Bloomberg News

San Francisco Dining’s ‘Golden Age’ Lifts Retail Real Estate

November 02, 2011

(Updates with Michelin ratings in seventh paragraph.)

Oct. 26 (Bloomberg) -- San Francisco’s wave of new restaurants is driving the retail property market as tourism and technology firms bolster a dining revival throughout the city.

Almost 300 eating, drinking and food-related establishments have opened in the last two years, spurring a surge in demand for street-level real estate, according to Cushman & Wakefield Inc. The retail vacancy rate, already the lowest in the U.S., will drop further and rents are poised to rise as more businesses seek space, said Ryan Severino, senior economist at research firm Reis Inc.

“The city is firing on all cylinders and we don’t have a lot of space that’s turn-key ready or easy to convert,” said Kazuko Morgan, head of retail at Cushman’s San Francisco office. Food deals account for a third of the brokerage’s retail business in the city, she said.

The dining revival wouldn’t be possible without the technology industry that’s fueling a rebound in the economy and providing customers for new restaurants, said Ted Egan, the city’s chief economist. Hiring at such San Francisco-based firms as Twitter Inc. and Salesforce.com Inc. has contributed to five straight quarters of office occupancy gains and the lowest jobless rate of any metropolitan area in California.

Visitors to the city spent an almost-record $8.3 billion in 2010, the most recent data available, according to the San Francisco Travel Association, a trade group. The San Francisco area’s retail vacancy rate was 3.7 percent in the third quarter, compared with 11 percent for the U.S. average, Reis data show.

‘On Fire’

The boom stretches from the Financial District, where Michael Mina merges Japanese and French influences with haute- cuisine technique, to South of Market, where Sushirrito serves Asian fusion burritos. Dozens of specialty stores in neighborhoods across the city sell such artisan products as salt-and-pepper ice cream and gluten-free cupcakes.

Mina’s restaurant earned a single star in Michelin & Cie’s new guide to the San Francisco area, released today. It’s one of 39 establishments in that category.

Michelin, a producer of dining guides since 1900, this month added 19 entrants to its list of best-value restaurants in the San Francisco area, while the Los Angeles Times ventured north to sample six hot spots and pronounced the scene “on fire.”

“It seems like a new golden age,” Meesha Halm, San Francisco editor for Google Inc.’s Zagat Survey dining guides, said after reviewing thousands of results from the 2012 edition.

‘Sex Appeal’

Landlords have taken notice and are seeking the “sex appeal” of a popular restaurant for their buildings, said Vikki Johnson, senior managing director at Colliers International.

A ground-floor space in 101 California St., a Financial District high-rise owned by Houston-based Hines, has at least four potential candidates, according to Colliers. Johnson said JPMorgan Chase & Co. at 450 Sansome St. and Broadway Partners at 100 California St. are fielding bids for real estate from restaurant groups showing “keen interest.”

A thriving dining business can give property owners a competitive advantage in a city like San Francisco with a “creative and innovative” business community because it can help attract office tenants, said Rob Black, director of the Golden Gate Restaurant Association, a lobbying group.

Upfront Costs

For some property owners, eateries may not be the first choice of tenant because they often entail risk that chain retailers with national credit don’t have, according to Morgan of Cushman & Wakefield. Restaurants have high upfront costs for design and equipment and are usually structured as limited liability companies, restricting what landlords can recover if the business fails, she said.

Startup costs average $250,000 to $500,000, according to Thad Vogler, an industry consultant who helped start the acclaimed restaurants Jardiniere and the Slanted Door

The recent successes are carrying the day for landlords, according to Johnson.

“People are giddy about seeing the new concepts being developed by chefs and restaurateurs who already have a huge fan base,” she said. “These aren’t sandwich shops. They’re very competitive businesses with extraordinary expectations.”

The San Francisco area has been in the forefront of food culture in the U.S. since at least 1971, when Alice Waters opened Chez Panisse in Berkeley. Her emphasis on cooking with the finest and freshest ingredients, and buying from local producers, came to be known as “California cuisine” and inspired a generation of chefs nationwide, according to Halm.

‘Head-to-Tail’

Current trends include more-affordable offshoots of high- end establishments, and “head-to-tail” -- cooking with all parts of the animal. Some chefs are offering “offal nights,” with exquisitely prepared meals of gizzard, tripe and other low cuts of meat, according to Black of the Golden Gate lobbying group.

The openings follow the 2008 financial crisis and ensuing recession, when retail leasing demand and rents plunged across the U.S. Rates in the San Francisco metropolitan area averaged $29.84 a square foot in the third quarter, little changed from a year earlier and down only 3.4 percent from the third quarter of 2009, according to New York-based Reis.

The city’s traditional strength as a retail market and international tourist destination may have persuaded landlords they’d be able to lure tenants without substantially lowering rents, Severino said.

Landlord Concessions

While the city’s retail rents have held their ground, the published numbers don’t reflect concessions property owners granted to tenants after the economic downturn, according to Anna Weinberg, who opened Park Tavern in the North Beach neighborhood last month.

“Hard-line leases” that could penalize a restaurateur with the loss of personal assets have fallen by the wayside and landlords have been “much more agreeable,” said Weinberg. In February 2010, she started Marlowe in the South of Market district, also known as SOMA.

The recovery in San Francisco has made it easier for restaurant groups to raise money, compared with the immediate aftermath of the credit crisis, when banks froze lending and investors were scarce, according to Johnson.

Many in the current crop kept their plans alive during the recession, Vogler said. He obtained a $200,000 loan from his landlord to turn a former SOMA garage into his first restaurant, Bar Agricole.

James Beard Award

“I think this recent group of restaurants is this strongest group ever, because we’ve worked so hard to get things open,” said Vogler, whose “modern urban tavern” was this year’s James Beard Foundation Award winner for best design. “They’re survivors who wouldn’t let things go under.”

Nationwide, U.S. mall owners are also turning to restaurants to fill their empty properties, giving patrons a reason to stay on the premises as Internet shopping cuts visits to stores, according to Green Street Advisors Inc.

“Restaurants can’t be replicated online,” said Cedrik Lachance, managing director at the Newport Beach, California- based research firm. “You’re seeing more food uses in malls and strip centers around the country. Landlords are pragmatic.”

San Francisco’s revival shows no sign of letting up as eateries serving Austrian, Cajun and Vietnamese fare -- along with taco trucks that serve food out of vans, and so-called pop- up restaurants that temporarily take over unexpected locations - - enter the scene, said Halm of Zagat.

A run-down neighborhood near City Hall known as Mid-Market, which has a 21 percent office vacancy rate, may be the next frontier for fledgling chefs. Twitter, the messaging service with a stated 100 million users, has announced plans to relocate there in mid-2012 and will probably lure other businesses, said Adam Lasoff, a Cushman & Wakefield broker.

“It’s not reflected yet, but you’re going to see a lot of retail follow Twitter,” he said.

--Editors: Christine Maurus, Daniel Taub

To contact the reporters on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net;

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net


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