Landlord-tenant partnerships could help spur CRE recovery in SF

Commercial industry leaders in San Francisco said proactive partnerships, flexible lease terms and greater civic engagement were the keys to turning around the city’s high commercial vacancy rates, especially in restaurants and retail.

Cyrus Sanandaji, founder and CEO of Presidio Bay Ventures, called on the commercial real estate community to get active in everything from returning to the office to putting its strength behind more business-friendly politicians in order to get the city’s spaces filled again. 

“Apathy is really what got us here,” the developer said at a panel discussion at Bisnow’s San Francisco Retail and Restaurants Conference on Tuesday. “And people overlooking the significance of consequences.” 

Sanandaji also suggested a lack of political will is a detriment to the city’s rebound. He called its low voter turnout a “disgrace” and said the Board of Supervisors needed to be swept out and reformed. He specifically called out District 3 Supervisor Aaron Peskin for “a litany of awful policy,” including the commercial vacancy tax and a recently lifted law that had required retail uses on the second and third floors of buildings in Union Square. 

Sanandaji asked those in the industry to take a look at how often they come into the office, polling the several-hundred audience members at the Hyatt Embarcadero ballroom to find out how many of them come in just three days a week.

“All of you just put every restaurant out of business because 40 percent of their margin is gone Monday to Friday,” he said in response to the room full of raised hands, adding that just coming in one extra day a week could make a meaningful difference between a restaurant being able to stay open or not. 

Landlords who partner with their ground-floor tenants—taking a percentage of revenue as opposed to a flat monthly rate and investing more in tenant improvements—and see them as an amenity to their building rather than a profit center will best be able to keep their ground floors filled over the next few years, Sanandaji said. They will also be rewarded by higher rents in their office buildings. 

“Our most recent project in Menlo Park we outdrove Sand Hill Road office rates by 30 percent and we attribute a lot of that to the nine different retail and F&B operators that we partnered with,” he said.

The importance of partnerships between landlords and their retail and restaurant tenants was touched upon repeatedly by panel members ranging from restaurant owners to builders to neighborhood improvement organizations. 

“It’s a different negotiation style than it was even two years ago,” said Alexandra Collins of Tishman Speyer, which recently announced several new retail and restaurant offerings coming to its Mission Rock development with the Giants.  “You kind of come to the table and say, ‘Look, what are your pain points, what are our pain points and how can we address them?’” 

Some of the most common pain points for new tenants are capital upfront costs, which for a restaurant can be over $1 million; lengthy permitting and construction timelines; and increased operating costs once the doors do open, according to Laurie Thomas of Golden Gate Restaurant Association and owner of two San Francisco restaurants. 

Thomas said she gets regular calls from experienced restaurant owners who can’t believe how slim their profit margins are today, especially as third-party delivery services like DoorDash take a sizable bite out of every order.

“As landlords and developers working with landlords, you need to realize that this is no longer a lucrative business,” she said. 

Some tenants are renegotiating terms on leases they signed just one year ago because San Francisco has not recovered to the extent they had hoped, with conventions and conferences still depressed, possibly until 2028, Thomas said.

“If I have a partner like a landlord that understands things have changed, then you’re going to have a much better chance of getting to a deal that doesn’t go dark in five or six months when you run out of the initial capital,” she said. “I cannot underscore enough how different it is.”

If landlords can’t work within the new reality for restaurants, Thomas had another piece of advice for tenants: Have an “upfront out clause” that allows for ending a lease early with an affordable penalty. It’s a clause she used when she closed Rose Pistola in 2017 after over 20 years in North Beach three years before the end of her lease.

“This is not rocket science, guys,” she said. “The more flexible for the tenant, the better.”

It’s a delicate dance for landlords and tenants to come together on agreeable terms, but Sanandaji said leasing agents are playing the role of matchmaker more than ever before.

“Bringing two parties together to actually speed date, get married, plan a life out and then execute on that is really tough,” he said. 

If the agent can’t play matchmaker it may be time to break up, according to Michael Van Every, president of Republic Urban Properties. 

“If you’re not producing, I’m firing you,” he said, adding that he is looking for agents who are young, “hungry” and not afraid to fail. 

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He agreed on the premise that partnerships with tenants are the best way to get deals done, and that TI numbers from pre-2020 should be scrapped. But he cautioned that retail and restaurants could be a capital risk for developers. 

“I think the lessons learned right now are that as developers we’re inherently entrepreneurs and we’re working with entrepreneurs, so there’s that synergy,” he said. “But don’t don’t get too drunk on that synergy because it’s expensive.”