New Commercial Real Estate Remains Robust in Potrero Hill and Mission Bay, Older Storefronts Suffering

in // by

The commercial real estate market in Potrero Hill and Mission Bay has so far been largely immune to COVID-19’s economic disruption. Vacancies remain low, office rents are rising, and tenants are signing leases for newly constructed retail storefronts. Life science spaces with research laboratories have a waitlist.

“It seems almost impossible when you look at what’s going on. These two submarkets – Potrero Hill and Mission Bay – they’ve had an increase in rental rates. They’ve maintained themselves and do not have a lot of vacancy,” said Elizabeth Hart, vice-chairman in the San Francisco office of Newmark Knight Frank, a commercial real estate advisory firm. “It is odd to see a rent increase in these two submarkets when you see a decline overall in San Francisco.” 

Mission Bay’s office rents increased from an average of $100 to $105 per square foot from the first to second quarter of 2020. Average prices on the Hill and Showcase Square rose from $73.97 to $78.30 per square foot over the same period.

Lexi Russell, director of research and analysis for CBRE, another commercial real estate firm, said “Class A” spaces on the Hill and Showplace Square rented for $83 per square foot in the first quarter, a bargain compared to Financial District prices, which averaged $88 per square foot. Office buildings are generally classified by age, amenities, and aesthetics. Class A buildings have high quality infrastructure and other attractive characteristics, such as a good location, access, and appearance. 

“Potrero Hill is a desirable area for cost conscious tenants,” Russell said. 

Class B space on the Hill rented for $76 per square foot, Class C for $68 per square foot during the first quarter. The Hill’s 2.4 million square feet of office space comprises less than three percent of the City’s 84 million square feet of total commercial area. The Hill’s vacancy rate is 4.7 percent.

“That really limits your options at what you can look at and what you can do,” Russell said of the low vacancy rate.

Citywide, commercial vacancies rose from 4.4 percent in February to 6.4 percent by the end of the June, according to data Hart supplied. Subleased office space increased from 3.37 million square feet, or four percent of the market, to 5.29 million square feet, 6.3 percent. There was a corresponding rise in availability of direct leasing space, from 5.8 million square feet, or 6.9 percent citywide in February, to 6.63 million square feet, 7.9 percent, by the end of the second quarter. 

“Given we have been under stay-at-home orders since mid-March, touring has been greatly reduced, which impacts the ability of companies to commit to the available space,” Hart said. “Beyond the economic impact being experienced, it is challenging for offices to be committed to when they cannot be toured and evaluated.” 

Commercial landlords in Dogpatch have temporarily reduced rent for retail and production, distribution and repair tenants forced to close during shelter-in-place. Mark Dwight, owner of Rickshaw Bagworks at 904 22nd Street, said he resumed paying full rent after his landlord of 13 years extended a discount for two months. Rickshaw Bagworks successfully retooled to make fabric facemasks after the factory briefly closed because bag production was deemed nonessential. Dwight said the ability to pivot and keep his business afloat made it possible to pay full rent, allowing the landlord to continue collecting lower fees to a few retail tenants while they remain closed.

“I’ve heard anecdotally from people who’ve requested reprieves in their rent and they were not given them. It’s a little bit of Russian roulette for the landlord. If you lose that tenant, you might not find a new tenant,” Dwight said. “When I walk around town, the Financial District and Nob Hill, I see so many closed businesses. It’s going to take a while to come back. From ground level, it looks bleak.” 

Workshop Residences, at 797 22nd Street, recently announced that it was permanently closing, Dwight said. He predicts 40 to 50 percent of San Francisco’s restaurants will go out of business. 

“Ground floor small retail and restaurant will see high vacancy rate,” said Dwight.

Mayor London Breed implemented a commercial eviction moratorium in March, which applies to commercial, sub, and month-to-month or holdover tenants that have gross receipts at or below $25 million, which have missed a payment during the moratorium period. Documentation that COVID-19 financially harmed the business must be provided. Last month, as the pandemic continued to cause financial hardship, Breed extended the moratorium to August 15. 

“A moratorium on eviction; that’s just delaying the inevitable,” Dwight said. “No court is going to allow a tenant to stay in their business indefinitely. In California, there’s no rent control for commercial tenants.”

Workplace health strategies to prevent COVID-19 outbreaks will likely reshape office layouts, with desks spaced farther apart and staggered work shifts being considered to lessen density. 

“Employee wellness is paramount,” Hart said. 

The San Francisco Business Times reported last month that lack of available laboratory space prompted Bayer HealthCare, 455 Mission Bay Boulevard South, to consider moving its research and development operations to Berkeley. Bayer had been looking to expand in Mission Bay.

“Mission Bay commercial spaces are primarily life science buildings, except for the four buildings not quite occupied that Uber has been working on,” said Terezia Nemeth, senior vice president of development and community relations for Alexandria Real Estate Equities, the developer and landlord for several Mission Bay life science campuses. “Occupancy has been 100 percent for the last five years. We have multiple interests and demand for any space when it opens up. We’ve not experienced any difference in occupancy.” 

Alexandria wants to build a life science campus at 1450 Owens Street, Mission Bay’s last undeveloped commercial property, featuring a seven-story building rising 109 feet and 169,810 square feet of life science research labs, meeting rooms, and a retail area which’ll be marketed as a café. The property is adjacent to Interstate-280, near where Mission Bay Drive crosses the Caltrain tracks and meets Owens Street at the traffic circle. 

Last month the Mission Bay Citizens’ Advisory Committee (CAC) endorsed the building exceeding present height limits of 39 feet, the level of the freeway guardrail adjacent to the property. CAC approval followed an informational presentation by Alexandria to the Potrero Boosters at its June virtual meeting, where it was favorably received. The project will now be evaluated by the Office of Community Investment and Infrastructure. 

Hart, who represents technology companies, has leased more than one million square feet of San Francisco office space to Uber Technologies. That includes 423,000 square feet at 1455 and 1515 Third Street, an 11-story tower and a six-story building in final construction stages, built in partnership with Alexandria to serve as Uber’s headquarters. After COVID-19 health directives forced companies with non-essential workers to temporary close this spring, Forbes and San Francisco Business Times reported massive layoffs by Uber. Asked about those reports, Hart cited a nondisclosure agreement with clients. 

“I can say, many of my clients in San Francisco have a deep employee base and are committed to being part of this community,” Hart said.

“Every indication is they intend to finish those projects and occupy them,” Nemeth said of Uber. “We’ve not heard otherwise. The two towers in front of the Chase arena are also on track to be occupied by Uber, to my knowledge.”

In June, the Mission Bay CAC approved Curo Pet Care to occupy the Fourth and Channel corner location in affordable housing nonprofit Mercy Housing’s mixed-use complex, which opened in 2014. It was the last vacant retail spot in the 1100 block of Fourth Street.

“We just signed a lease with Curo Pet Care, so we’re very excited,” said Julia Katz, commercial developer for Mercy Housing. Several restaurants had expressed interest in leasing the space over the years. “They all found a smaller, or a cheaper spot. That spot is very big. There was a lot of construction needed in that space. We’re a nonprofit; we don’t have the tenant improvement allowance to build it out.” 

At 3,162 interior square feet, the space is being rented for $3.25 per square foot, not counting triple net shared costs; in addition to base rent the tenant pays a pro-rata share of operating expenses, such as property taxes, insurance, and maintenance of common areas. 

“We did not lower it,” Katz said. “We’d been talking to Curo Pet since before COVID. It was sad to let go of the idea of that spot as a restaurant. It was a gateway to the community. It was pedestrian friendly and would really activate the corner. There are ways that a veterinary hospital could also activate the corner. Their business model was very stable. Once COVID started, it became very important to have stability. They’re an essential business. There are tons of pet owners in the area.” 

A few blocks away, Tenderloin Neighborhood Development Corporation (TNDC) is hoping a restaurant will occupy its last remaining ground floor storefront at Fourth Street and Mission Bay Boulevard North.

“We have only one space that hasn’t been leased; the corner space. That’s our flagship space,” said Kim Edmonds, chief executive officer for Ventura Partners, the company renting the storefronts for TNDC. “We weren’t completely unscathed. We were under negotiations with a serious tenant when COVID hit. They’ve told us they want to continue that discussion, but we’re going to be marketing it on the open market. I am getting inquiries about the space. I’m very optimistic about it.”

TNDC’s storefront rent is $3.50 per square foot, triple net. 

Happy Lemon, a bubble tea shop at 1320 Fourth Street, wasn’t able to schedule final inspections in March for a targeted April opening before shelter-in-place went into effect. It now hopes to be accessible this month. 

Recently, signage appeared in the window of 1350 Fourth Street for Somi Somi, a soft serve ice cream shop. The 1330 storefront is leased to a small pharmacy that specializes in delivery service; it’s unknown when this tenant will move in. The 826 Valencia afterschool writing program which shares space with Woodland Creature Outfitters at Fourth and China Basin has been closed during the public health crisis.

Cahill Contractors is renting the 1340 Fourth Street storefront on a month to month basis while working on Mercy Housing’s affordable housing project at 691 China Basin. Slated to open next year, 691 China Basin’s two commercial storefronts are already spoken for, one by a daycare facility, the other by the nonprofit Blue Bear School of Music. 

“In general, retail activity is quite slow. But, relative to other markets in San Francisco, we are seeing some activity in Mission Bay,” said Laura Sagues-Barr, CBRE senior vice president.

The Exchange on 16th Street, a large new complex occupying the 1800 block of Owens Street, has had signs in its windows for months announcing retail space for lease. Neither the developer, Kilroy Realty Corporation, nor its leasing representative returned inquiries from the View.