Westfield gives up on San Francisco Mall, signaling 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 this week a mall owner decided to walk away from a prominent property. Perhaps more worryingly, market analysts say the city still has a way to go before the bleeding stops.

The city has the highest office vacancy rate of any major American city. Asking rent for retail space has fallen 21 percent since before the pandemic. And even though tourists are visiting San Francisco again, the amount they spend in the city is 77 percent less than it was in 201[ads1]9.

“I don’t think we’re in the recovery yet for San Francisco,” said Vince Tibone, CEO of real estate firm Green Street. “I’d say we probably haven’t even hit rock bottom yet.”

On Monday, mall owner Westfield said it is returning the Westfield San Francisco Center to the lender, which will decide who will operate the property moving forward.

Westfield’s decision to walk away from the site it has owned since 2002 raised another round of questions about how long it will take downtowns across the U.S. to recover and the options retailers and mall owners have to continue operating in the meantime.

Downtown shopping centers 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 flow of foot traffic from local residents, office workers, convention-goers and tourists. That calculation was turned on its head during the pandemic.

The office market in San Francisco has been the hardest hit of any major US city, with office vacancies plunging to around 30 percent from 4 percent before the pandemic. This has had serious knock-on effects for sandwich shops, clothing stores and many other merchants.

Colin Yasukochi, an analyst at CBRE, the real estate firm, predicted the market would not bottom out until sometime next year. Vacancies, he said in an interview, could reach 35 percent.

In San Francisco, the situation in the center has been completely different from before. During the financial crisis a decade and a half ago, rental prices fell by 30 per cent. And during the dot-com market plunge at the turn of the century, commercial rents plummeted 70 percent. This time the fall in rents has been much more modest, around 15 per cent.

Mr. Yasukochi said that was partly because of what was sometimes described in the industry as “extend and pretend.” Banks are reluctant to foreclose on non-performing properties because of the commitment required to find tenants and because they will often take over the property at a loss. Instead, they come to stay with the borrowers and try to wait out the crisis in the hope that the market will turn around.

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

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

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

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

Westfield is not the first shopping center owner to decide to leave a long-standing downtown shopping center. Last year, Brookfield Property Partners divested Chicago’s Water Tower Place, the mall that anchors the Magnificent Mile, an upscale shopping district. The shopping district had struggled with lower foot traffic and noticeable retail vacancies since the start of the pandemic. More than half of the space in Water Tower Place is vacant, including an anchor store that was a Macy’s until 2021, according to Cushman & Wakefield.

In 2022, when Macerich sold its 50 percent stake in the second mall in the Magnificent Mile — the Shops at North Bridge — it took a loss of nearly $30 million.

Malls, in general, are in a difficult situation. Since 2016, shopping centers in the United States have lost 50 percent of their value, according to data from consulting firm Green Street. In fact, Westfield’s decision in San Francisco is part of a broader strategy by its parent company, Unibail-Rodamco-Westfield, to reduce the number of shopping centers it operates in the country.

But analysts say the retail situation in San Francisco is being exacerbated by other factors such as concerns about shoplifting, the slower return-to-office plans and the all-important convention economy that has yet to return to its pre-pandemic levels.

In its statement about its decision to relinquish ownership, Westfield said the San Francisco Center was a departure from its other malls. At the San Francisco Center, sales fell 35 percent from 2019 to December 2022. At one of the group’s malls in nearby San Jose, it said, sales rose 66 percent over the same period. Sales across its 18 American shopping centers increased by 23 percent.

When Westfield took over the mall in 2002, San Francisco was emerging from the dot-com crash. The urban mall was 1.5 million square meters, and Westfield spent $460 million on an expansion. At the time, housing was being built in the city center and online shopping was still a new concept. The centre’s food hall became a draw for office workers on their lunch breaks, and a novelty for tourists who were used to shopping in street-facing shops along Market Street. Inside they were greeted with an emporium that had large spiral escalators that transported them to several floors filled with shops.

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

It became part of the fabric of the city. The town’s mayor, London Breed, could be seen buying clothes there. Willie Brown, the former mayor, is a regular at the cinemas.

Many San Franciscans fondly remember shopping trips to the Nordstrom store on the upper floors. Dianne Boate, a San Francisco resident who for decades ran an underground cake business, remembers shopping for housewares — “anything that might look 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 shop for gifts.

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

“Maybe the demise of some of the stores has to do with the fact that people realize they don’t need as much stuff,” she said of store closings in San Francisco. “People’s interests have changed – how they want to spend their money has changed.”

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

The exits clear the field for retailers who may have struggled to break into San Francisco’s expensive market, said Kazuko Morgan, executive vice president at Cushman & Wakefield’s San Francisco office. Places that have been occupied for decades are now open and tenants can ask for concessions, a rarity in San Francisco’s commercial market.

“We’ve told tenants it’s a buyer’s market,” 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 top global cities and obviously has some challenges at the moment. But we’re getting through it. Look how New York has turned.”

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