Real Estate Today

A new, improved formula

An open letter to the Union Street Association

The Marina Times recently obtained a letter from Pam Mendelsohn of Maven Retail in response to formula retail on Union Street. This letter was directed to Eleanor Carpenter and Leslie Drapkin of the Union Street Association, and it helps to explain the many retail vacancies throughout San Francisco. Mendelsohn generously agreed to share the letter with our readers. 

As you may know, I have lived in this part of town for over 40 years. The professional relationships and transactions that I make in my professional life can dramatically affect my personal life, my family, and my neighbors. I am not a proponent of big-box retail in our neighborhoods, nor do I want to see our neighborhoods filled with fast food chains. However, the term “formula retail” is all-encompassing and tends to clump smaller emerging (and often local) restaurateurs and retailers with the likes of McDonald’s, Supercuts, and Dollar Store. I believe that the city should make a distinction, and not just leave it at “11 or more stores.”

As brokers, we hear about formula retail and permitting on a constant basis. Frankly, our biggest obstacle is not high rents, but rather the crime, looting, filth, and homeless roaming the neighborhoods and our downtown area. Shoppers, neighbors, employees, and merchants simply just do not feel safe and complain about this on a daily basis. You both know I love this city and put my best efforts forth into making it better, so this is all heart-breaking for me.

Prior to the pandemic, we had seen a drop in interest from tenants that would be considered formula retail by 70–80 percent, simultaneous with a very sudden drop off in retailers wanting to come to San Francisco. During my last prospecting trip to New York City in late February 2020, I scheduled about 20-plus tenant/broker meetings over a period of four days. The meetings were made as a continued effort to bring good quality, up-and-coming retailers to our neighborhoods and Union Square. I arranged the meetings and attended them with our Maven partner from Chicago. Our partner was flabbergasted at the responses we received from the prospects during our meetings regarding our request for them to expand to San Francisco. Most of the negative comments revolved around crime, homelessness, filth, and general comments about what they thought were “over-reaching bureaucratic policies in the city.” We were told San Francisco was too scary and that it was just a tough place to conduct business. They basically said business was tough enough as is, and that they had other U.S. cities bending over backward to get them to open up stores in their neighborhoods and downtown areas, and they did not want to deal with San Francisco. I also heard again countless stories about employees and companies dealing with crime.

Post-Covid, we have experienced scores of vacancies with more to come. The city’s homeless and crime issues have only increased, and it is harder than ever to attract both local and out-of-town businesses. Our process, whether a conditional use permit (CUP, often required for formula retail) or even a simple over-the-counter permit, are ridiculously expensive and time consuming for tenants. Our processes and rules are hard to maneuver even for the most experienced merchant. As of yesterday, the waiting time for a pre-app for anover-the-counter permit is fourmonths, with no appointments until Jan. 26, 2021, which is ridiculous, even during this pandemic. As you can imagine, this is devastating for the retailer that hoped to open for the holidays. The tenants have historically been responsible for paying rent from delivery of the premises, often resulting in paying rent while they stand in line waiting for the city officials to respond to their request for permits.

The formula retail process was originally introduced and put in place to protect our local tenants. However, formula retail created a false demand for space with out of town retailers eventually learning that if they wanted to open in San Francisco, they needed to do so before they reached 11 stores to avoid a costly and very long process. As a result, a tenant who comes close to the formula retail threshold is willing to pay more for the space, thus increasing the rents in the marketplace — and hurting the local tenants. Formula retail did the opposite of what it was set out to do; neighborhood rents, which had been constant for so many years before the global cap of 11 stores, grew quickly. And as the CUP delay went up (pre-Covid, it increased from about four months to 10 months), the few businesses that did want to enter the San Francisco market were paying even higher premiums to get here before they hit the 11-store threshold. 

About two years ago, as formula retail process cost escalated,  housing and labor costs went up, homelessness and crime grew, and we have fallen off the list of “must have” locations — and it is accurate to say that San Francisco has been passed up for other “business-friendly” cities. During the pandemic, the tenants that will pay the fees and the rent during the formula retail process are very few and far between. In fact, they have all but disappeared. 

Sadly San Francisco’s reputation is that it is a difficult and not business-friendly city. I’m not sure how many more companies need to pull out of San Francisco before we as a city start to understand the long-term impacts on our lives. One only needs to walk the neighborhoods and talk with the shoppers in stores and the diners in the restaurants to understand how worried local people are about the loss of merchants and the vibrancy of their neighborhoods. It is hard to hear that it is hard to love San Francisco right now. Again, I have lived here for most of my life.

At the moment, there are not enough local merchants to fill our vacancies. I strongly believe that our neighborhoods and downtown areas would benefit by either a temporary measure loosening formula retail restrictions (perhaps for 12–24 months) until we find our way past this economic downturn, or a measure that distinguishes smaller emerging brands from the big-box retailers, perhaps by creating a middle-level of 12–25 locations. I believe the city would also benefit from legislation that would not treat a pop-up (of 24 months or less) like a long-term business.

This is my two cents as a professional in the industry and as your neighbor of 40-plus years.

Pamela Mendelsohn is a principal at Maven Retail, a San Francisco-based firm focused on urban retail leasing. She is an expert in commercial leasing and tenant representation in San Francisco and nationally.

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