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Looking down O'Farrell Street in San Francisco.
Experts have been sounding the alarm of a looming commercial real estate crisis since early 2023. Retailers are struggling to afford rent and have exhausted all financing. $2.2 trillion worth of commercial mortgage loans are coming due by 2027. Refinancing at a higher interest rate is a costly out-of-reach option for most companies. When you add it all up, rent, labor costs and theft is killing the demand for retail space.
Looking around and walking down the street it’s easy to spot the overwhelming vacancy of offices and storefronts sitting empty, windows covered in brown paper and graffiti sprawling on the façade. Our urban cities are in decay and commercial real estate will spell disaster for those already struggling. Retail is not spared in this restructuring of commercial real estate, as more and more retailers find themselves scaling down their physical presence, primarily by shutting down less profitable store fronts as they tighten their belts. Some are ever opting to go digital only!
San Francisco is a stark representation of how crime ridden cities can become crippled relics of their glory days. Westfield’s San Francisco Centre was once the shopping hub of the city, but now more that half of the 1.5 million-square-foot complex sits empty. In July 2023, the owner of Westfield turned the keys back to the bank when it stopped paying its debts, as sales and foot traffic dropped.
Turning commercial space back to the bank leaves banks in a position to sell the properties for pennies on the dollar, which may help retail in the long run, assuming a buyer will lease spaces at a reasonable rate instead of the sky-high market rates. However, potential buyers may be few and far between, as there is no guarantee they can lease it fully.
Entrance of Westfield San Francisco Centre
Shortly after Westfield was handed back to its lender, Nordstrom departed its five-story space in the mall, which kicked off a max exodus from Madewell and J. Crew to Adidas and Hollister, all citing high rent and theft as main contributors. Tourism has died off since the pandemic and has never returned due to their cities policies on allowing out of control crime, such as open-air drug use and organized crime rings. To make matters worse, Hilton at San Francisco Union Square and Parc 55 stopped making their loan payments and turned both properties back over to the lender.
Malls are gradually getting wiped away, as they get converted into something other than retail. San Francisco Mayor Breed has been floating the idea of turning San Francisco Centre into a soccer stadium. You never know, maybe one day we’ll all be living in our own private suite at Bellevue Square where Banana Republic and Pottery Barn once flourished. However, converting spaces also pose their own set of issues. Contractors have stated that converting offices and retail into housing is in some cases not feasible as they are not constructed in ways that allow for multiple units to receive proper utilities, without completely starting from scratch. That’s why we have seen some major cities buy up hotels, which are already outfitted with the necessary utilities for housing.
Retail will continue to dwindle as online remains prevalent, however, if more retailers go by way of no longer offering free shipping and/or free returns, shoppers may rethink how and where they buy. Brick and mortar will never die as there will always be consumers who must see, feel and try on, especially when standard sizing has seem to have fallen by the wayside.
Vacant Building in Financial District in San Francisco
A commercial real estate crash is inevitable and cumbersome in the short term, but it will ultimately create a positive outcome for the market and the economy in the long run. It will make for more affordability for both retailers and consumers. A vast majority of people blame the pandemic for the current state of affairs, but this is capitalism at its best, deciding the outcome based on demand and bringing equilibrium to the free market. Let’s just hope this does not spell trouble for the average American, who always seems to be the one bailing out big business.
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