Westfield gives up on San Francisco Mall, hinting at more pain ahead

Nordstrom. Old Navy. anthropology. H&M. Crate & Barrel.

Downtown San Francisco has seen a mass exodus of retailers in recent months, and one this week the owner of the mall has decided to walk away from a prominent building. Perhaps even more alarming, market analysts say the city still has some way to go before the bleeding stops.

The city has the highest office vacancy rate of any major US city. Rents for retail space have fallen by 21 percent since before the pandemic. And even as tourists return to San Francisco, the amount they spend in the city is 77 percent less than in 2019.

“I don’t think we’re in the upswing for San Francisco,” said Vince Tibone, general manager of the real estate firm Green Street. “I would say we probably haven’t even bottomed out yet.”

On Monday, mall owner Westfield said it would return the Westfield San Francisco Center to the lender, who will decide who will operate the property going forward.

Westfield’s decision to walk away from the location it’s owned since 2002 raised a new set of questions about how long it will take for city centers across the United States to recover and whether retailers and mall owners will move in the meantime. can continue to operate.

Downtown malls have always been a rare sight given the limited space available in city centers for sprawling shopping areas. But those that have been built have long relied on a steady stream of foot traffic from local residents, office workers, convention attendees, and tourists. That calculus was turned on its head during the pandemic.

San Francisco’s office market has been the hardest hit of any major city in the United States, with office vacancy rates falling from 4 percent pre-pandemic to about 30 percent. This has had serious ripple effects for sandwich shops, clothing stores and many other merchants.

Colin Yasukochi, an analyst at CBRE, the real estate services company, predicted that the market would not bottom out until sometime next year. Vacancies, he said in an interview, can be as high as 35 percent.

In San Francisco, the situation in the center was very different from before. Rents fell by 30 percent during the financial crisis a decade and a half ago. And during the dot.com market downturn at the turn of the century, commercial rents plummeted 70 percent. This time the rent decrease is much more modest, around 15 percent.

Mr Yasukochi said this was partly because of what was sometimes described in the industry as “prolong and pretend”. Banks are reluctant to foreclose on non-performing properties because of the dedication required to find tenants and because they would often take over the property at a loss. Instead, they reach accommodation with their borrowers and try to wait out the crisis in the hope that the market will change.

Will the delaying tactic work? “It depends on how long you can pretend,” Mr. Yasukochi said.

In many cases, shopkeepers in urban centers voluntarily choose to leave. In San Francisco, Nordstrom said it would close its old San Francisco Center store in August, leaving the mall 45 percent empty. In May, Anthropologie closed the downtown location it had had for two decades.

In New York, Neiman Marcus closed its Hudson Yards store – the only one in Manhattan – in July 2020, following bankruptcy and just over a year after its grand opening. In downtown Seattle, Nike closed the NikeTown store it had operated since 1996 in January. Outdoor retailer REI said it would close the downtown Portland store for two decades when its lease expired early next year.

Downtown pedestrian traffic is slowly recovering, but for many retailers, sales have not returned to pre-pandemic levels, making it unsustainable to continue paying high rents in prominent downtown areas.

Westfield isn’t the first mall owner to decide to leave an old downtown mall. Last year, Brookfield Property Partners parted ways with Chicago’s Water Tower Place, the mall that anchors the Magnificent Mile, an upscale commercial district. The shopping district has suffered from reduced foot traffic and noticeable retail vacancy since the start of the pandemic. More than half of the space in Water Tower Place is vacant, including an anchor store location that was a Macy until 2021, according to Cushman & Wakefield.

When Macerich sold his 50 percent stake in the other shopping center in the Magnificent Mile – the shops on the North Bridge – in 2022, it took nearly $30 million loss.

Shopping centers are generally struggling. Malls in the United States have lost 50 percent of their value since 2016, according to data from consultancy Green Street. Indeed, Westfield’s decision in San Francisco is part of a broader strategy by its parent company, Unibail-Rodamco-Westfield, to sharply reduce the number of malls it operates in the country.

But analysts say the retail situation in San Francisco is exacerbated by other factors, such as shoplifting concerns, the slower return to the office and the important conference economy that has not fully returned to pre-pandemic levels.

In his statement about his decision to relinquish his ownership, Westfield said San Francisco Center was an outlier from his other malls. In San Francisco Center, sales fell 35 percent from 2019 to December 2022. At one of the group’s malls in nearby San Jose, the company said, sales rose 66 percent during that same period. Sales in the 18 US malls increased by 23 percent.

When Westfield took over the mall in 2002, San Francisco emerged from the dotcom crash. The urban mall was 1.5 million square feet and Westfield collapsed $460 million to an extension. At that time, houses were being built in the center and online shopping was still a new concept. The downtown food court became a draw for office workers on their lunch breaks, and a novelty for tourists accustomed to shopping at street-side stores along Market Street. Inside, they encountered an empire with large spiral escalators that took them to several floors filled with shops.

“It was like a new attraction because there really weren’t any downtown malls,” said Gabriella Santaniello, founder of the retail consulting firm A Line Partners, who lived in San Francisco from 2001 to 2007. .”

It became part of the fabric of the city. The mayor of the city, London Breed, was there shopping for clothes. Willie Brown, the former mayor, is a regular at the movie theaters.

Many San Franciscans fondly remember shopping trips to the Nordstrom store on the upper floors. Dianne Boate, a San Francisco native who ran an underground cake business for decades, recalls shopping for household goods — “anything that looks a little French.” A wealthy friend who flew into town from Florida on a private jet would make a point of going to Nordstrom to buy gifts.

Ms. Boate hasn’t been to the mall in years — not because of the neighborhood’s challenges, homelessness and poverty, which she calls a “sad commentary on the times.” But at 87, she is less interested in collecting things.

“Maybe the downfall of some stores has to do with people realizing they don’t need that much stuff,” she said of store closures in San Francisco. “People’s interests have changed – the way they want to spend their money has changed.”

Some major retailers like Neiman Marcus and Bloomingdale’s decide to stay in downtown San Francisco. Bloomingdale’s, which has a store in the mall and is owned by Macy’s, is “committed to providing exceptional service” in the San Francisco area, a spokeswoman said.

The exits pave the way for retailers who may have struggled to break into San Francisco’s expensive market, said Kazuko Morgan, executive vice president of Cushman & Wakefield’s San Francisco office. Locations that have been occupied for decades are now open and tenants can ask for concessions, which is rare in San Francisco’s commercial market.

“We’ve told tenants it’s a buyer’s market,” Ms Morgan said. “Never in my career – and I’ve been doing this for a while – have we seen this kind of quality real estate available. San Francisco is one of the best cities in the world and clearly has some challenges right now. But we’ll get through it. Look how New York has changed.”