WESTERN SNAPSHOT, JANUARY 2006

San Francisco Retail Market

The San Francisco retail market, a unique one with an international focus, has seen improved performance over the past 3 years while recovering from the dot-com fallout. Several dynamic characteristics make the market interesting to watch. Historically quiet submarkets within the city, focused on office product or without a singular focus at all, are seeing renewed retail activity. The city's core retail submarket, Union Square, is also seeing new activity, creating a rosy outlook for the shopping district.

As for other areas in the city, office-to-residential conversions and new residential developments are bringing retail to the historically underserved submarkets of South Beach and South of Market. The new residences are bringing an influx in population and the accompanying new residents' needs for goods and services near home. In the South Beach, South of Market and Mission Bay submarkets, office and industrial needs have dominated the space with the majority of buildings being brick and timber warehouses.

In the past 4 years, with the advent of live/work lofts and individual warehouse conversions, living spaces in these submarkets have become more prevalent. Developers have taken notice of the residential migration into these areas. Additionally, these submarkets are also seeing a formalization of their use. After years of remaining quiet and unfocused, the South Beach and Mission Bay submarkets are seeing a revitalization with focused office development influenced by biotech companies.

Currently, there is 111,221 square feet of available retail space in the South Beach and Mission Bay areas.

Mission Bay currently has seven residential projects under construction, including Mission Bay developed by Avalon Bay. The South Beach submarket also has a number of residential projects under construction, including St. Regis Residences developed by Starwood Hotels.

Union Square Trends

At the figurative center of San Francisco sits Union Square, a destination shopping district for the city, the surrounding area and the world. With international tourist and local traffic, the area sees high visitor volume practically year-round. The square features many flagship stores for a variety of retailers, from music and computer stores to luxury goods retailers.

Vacancy is 5 percent in Union Square, a 5.1 million-square-foot retail submarket. The average asking rate in this prime submarket is $275 per square foot whereas downtown San Francisco has an average asking rate of $45 per square foot.

San Francisco's Union Square will see a new shopping destination with the completion of the Westfield Centre, located adjacent to the existing San Francisco Center, home to Nordstrom, Max Studio, Club Monaco and Abercrombie & Fitch. The Westfield Centre will feature Bloomingdale's first location in San Francisco in addition to 658,000 square feet of retail space.

In addition to the Westfield Centre's debut, Barney's plans an entrance into the Union Square submarket. The New York-based luxury department store's San Francisco location would be the second one the retailer will open in 11 years, after the store opening in Boston's Copley Place this year.

The city's main shopping district has seen several flagships open in 2005. Zara, H&M and Forever 21 all opened flagships in Union Square. These constitute initial forays into San Francisco for each of the retailers.

The major influx of retailers into the Union Square submarket reveals retail's solid footing there. The new Westfield Centre points to the Market Street corridor's rising profile as a retail destination. Historically, the upper Market Street corridor faced challenges without a major anchoring retail force. This should change in the future.

Luxury Hotels

Retail is feeding off of the success of the new luxury hotels that have opened in Union Square and downtown San Francisco. Both Chip Conley's Hotel Vitale and the St. Regis opened their doors this year. The Hotel Vitale is at the boutique end of the hospitality spectrum with 199 rooms, and the St. Regis is at the ultra luxury end with 260 rooms. The Four Seasons Hotel & Residences also saw Yerba Buena Lane, a walking street adjacent to the hotel, open this fall. Several retailers, such as Coffee Bean & Tea Leaf, Golfsmith and Sports Club LA opened locations in the hotel and along the lane in 2005.

Piers Projects

Both Piers 30-32 and Piers 27-31 expect to undergo development in the future that could bring significant amounts of retail to the wharf area of San Francisco. The Ferry Building, the most recently executed and wildly successful pier project, shows the viability for such development. In addition, older projects such as Fisherman's Wharf and Pier 39, along with newcomer SBC Park, also point to the waterfront's popularity among locals and tourists alike.

Kazuko Morgan is senior director for Cushman & Wakefield of California in San Francisco.

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