixed monthly amount. That’s the type of
deal that Julian Prince Dash said he wished he’d had.
In
addition to the Vacant to Vibrant program — which received $1 million from the
city initially and is set to receive another $1 million for the current fiscal
year, which began July 1 — the city is directing nearly $2 million toward a
similar pop-up program. This new program would help businesses occupy larger empty
spaces along Powell Street, as crime and other retail pressures have driven out
several retailers, including Anthropologie, Banana Republic and Crate &
Barrel, in the Union Square area.
Private
businesses are throwing financial support behind the Vacant to Vibrant effort,
too. Among others, Wells Fargo contributed $1 million to help the businesses
execute permanent leases, said Simon Bertrang, the
executive director of SF New Deal.