Westfield Gives Up San Francisco Mall, Signaling More Pain Ahead

Nordstrom. Old Navy. Anthropologie. H&M. Crate & Barrel.

San Francisco’s downtown has seen a mass exodus of retailers in recent months, and this week a mall owner has decided to walk away from a prominent property. Perhaps more troubling, market analysts say the city still has a ways to go before the hemorrhaging stops.

The city has the highest office vacancy rate of any large American city. Asking rents for retail spaces have dropped 21 percent since before the pandemic. And even as tourists are visiting San Francisco again, the amount of money they spend in the city is 77 percent less than it was in 2019.

“I don’t think we’re in the upswing yet for San Francisco,” said Vince Tibone, managing director at the real estate firm Green Street. “I would say we probably haven’t even reached bottom yet.”

On Monday, the mall owner Westfield said it was handing Westfield San Francisco Centre back to its lender, who will decide who will operate the property going forward.

Westfield’s decision to walk away from the location it has owned since 2002 raised a new round of questions about how long it will take city centers throughout the United States to recover and the ability retailers and mall owners have to keep operating in the meantime.

Downtown malls have always been a rare sight, given the limited space available in city centers for sprawling shopping areas. But those that have been built have long relied on a steady flow of foot traffic from local residents, office workers, conventiongoers and tourists. That calculus was turned on its head during the pandemic.

The San Francisco office market has been the hardest hit of any major city in the United States, with office vacancy rates plunging to about 30 percent from 4 percent before the pandemic. This has had severe ripple effects for sandwich shops, clothing stores and many other merchants.

Colin Yasukochi, an analyst at CBRE, the real estate services company, predicted that the market would not bottom out until sometime next year. Vacancies, he said in an interview, could reach 35 percent.

In San Francisco, the situation downtown has been starkly different from previous ones. During the financial crisis a decade and a half ago, rents declined 30 percent. And during the dot.com market plunge at the beginning of the century, commercial rents plummeted 70 percent. This time, the fall in rents has been much more modest, around 15 percent.

Mr. Yasukochi said that was partly because of what was sometimes described in the industry as “extend and pretend.” Banks are reluctant to seize nonperforming properties because of the commitment required to finding tenants and because they would often be taking over the property at a loss. Instead, they reach accommodations with their borrowers and try to wait out the crisis in hopes that the market will turn around.

Will the delaying tactics work? “It depends how long you can pretend for,” Mr. Yasukochi said.

In many cases, retailers in urban centers are voluntarily choosing to depart. In San Francisco, Nordstrom said it would close its longtime store at San Francisco Centre in August, which will leave the mall 45 percent empty. Anthropologie closed the downtown location it had for two decades in May.

In New York, Neiman Marcus closed its Hudson Yards store — its only one in Manhattan — in July 2020, after a bankruptcy and a little over a year after its grand opening. In downtown Seattle, Nike shuttered the NikeTown store in January that it had operated since 1996. The outdoor retailer REI said it would close the store its had in downtown Portland for two decades when its lease expired early next year.

Foot traffic is slowly recovering in downtowns, but for many retailers sales haven’t come back to pre-pandemic levels, making it unsustainable to continue paying the high rents in prominent downtown centers.

Westfield isn’t the first mall owner to decide to leave a longtime downtown shopping center. Last year, Brookfield Property Partners relinquished Chicago’s Water Tower Place, the mall that anchors the Magnificent Mile, an upscale commercial district. The shopping district had grappled with lower foot traffic and noticeable retail vacancies since the start of the pandemic. More than half of the space in Water Tower Place is vacant, including an anchor store location that was a Macy until 2021, according to Cushman & Wakefield.

In 2022, when Macerich sold its 50 percent stake in the other mall in the Magnificent Mile — the Shops at North Bridge — it took a nearly $30 million loss.

Malls, in general, are in tough spot. Since 2016, malls in the United States have lost 50 percent of their value, according to data from the advisory firm Green Street. Indeed, Westfield’s decision in San Francisco is part of a broader strategy by its parent company, Unibail-Rodamco-Westfield, to greatly reduce the number of malls it operates in the country.

But analysts say the retail situation in San Francisco is exacerbated by other factors like shoplifting concerns, the slower return-to-office plans and the important conference economy that has not yet fully returned to where it was before the pandemic.

In its statement about its decision to relinquish its ownership, Westfield said that San Francisco Centre was an outlier to its other malls. At San Francisco Centre, sales fell 35 percent from 2019 to December 2022. In one of the group’s malls in nearby San Jose, it said, sales increased 66 percent during that same period. Sales across its 18 U.S. malls rose 23 percent.

When Westfield took over the mall in 2002, San Francisco was emerging from the dot-com crash. The urban shopping center was 1.5 million square feet, and Westfield poured $460 million into an expansion. At the time, residential housing was being built downtown and shopping online was still a novel concept. The center’s food court became a draw for office workers during their lunch breaks, and a novelty for tourists who were used to shopping at street-facing stores along Market Street. Inside, they were met with an emporium that had grand spiraling escalators ferrying them to multiple floors filled with shops.

“It was like a new attraction because there really weren’t any malls downtown,” said Gabriella Santaniello, founder of the retail consultancy A Line Partners, who lived in San Francisco from 2001 to 2007. “It was a lot more vibrant with retail.”

It became part of the fabric of the city. The city’s mayor, London Breed, could be seen buying clothes there. Willie Brown, the former mayor, is a regular at the movie theaters.

Many San Franciscans fondly recall shopping trips to the Nordstrom store on the top floors. Dianne Boate, a San Francisco resident who for decades had an underground cake business, remembers shopping for housewares — “anything that might look a little bit French.” A wealthy friend who flew into the city from Florida on a private jet would make a point to head to Nordstrom to shop for gifts.

Ms. Boate has not been in the mall for years — not because of the challenges of the neighborhood, the homelessness and the destitution, which she calls a “sad commentary on the times.” But at age 87, she is less interested in accumulating things.

“Maybe the demise of some of the stores has to do with the fact that people realize that they don’t need so much stuff,” she said of stores closures in San Francisco. “People’s interests have changed — how they want to spend their money has changed.”

Some big-name retailers like Neiman Marcus and Bloomingdale’s are deciding to stay put in San Francisco’s downtown. Bloomingdale’s, which has a store in the mall and is owned by Macy’s, is “dedicated to providing exceptional service” in the San Francisco area, a spokeswoman said.

The exits clear the field for retailers who may have struggled to break into San Francisco’s expensive market, said Kazuko Morgan, executive vice chairman at Cushman & Wakefield’s San Francisco office. Locations that have been occupied for decades are now open and tenants can ask for concessions, which is rare in San Francisco’s commercial market.

“We’ve told tenants that it’s a buyers’ market,” Ms. Morgan said. “Never in my career — and I’ve been doing this for a while — have we seen this type of quality real estate available. San Francisco is one of the top global cities and obviously has some challenges at the moment. But we’ll get through it. Look at how New York has turned.”