Retailers and Landlords Get Creative with an Eye to 2021 Upturn

SAN FRANCISCO—Neighborhood retailers are the heart and soul of local communities, and create that unique character that makes them special to residents and visitors alike. Not only are these retailers fighting headwinds from COVID-19, there are challenges beyond the virus such as the online onslaught of Amazon and others, the lengthy permit process from local jurisdictions, and the ever-growing costs of simply opening a brick-and-mortar location.

Hundreds of shops and restaurants in San Francisco and elsewhere have been reporting closures, with more to come amid the ongoing pandemic. At the same time, some businesses are displaying creativity and resilience in finding solutions, and landlords are helping.

According to retail broker and adviser Maven Commercial, these retailers are making lemonade from the lemons of a soured economy. Examples include Spork and Stix opening its first-ever brick-and-mortar cafe, Il Casaro and Maison Danel changing business plans to accommodate the downturn, and an entrepreneurial café owner turning to online magic.

“The vast majority is struggling and we are spending enormous time counseling shop owners and landlords on solutions,” Santino DeRose of Maven, which represents retailers and landlords in Bay Area commercial real estate, tells GlobeSt.com.

A silver lining for many businesses is there are highly competitive rental rates and a plethora of move-in ready spaces in today’s market, says Maven.

“Everyone’s on the same side of the (negotiation) table these days, finding ways to survive and move forward,” adds Maven’s Pam Mendelsohn.

Landlords such as Veritas Investments stepped up to help existing tenants and worked quickly to facilitate new businesses that could take advantage of the emerging opportunities. Like its own hard-working tenants, Veritas has been devoting lots of overtime to help stabilize tenants, and get creative with ideas and solutions.

“We went right away to our retail tenants because we all need to get through this together,” said Jeff Jerden, Veritas’ COO. “We’ve shared the pain. And it is a huge shared win when a retailer says they’re seeing some light of day.”

Maven and Veritas cited several retailers pursuing creative alternatives for moving forward:

Pivot: Taking advantage of this time of opportunity, Spork and Stix is pivoting its highly successful food truck business to take advantage of vacant retail space at 450 Judah, opening its first brick-and-mortar space in the region. The locally owned and operated firm is expanding its Thai and Korean fusion fare from mobile into one of the city’s storied neighborhoods, using the new kitchen for more catering and delivery as well.

Go all out: Ramping up take-out/pick-up is a big story for Il Casaro, one of the most popular pizza pie experts in North Beach, which heretofore had a stronger dine-in business than anything else. By making it easy to order by phone, web or “however they want to let us know”, the Italian eatery is serving a hungry clientele.

Simplify: Maximizing its core offerings, Maison Danel, a French patisserie that opened to rave reviews just weeks before the citywide shutdown, has come back with a trimmed-down menu of must-have pastries and desserts. Customers are responding with online orders, take-out and drop-bys.

Veritas says many other tenants are finding ways to cope with the difficult times. Shops such as Barnzu, Woodhouse Fish Co. and Plant Therapy have simplified offerings, pivoted or ramped up take-out too.  Innovative entertainment-based cafe Magic Patio began offering “Magic Studio” shows online, with a combination of humor, magic tips and recipes, and a welcome-back strategy for when things return to normal.

Landlords have had to pivot too.

While many tenants received funding assistance from recent federal programs, many did not, and everyone needed individual solutions. For example, Veritas found that 25 or more of its tenants had scored direct paycheck protection program funding to help cover payroll, rent and other expenses. About 50 more tenants who didn’t receive federal assistance were given priority attention in working out solutions to help them get through the tough times.

Veritas’ own PPP funding enabled it to provide more resources within its management team to assist retailers through lease modifications or business planning. As for Veritas’ direct accommodations to tenants, strategies typically included some combination of rent abatement that forgave a portion of rent due and/or deferred rent that pushed out the obligation within a mutually agreed period or other creative ideas. This action plan met the retailers’ own plans and ability to pay without forcing a big back-end payment or other onerous terms.

San Francisco’s retail scene has been jolted by an array of factors, including the coronavirus. Retail vacancies are at dramatically high levels, driven partly by the empty 6X6 shopping mall on Market Street. This vacancy will be filled in 2021 by an urban concept Ikea.

Vacancy levels in San Francisco were at 14.4% in the spring, up from 14% in the winter. Springtime asking rents were at $42.38, a decline of more than $2 a square foot from $44.96 in the winter, a second quarter Colliers International report showed.

Vacancies for retail properties rose during the spring compared with winter in the East Bay, San Mateo County and San Francisco, but vacancies shrank in Santa Clara County. Asking rents for retail spaces rose in Santa Clara and San Mateo counties, but decreased in San Francisco and the East Bay, according to the Colliers report.

East Bay retail vacancy levels were at 8.4% in the spring, a slight increase from 8.3% in the winter. The hottest East Bay submarkets remain Berkeley, Emeryville and central Contra Costa, says Colliers.