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Real Estate Investor

Going for the gold

Short-sightedness vs. long-term relationships
Running a small business in San Francisco is expensive and difficult. Are landlords adding to owners’ woes? Photo: JOE MABEL

Most of the time, when people think of good or bad business practices, they are thinking of business-to-consumer companies, businesses whose customers are private consumers. But the rules of good business apply also to the business-to-business community, and if done poorly, they can have knock-on effects that also hurt the end consumer.

The city’s commercial landlords are business people who have some of the best assets in the country. Retail, office, warehouse, or multifamily space in this booming city where real estate competition is kept artificially low is a good gig; it would not be accurate to say it’s a license to print money, but if one isn’t greedy, it is a ticket to steady income. If one isn’t greedy.

One recent Sunday afternoon, I visited Noe Valley’s 24th Street shopping district in search of lunch. Wandering the streets, I turned into a charming little shop selling glassware, wall-hangings, and other vintage interior design objects. It was a nice selection; beautiful crystal glassware sets filled a wall of shelving, behind the cash register was a vintage (1930s? 1950s, maybe?) clock attached to a metal sign reading “DINER.” If you just moved into your (frankly overpriced) Noe Valley home and wanted to give it some flair, you could discover some great things at this store.

As I browsed, the store’s owner behind the counter helpfully gave some price tips on the items I was examining, and we soon fell into a conversation about what had drawn me to the store. I told her about lunch and then just browsing down the street, and she said she wished there were more people like me—”The new folks moving in buy everything online.”

She was certain that the online retailers were hurting the local storefront retailers. She predicted that her street will end up with more coffee shops and hair stylists, but it’ll have lost the independent design stores, interiors stores, and such like hers.
I had heard that complaint before. I don’t think it’s exclusively a “new folks” or a “young folks” trait. Amazon and other online retailers have gotten more than a little of my money. But I’m not an either-or type of person. I like shopping online; I also like wandering through brick-and-mortar stores, touching things for myself.

Running a small business is difficult and it’s expensive. San Francisco business owners are already dealing with a minimum wage headed to $15 an hour, new parental leave costs, battles with the city’s planning departments over lost parking spaces for their customers, a spike in property crimes, and of course competition from other small businesses, big-box stores, and online retailers. And then they have to deal with landlords who would like to see them vacate the space.

The store owner said 24th Street was hurting because of online competition and a lack of interest of new residents. She explained that just in the past month, three stores had closed on the street. Furthermore, five or six storefronts were sitting empty because the landlords had chased away existing tenants by dramatically hiking their rents, but then the building owners couldn’t find new tenants willing to pay the higher rents. So there are stores on a prime shopping street in one of the toniest neighborhoods in the city that are sitting empty for several months at a time. We see the same thing in parts of the Marina.

Indeed, across the city and perhaps in other booming cities around the country, there are some short-sighted landlords who are trying to replace long-term, stable business tenants with hip new businesses that can pay rents three or four times what the old tenant paid. As pro-business as I usually am, I still find myself thinking these landlords are shooting themselves in the feet.

The woman I was talking with was a good business owner; engaging her customers, knowledgeable about every item we asked about, talkative but not obnoxiously so. If you were looking to buy the types of things she sold, her store would be a good place to visit.

We chatted some more about the short-sightedness of some landlords who will face an unwelcome comeuppance when the current real estate boom busts, and it will.

Finally, I asked: So when does your lease expire?

“In four years,” she said.

With any luck, the market will have crashed by then and she’ll get a reasonable renewal rate. She said that was what her husband was hoping for, too.

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