San Francisco | Free rent to revive downtown?

Downtown San Francisco is experiencing a surge of energy from a source that has been lacking for years: occupied storefronts.

One such store is Paper Son Coffee, a roastery with flavors popular among Latino and Asian communities that has been operating in the South of Market neighborhood since June. Before that, the space had sat empty for nearly three years.

People who work or live in the neighborhood stop by and say, ‘Wow, there’s something here,'” says Alexander Pong, owner of Paper Son. “They’re excited.”

Paper Son is part of an effort to help San Francisco reconnect with a time when the city wasn’t yet a devastating example of what could go wrong in American cities during the pandemic. The company was selected to participate in Vacant to Vibrant, a program launched last year by Mayor London Breed to fill empty spaces in the city’s downtown, which consists primarily of several blocks straddling Market Street in the Financial District and South of Market neighborhoods. Downtown San Francisco has the highest concentration of vacant storefronts in the city.

“Retail rents have historically been very high in the Financial District,” said Santino DeRose, principal at Maven Commercial, a real estate brokerage with offices in San Francisco and Chicago. “Now these companies have an opportunity to go out and see if their concepts are viable in these locations.”

Under the program, the city and business leaders offer free rent for up to six months, as well as other funding for business expenses and incentives such as technical assistance and help obtaining business permits to entrepreneurs who want to move into empty spaces, many of which are on the ground floors of office buildings.

The goal is to encourage these businesses to pay their rent and sign longer leases after the free period ends, and to ensure that their presence regenerates pedestrian traffic in the neighborhood.

Some 850 entrepreneurs applied and 17 businesses were selected to occupy nine commercial spaces last fall. Seven of them have extended their leases and are now paying rent. Eleven businesses were selected in May for the second cohort of the program, which began operating their storefronts this summer.

A rare opportunity

For Hilary Passman, owner of Devil’s Teeth Baking Company, a breakfast and lunch cafe known for its bacon, egg and cheese sandwiches made with buttermilk biscuits, Vacant to Vibrant represented a rare opportunity: to open a store at One Embarcadero Center, a sprawling four-building office complex in the Financial District that includes shopping, dining and entertainment.

This is the third Devil’s Teeth store in the city, and M^me Passman signed a five-year lease with the building’s owner, BXP, a large office building owner formerly known as Boston Properties.

“I always wanted to move to the city centre – pre-pandemic, it was a busy, vibrant and energetic place,” says M.^me Passman, who worked downtown as a lawyer before opening Devil’s Teeth in the city’s Outer Sunset neighborhood in 2011. “But back then, big landlords weren’t interested in a tiny bakery.”

Those same landlords are now taking notice. San Francisco’s business community had hoped that a wave of investment in artificial intelligence startups would help revitalize the office market, but ground-floor storefronts have remained empty. The city’s office vacancy rate hit a record 33.7% in the second quarter of this year, according to JLL, a commercial real estate brokerage. It’s one of the country’s bleakest office markets, with an average vacancy rate of about 22%.

For now, though, Vacant to Vibrant represents a beacon of hope for San Francisco.

Rod Diehl, BXP’s executive vice president who oversees West Coast properties, said the pop-up strategy is beneficial not only for local business owners, who can test their concepts and explore growth opportunities, but also for office leasing efforts. In addition to Devil’s Teeth, BXP has signed long-term leases with three other Vacant to Vibrant graduates.

In addition to rent-free rent, which is typically granted for three months with the option of an additional three months, Vacant to Vibrant provides businesses with up to $12,000 to help cover insurance and other expenses. The program also provides grants of up to $5,000 to building owners to cover the cost of tenant improvements to spaces as well as other expenses such as utilities.

Most of the selected businesses are small businesses that already have online customers or whose products and services can attract customers away from home.

For the first group, program officials selected an equal number of businesses from restaurants, retail and arts, and nightlife and entertainment. But restaurants responded better to market conditions, so the second group is made up of those tenants in the majority. In the future, the program will welcome new pop-up businesses on an ad hoc basis.

While the program has generated new enthusiasm for the city’s economic recovery, some businesses say attendance isn’t high enough to sign a long-term lease.

Priti Narayanan, who opened an Indian-inspired ice cream shop in South of Market with partner Koolfi Creamery in June, says “the jury is still out” on whether she will extend her lease after the rent-free period.

“There are not as many people as before the pandemic,” Mr.^me Narayanan, who previously worked downtown as a transportation planner, is hoping that the opening of new businesses nearby will attract more people.

Beyond filling empty storefronts, the program has the potential to bring a breath of fresh air and a more local experience to downtown, said Laurel Arvanitidis, director of business development at the San Francisco Office of Economic and Workplace Development. Her organization runs the program with SF New Deal, a nonprofit that seeks public-private partnerships to provide grants and other assistance to small business development.

“I think in the first round of pop-ups, owners were hoping that the economy would magically come back and a Starbucks would pop up in three months,” Mr.^me Arvanitidis. But these companies create excitement on the upper floors of offices and residential buildings in a way that excites the owners.”

Rent based on turnover

To help tenants with long-term leases succeed, BXP initially charges a revenue-based rent instead of a fixed monthly amount. It’s the kind of deal Julian Prince Dash would have liked to have.

In 2006, Mr. Dash founded Holy Stitch, a company that combines education and sewing to revive denim manufacturing in San Francisco. His company was part of the first Vacant to Vibrant cohort, but after six months of rent-free rent, the landlord was asking for $23,000 a month. The rent was eventually reduced to about $15,000 a month at the end of negotiations, but on a month-to-month basis, which created too much uncertainty for Mr. Dash.

Holy Stitch now occupies space on Market Street as part of another program funded by the Office of Economic and Workplace Development.

In addition to the Vacant to Vibrant program – which received $1 million from the City initially and is expected to receive another $1 million this fiscal year, which began on March 1^er July – the city is dedicating nearly $2 million to a similar pop-up program. The new program would help businesses fill larger empty spaces along Powell Street as crime and other retail pressures have driven several brands, including Anthropologie, Banana Republic and Crate & Barrel, out of the Union Square area.

Victor Gonzalez, an entrepreneur who founded GCS Agency, which organizes exhibitions for artists, seized the opportunity to establish a presence downtown despite the city’s challenges. When he opened a space as part of the first Vacant to Vibrant cohort in the Financial District last year, he knew right away that he wanted to stay there for as long as possible. He has since signed a three-year lease.

“San Francisco is no stranger to boom and bust,” he says. “If we’re in a bust, what’s next? It’s a boom. And I want to be able to be a part of it.”

This article was published in the New York Times.

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