With So Much Vacant Ground Floor Retail, Why Are We Still Building More?
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From KQED in San Francisco, I'm Alexis Madrigal. Today, today, we are going to get to the bottom of a question that has haunted me for years now. Why? Why is there so much ground floor retail space in our Bay Area cities? And why? Why is so much of it vacant?

It goes without saying, I think, that all that vacant space is terrible for urban life. But as I understand it, that retail space was required precisely to add to the vibrancy of our street life. What went wrong? And can we somehow fix it? It's all coming up next, right after this news. Welcome to Forum. I'm Alexis Madrigal.

All across the cities of our Bay Area, there's a kind of development that's struggling. For decades, new buildings have put in ground floor retail. Mixed-use development like this was supposed to add to the vibrancy of city life. And certainly there are places all over the world where cute little shops and restaurants sit underneath apartment buildings. And the city feels alive in those places. People stroll, people shop, people eat, people work. It's great.

But that's not really how Berkeley and San Jose and San Francisco and Oakland feel in a lot of places right now. We've got new buildings, housing and commercial alike. And then we've got vacant space on the ground floor. And it is such a vibe killer to walk two or three blocks and see nothing but for lease signs.

So what happened? Today, we're going to gather the threads with three different kinds of experts to try to tell you the story of why our cities have this particular dysfunction and where we might find our way out of this mess. We're joined first by Sujata Srivastava, Chief Policy Officer of SPUR, a nonprofit public policy organization in the San Francisco Bay Area. Welcome, Sujata.

Thanks for having me. We're also joined by Alex Sigges, who is a commercial real estate broker specializing in retail, senior vice president at C-R-B-E, C-B-R-E? C-B-R-E. C-B-R-E. And we're joined by Daniel Chapman, professor and chair of the Department of City and Regional Planning in the College of Environmental Design at UC Berkeley. Welcome, Daniel. Hi there. Hi there.

So, Sir Jetson, lay out the issue for us. I mean, is this like my just my city level walking around observation and there is all this ground floor retail or like there really is a problem with this, right, in a lot of our barrier cities? There really is a problem with it in a lot of our urban centers and our downtowns specifically. I think, you know, for shopping centers and malls, I think this is less of an issue than

putting San Francisco Center, Westfield Mall to the side. I think for the most part, the real issue is that there's been a combination of factors. There's been changes in how people spend their money and how they shop.

There's been a lot of change in the retail sector. And we've had this huge decline in foot traffic in the last five years, you know, as a consequence of the pandemic and hybrid work and a decline in tourism. So all of those factors are kind of contributing to this issue, particularly for like those walkable urban retail centers. Yeah.

Yeah, that's really where I have been seeing and thinking about this is downtown Oakland, downtown San Francisco, the Shattuck Strip in Berkeley and pieces of San Jose too. Is that right? Are there other places where this is happening too? Like what's happening in Walnut Creek or something, Alex? Is it still the same thing there? Yeah, you see this –

effect play out in every sub-market. So it's certainly occurring in Walnut Creek. I think maybe not to the same degree. Walnut Creek, I think, has been a net beneficiary from COVID. You have more people working remote there. And it's a longer commute to other retail, longer commute to the city. So the retail in Walnut Creek specifically has benefited. But even there, you still see pockets where you have vacancy or, you know, ground floor retail and mixed-use buildings that has been more challenging. Mm-hmm.

Daniel, tell us where the kind of concept of building this particular kind of development kind of came from, this idea that you'd have new buildings with ground floor retail.

Yeah, my impression of this, and I'm happy to hear what the other guests have to say, is that like many zoning requirements imposed by municipalities, there has been an idea of a vision of what ought to be there that has then been adopted in order to try to make it sort of make it happen and to intervene in the market. And in this case,

The desire to have ground floor retail is, you know, there's a couple of different aspects to it. One of them is about sort of encouraging economic development, maybe bringing in retail sales. Municipalities have an incentive to try to encourage retail development because of the sales tax revenues that accrue to them. But also there has been this intention to try to increase walking and decrease driving and make it easier to take transit and to enable people to make shopping trips to and from those transit stops.

And so I think the intention was to do that. It's just a question of the way that it was carried out and the extent to which it was kind of universally adopted as a mandate. Because, yeah, this is part of the rules, right, that people have to do this?

I mean, I think it has been imposed upon in certain locations and certain instances and places that are developing relatively, let's say, you know, four and five story development in downtown areas that are seen as being being worthy recipients, as it were, of retail stores and restaurants and that sort of thing. And so I think that.

you have this intention or belief that it's almost necessary to have retail be part of the story. And it's sort of a reification of the concept of mixed-use development, that somehow mixed-use development is the holy grail of development and kind of the transfer into development and smart growth scheme of the world. And so to the exclusion of other sorts of notions of travel and of people's time, it's been this kind of privileging of retail.

I mean, it makes sense, right? This seems like a good idea. Like, is it a good idea that sort of was overly broadly applied? Or do you think it was more in the execution and the details where things went awry?

I mean, you know, I would love to hear what the other guests have to say about this, but, and I know Sujata knows a lot about this, but I, you know, my, I would put it very simply. I think it was great to allow mixed use development. I think that it used to be the case that you couldn't have it.

And then people realized, oh, no, no, no, no. Why shouldn't we have mixed-use development? Why shouldn't we have corner stores? Why shouldn't – and those sorts of sentiments gained sway. But then the problem was very simple. What planners always do is they require things. It's not that they just – they allow them. They decide, oh, no, it's not that we're going to allow them. We're going to require them. Well, requiring things universally is a recipe for disaster.

What do you think, Sujata? What do you think? I mean, I agree to some extent to the fact that like there were some requirements that were put into place, particularly without the density to really justify it. I think that's part of the issue. So I think there's a distinction to be made between places like downtown Berkeley that have actually experimented a lot with increasing densities in residential areas and also had a historic area that already had those storefronts already in place.

And you see a lot of success there pre-pandemic, particularly with restaurants and dining, you know, bars, entertainment kinds of uses. They were never really successful in getting a lot of like comparison goods, shopping kind of retail that maybe Emeryville and other places captured. Same thing for downtown Oakland with like

the uptown area with a lot of those new buildings, they had quite a bit of success because they added a lot of housing with some of the restaurant spaces. I think what you do see, though, is sometimes there will be a new development project at a BART station, and there will be a requirement for retail because with the idea that we don't want just a blank face here. We want to create a sense of place for the community. We want them to have some of the everyday things there.

But without enough housing density to really justify those spaces, they sort of struggle. And sometimes we also don't want to create a lot of parking lots. So some of the retailers struggle because there's not enough density in the walking area, kind of in that radius, for people to come to them. And there's maybe not enough parking to induce people to get there. So I think getting the balance right and understanding what type of place is this and do we have the right space.

mix of uses? Do we have enough density of employees and residents and visitors to justify this type of space? Because I did a lot of market feasibility studies in my past career. Yeah.

We would always make recommendations that were maybe 20 percent of what was eventually in the plan because there's this concern of like, what is the street going to feel like if we don't have activation? How do we actually try to make something here that didn't exist before? Yeah, I mean, right. That's part of the problem. It's like, what's the alternative? If there's not retail on the ground floor and the building is just completely closed off to the to the street, then what? Right. That also seems kind of bad.

Right. And I think part of it is like there's a reliance on these like commercial uses. We really want commerce here. And maybe we should be thinking a little bit more openly about arts, culture, other kinds of institutions and organizations. There's like some cool other ideas that are emerging, particularly in this moment, as folks are thinking about downtown revitalization of how else can you create activation that doesn't rely entirely on art?

goods and services in that typical way. Yeah. Alex, I wanted to ask you about some of these terms that kind of help people understand what these spaces are actually like and why they might be difficult to lease.

These new buildings, as I understand it, have – the retail space is a cold, dark shell. What does that mean? Yeah. So that's really a description of how retail space and commercial space is often delivered in new construction projects. So it's not just a vibe. It's actually technical. Oh, it's also a vibe. They're cold and dark. But, you know, and that is really based on the, you know –

If you're saying, okay, we want to build HVAC or air conditioning in a space, well, how much? Your architect or your engineer will ask you how much. And what a restaurant needs is very different than what a clothing store needs. Similarly, where should we put a restroom? Well, everyone's going to have a slightly different ideal location for that, and you're also constraints of the building. And so what developers have tended to do is say, well, we won't build those things. We'll provide an allowance to a tenant when they come into the space to

build. And, you know, and that's really worked the best. If you're a national tenant, you know, a national restaurant. Starbucks wants a Starbucks to look like a Starbucks. Exactly. And they, you know, and operations are really important to them, you know, and how every, the location of every piece of equipment is very important to just retail, you know, national retailers in general. So,

The challenge is for a small, you know, local retailer, the cost, you know, for construction is much more impactful for them. So they're more flexible about where it can go. And where you've seen this problem, you know, emerge where you see some and this is, you know, it's not one size fits all, but where you've seen...

this create vacancy is that costs of construction have gone up tremendously over the last five or 10 years. And developments work on a very long timeline. If you're building an apartment building, you might be underwriting that development or entitling it and not building it

for, you know, it might not be complete for five or 10 years. And so your business plan five or 10 years ago would look very different than it was today. At the same time, you know, most developments are built with a contingency, you know, a, um, a just in case bucket. And that has also been really impacted by rising interest rates, um, and insurance. So we work on some developments where insurance has gone up 300%. It's the same impact that homeowners are feeling. And, uh,

that contingency has gone away and now retailers, you know, developers don't have that just-in-case bucket anymore. So interesting. Alex Seguest is a commercial real estate broker specializing in retail with CBRE. We're also joined by Sujata Srivastava, who's chief policy officer at Spur, and Daniel Chapman, who's professor and chair of the Department of City and Regional Planning in the College of Environmental Design at UC Berkeley. We want to hear from you, of course, too. If you're a small business owner or landlord, what are the biggest hurdles that

that you've faced in trying to fill up the space or get into a space. 866-733-6786, forum at kqed.org, and all the social media things. We're also KQED Forum. We'll be back with more right after the break.

Support for Forum comes from the University of San Francisco School of Management. Celebrating 100 years of partnership with the Bay Area business community, the USF School of Management connects students to the city's vibrant culture, hands-on internships, and a wealth of career opportunities. Where AI and sustainability are integrated into every facet of business education.

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They wield the power of the law to protect people's health, preserve magnificent places and wildlife, and advance clean energy to combat climate change. Earthjustice fights in court because the Earth needs a good lawyer. Learn more about how you can get involved and become a supporter at earthjustice.org.

Welcome back to Forum. Alexis Madrigal here, joined by Sujata Srivastava, Chief Policy Officer at SPUR, Alex Seguess, Commercial Real Estate Broker at CBRE, and Daniel Chapman, Professor and Chair of the Department of City and Regional Planning in the College of Environmental Design at UC Berkeley. We're talking about the challenges of filling up

The retail space sitting along the bottom of so many buildings here in the Bay Area, much of it vacant. Maybe much might be a little strong, but a lot of it vacant. And we want to hear from you, too. Maybe there's vacant ground floor retail space in your neighborhood. What would you like to see go in there? What's holding it up, you think? The number is 866-733-6780.

That's 866-733-6786. You can email forum at kqed.org. Find us on social media, Blue Sky, Instagram, et cetera. We're KQED Forum. Daniel, let me ask you this. How much of the problem is just that the property owners or the landlords themselves

Don't just are asking too much money for these spaces. Like how much do you think it's just like this could be fixed? Like there's that some actor in the market could just fix things by behaving differently.

Oh, gosh. You know, I have to say I'm really curious to hear what Sujata and Alice have to say about this. But my impression is that they have nothing to do with it. I think that there's probably an oversupply of spaces like this that's just being exacerbated and sort of added to by these policies and new construction and some buildings to require it.

even more of it. I mean, we've been seeing a long-term secular change towards larger format retail that hasn't stopped. If anything, it's probably even more important in order to be able to compete with online retailers and to have lower sort of prices being available by some economies of scale. And

It's just harder to see how lots of small spaces like the kinds that typically are included in ground floor retail and the ones that were mentioned along Chaddock Avenue or along Telegraph Avenue in Berkeley or in lots of places in Oakland and San Francisco, how those could really compete with the spaces that are

that are seen as much more desirable by many, many retailers that have larger floor plans and have more flexibility in how they can be organized. And so I don't really think this is about greedy developers or greedy landowners. I think for the most part,

What we're seeing is that the real costs of actually making it possible to have that space occupied are relatively high to the point that Alex was making earlier. So I do think this is an oversupply issue more than anything.

Alex, what do you think? I mean, you're in this market. Yeah, I'd say a vast majority of the vacant space is not because of a lack of interest from an owner of real estate to get at least. It's really about construction costs. The other obstacle are codes. Codes have been changing dramatically. I shouldn't say dramatically, but they've been changing incrementally for the last 10 or 15 years. And you have spaces that sat vacant because of

you know, COVID and other impacts and those pile up. And so now you have to make all of these changes that then trigger more changes. And you're talking about a major project at that, you know, at a certain point. And it's, you know, developers or owners of the building might also be under pressure, don't have the same resources that they

did. And tenants, similarly, their cost of operation has gone up. So what they can spend to open a store has gone down. And you end up with this big gap. That's another important factor. You know, Sujata, it just feels like there's really kind of a misalignment for what a pedestrian on the street might want, what a developer might want, what a retail lessee might want. I think that's a really good way to put it. I think it's not...

The incentives aren't really lining up super well. And I think that's where Spur is really interested in engaging with the public policy of it all. I think part of the issue is that property owners, some property owners are waiting for something to change. And so, you know, it's hard to participate in some of these really innovative programs like Vacant to Vibrant in San Francisco or Moment in downtown San Jose. These are programs that are intended to put a pop up

into some of these retail storefront spaces with the idea that this benefits the property owner because they have some activity and that helps lease up the upper floors. And anecdotally, that's been happening for a lot of those participating properties. But

So what's the incentive to do that on a short term if you believe that two years down the line you can get that national credit-worthy tenant that can pay twice as much? Because the only way it really works to do these really small business-oriented or arts-oriented types of strategies is if you can reduce the rents. And as Alex mentioned, the Performa isn't really built that way. It's not like they planned for the project or financed the project to be at below market rate rents.

So how do you do that? The other big challenge is

Who pays for the improvements that are needed to be able to convert either a cold shell or an existing older space that needs to actually put in the new systems for it to turn from what used to be a clothing store into a restaurant? Who pays for that? What's the role of the city in that? And I think cities also have responsibility for really slow permitting processes, really inconsistent requirements across different departments for what is needed to be able to get approved for a change in use.

Sometimes, even if it's the same use, like one laundromat to a new laundromat, can cause these bureaucratic hurdles in San Francisco. So I think that there's actually a lot of change that needs to happen across these different areas to make it work. Let's bring in a first caller here. Let's bring in Brian in Emeryville. Welcome. Hey, Brian. Go ahead. Hi. Can you hear me? Yeah, sure can.

Yeah, so I'm the editor of the Emeryville Tatler. It's an online news site about Emeryville for the last 15 years. And I've been pushing this idea before the council for many years. So far, they haven't shown any interest.

And my solution is maybe sort of unique to Emeryville, because Emeryville is in the sort of envious position of having killed its RENA numbers over the last 25 years, RENA being the Regional Housing Assessment Needs Assessment, and

through the Association of Bay Area Governments. So we have built way more than our share of housing. And so we can be a little pickier with our developers now as a result. And so what I say should happen is that we should essentially force the developers to underwrite

the line of retail. So, you know, by rent reduction all the way down to perhaps zero as a condition of approval. So, in other words, in perpetuity, the developers could choose from a list of

approved uses like independent bookstores, various locally serving retail, not disallowing formula places like fast food and what have you. So in other words, the idea is just to get the developers to underwrite it. Now, a lot of developers are letting their retail sit empty

Uh, not because they, they can't charge the rent. I mean, it sits empty for 25 years. It's because they just don't want to be in that business. They don't want to be in the specifically the commercial real estate business, but, uh, we could just say, well, if you want to be in the apartment business, this comes with the territory. Sorry, this is what you have to take it or leave it. And then if you don't like it, move to it and thank you anyway, and then go on to another developer that will do it. Yeah. Uh,

Thanks, Brent. Thanks for that. I mean, I think there's two pieces to that, Alex, maybe I'll send to you. One is it does seem crazy that these spaces sit empty for so long and it doesn't

It doesn't seem like there's massive incentive from developers to want change. And so you can see where the impulse to go, well, let's mandate that you put something there would come from or that you drop the rent so that something goes in there. Have we tried that in places? Does it work? Yeah. Yeah.

So first on the development piece, you know, there's nothing or very little that's proprietary in development. So the answer that one developer is getting is based on the same construction costs that another developer is going to have. We tend to see more regulation, you know, raises the bar for development and makes it more challenging to develop. We also see right now that developers want activated ground floor retail. And so I think some areas of success are

that you can look at are the Mission Rock development in Mission Bay. It's a project that we work on. And I think they've benefited from policy and from the decisions that Tishman Spire and the San Francisco Giants, who are the developer, have decided. And so from a policy standpoint, there's a lot of flexibility on zoning. National tenants are permitted, local tenants are permitted. And the

That development has decided, well, we want a local, vibrant neighborhood. We want this to be a very San Francisco neighborhood. And you look at the tenants that have ended up there, and they are largely local businesses. There's now a couple national tenants, Sweetgreen and Blue Bottle Coffee. But you have Arsicult Bakery. You have LuxFit, which is a true San Francisco success story of a gym that was working outside. You know, they didn't.

even have a brick and mortar location. They were in parking lots and in parks. And that developer said, we are going to figure out how to make this a successful business. We're going to work with you because we want an activated ground floor. We want a place that feels like a San Francisco neighborhood. And they've been successful in that. Were there things that they did specifically differently in the development? Yeah, absolutely. So they ended up in the same boat many developers did in terms of the construction costs increasing and

And they rolled up their sleeves and said, we're going to figure this out. We're going to solve for a great local retail scene. And we're going to figure out how we need to change the other side of the equation to achieve that outcome. And so what that means more concretely is they got involved in design and construction. They got involved in permitting. That's under the jurisdiction of the Port of San Francisco. And so it's a little bit

different of a process than the rest of the city. And Tishman and the Giants have gotten very involved in that process. It's not just sign a lease and here you go figure it out. It's, you know, we're partners in this because if you're you, the tenant are not successful, if you can't get open for business, we all fail.

And that's the more modern approach that we're seeing more and more developers take, and it's yielding success. But it's also somewhat predicated in having flexibility. You know, they're not concerned, well, if we put a national tenant in here, are we not going to be able to put a national tenant there? Are we going to get pushback from a public or discretionary process? You know,

There is the understanding that we have control over our ground plane. We can do what's right for the project and what's right today might be different than what's right in five or ten years. Yeah.

Daniel, just thinking about places that are working, another listener writes in to say,

What do we know about places where, you know, obviously in a super dense part of the city, it's easy to imagine why something like this might work. But in the Richmond, why do some of these retail strips work and others don't?

Oh, I mean, I might be the wrong person to answer that question. I will say that, I mean, it can be so hyperlocal and so particular to particular neighborhoods. But I will say that what's been happening in San Francisco has been a reorientation to some extent of retail away from the downtown towards these residential centers. And there's been success over the years there, but also, you know, greater success post-pandemic there.

Because of the extent to which people are changing their sort of travel habits and their location preferences and the extent to which they're centering their lives more around neighborhoods. And so that's probably part of the story there. I do think that it is about density. Coming back to Sujata's point earlier about some other related policies, density.

the requirements for off-street parking, the impediments to further densification and taller buildings when buildings are built. I think all of those things really matter, especially when multiplied over multiple parcels over time. I think sort of looking at the site by site basis is not the way to think about this. You have to think about this as kind of a larger area.

being really relevant to whether or not foot-based retail is going to succeed. And I just want to bring up one additional point here, which I don't think has been mentioned. I'm curious to hear what Alex thinks about this, which is, you know, the U.S., the retail vacancy rates kind of peaked during the pandemic, and then they really dropped and dropped to below pre-pandemic levels. And yet we still are seeing massive

amounts of vacancy in this kind of retail. And I just do see this as being a different beast than other kinds of retail. And it's notable that that has happened.

I want to turn us a little bit to what we're going to do about some of this stuff. Andrea over on Blue Sky writes, how about we take a page from Amsterdam's book and allow empty retail spaces in residential neighborhoods to become housing retrofit with full bathrooms and small kitchens and suddenly we've increased our housing supply by thousands of units. Sujata, what do you think?

I think there are definitely places where we can think about the conversion of some of those spaces to housing. It's not quite as cheap and easy as sometimes we would like it to be. I think we could also change policies to require less of that ground floor retail moving forward. I think another thing that has been really successful is there's been some state legislation like AB 2011 that says,

Buy right basically allows you to build housing on commercial corridors like strip centers that haven't really been successful so that you don't have to go through a really onerous process to get approvals for those types of things. So then you're taking out some of that obsolete retail and replacing it with housing. That's a little bit easier to do than to convert like a really deep.

Cold shelves space. Or even some of these older, you know, older retail is awkward. Like there's a lot of really deep, long spaces because they used to do a lot of the storage. They used to keep all their merchandise in the store. It's not the way that it works now. And so you have these really awkward spaces that might be a little bit challenging to turn into housing. But I think being open to lots of different kinds of things, I know there's a movement to think about housing

clean manufacturing uses, you know, just doing even like apparel manufacturing. Like, why not think about those kinds of spaces for those uses that are not just about like traditional retail? Yeah.

I mean, I guess, Alex, what I find, it's not... Obviously, it's a big problem for the bearers, so it's not exciting in a narrow sense. But the problem is so similar in different spots with this particular kind of development that it feels like if something works somewhere, it could actually work a lot of places. Have you seen other developers...

working with some of the, you know, converting these retail spaces to something else? Yeah, I think flexibility is the most helpful thing. And that's, if you look from a policy perspective, that's something that can be, I think, easily addressed. Everywhere in the Bay Area has slightly different, uh,

land use restrictions or zoning restrictions on what you can do in the ground floor. And San Francisco actually tends to be on the easier side. You look at a good example is Palo Alto and University Avenue. There's some discussions around changing some of their zoning requirements. But right now, you need a conditional use permit or a, you know, it's a discretionary process that can take, you know, six months or longer in order to put in a Pilates studio on parts of University Avenue. And I think that's really based in

policy that was conceived a long time ago. And you see that, and that's just one example, but you see other municipalities where medical is not allowed on the ground floor. And now you have very active retail medical uses, One Medical and Carbon Health and these that drive a lot of traffic. They're different than a traditional doctor's office. And those are important in the fabric of a neighborhood. And so saying you can't have this use whatsoever, it's

creates constraints. The fewer constraints there are, the more flexibility that you have in these neighborhoods, the more diverse uses you can have. It's going to lead to success. So I think that there's obviously the economic problem we discussed, but there's also the legislative or the code piece of it as well. Yeah.

A bunch of comments coming in. You know, Sarah writes, developers of new buildings at times fail to plan for the needed infrastructure in a building for their advertised uses. For example, a commercial space in a building near my home had signs on the window saying it could be a big restaurant, but they had designed it in a way that made it prohibitively expensive to install the ventilation system that would be needed to have a restaurant. They failed to plan ahead and no tenant could afford to fix their mistake.

Another listener writes, property owners want too much rent to lease rent space and shopping trends have changed to more convenient online retail. Considering cost, why would a business owner pay lease costs if a warehouse is as effective?

So we've got some big structural things. We've got some small nitty gritty development things. We're talking about all of it in ground floor retail. Joined by Alex Sagas, commercial real estate broker specializing in retail, senior vice president at CBRE.

We're also joined by Daniel Chapman, professor and chair of the Department of City and Regional Planning in the College of Environmental Design at UC Berkeley. We're also joined by Sujata Srivastava, who is chief policy officer at SPUR, which, of course, you know, is a nonprofit public policy organization here in the Bay Area.

We're also going to take a bunch more of your calls after the break talking about ground floor retail, what you'd like to see happen with it, particularly in the specific kind of development we're talking about, tower or new building with ground floor retail. I'm Alexis Madrigal. Stay tuned for more right after the break.

Support for Forum comes from the University of San Francisco School of Management. Celebrating 100 years of partnership with the Bay Area business community, the USF School of Management connects students to the city's vibrant culture, hands-on internships, and a wealth of career opportunities. Where AI and sustainability are integrated into every facet of business education.

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Welcome back to Forum. We're talking about ground floor retail, what we're going to do about our problems here in the Bay Area around it. We're joined by Sujata Srivastava, who is Chief Policy Officer at Spur. We have Alex Seguess, who is Commercial Real Estate Broker specializing in retail at CBRE. And we've got Daniel Chapman from UC Berkeley. Let's bring in Justine in Berkeley. Welcome. Hi, thanks for having me.

Oh, go ahead. What I want, sorry, what I wanted to say is that I think that maybe part of the problem is our tax incentives or tax policy. I grew up in Berkeley and I've seen lots of really belittled

beloved, popular local businesses be forced out by building owners who raise rents on them. And then they would stay empty for years. And I had to wonder, were these owners getting tax write-offs for the quote-unquote market value of the empty space that was better for them than continuing to host a popular business? Thank you for that. Yeah.

Alex, talk to me about this. I've definitely heard this as well, that taking the loss is preferable to having a very low-rent tenant in the space. Yeah, we...

I often hear from our clients or our developers, man, we'd love to find that tax benefit because for us, there's no situation in which having a vacant space is better than an occupied space. And that's not to say that hasn't happened. I'm sure that has. We tend to focus on work with institutional owners of real estate, and those are large institutions that typically raise money from pension funds or teacher retirement systems.

And they're very incentivized to create value. That means getting rent, you know, and then ground floor space in mixed use buildings. I mean, we have seen that in office buildings, hotels, apartments, having good ground floor increases the value, the rents that you're going to get from office tenants and apartment tenants. And so there's a huge incentive and more and more.

those occupiers of office and residential are attracted to local businesses. There's a number of cases we've worked on projects where, you know, there's big national coffee shops and developers say, hey, it's the end of term. We're actually not interested in renewing. We want to go for a small local coffee shop and we're going to take a huge cut in rent or we're going to do a deal that's a percentage of sales rather than a fixed rent because the

the office tenants or the residential tenants want an authentic local experience. And if you have three or 400 apartments, if you can, you know, get a little bit more rent, if it becomes more desirable on those apartments, it more than covers the cost of the ground floor. So I, in my experience, have not seen any tax benefit from keeping space vacant. You know, where you have seen an impact from taxes, you know, buildings have been owned for a very long time that have a low

basis, there's less economic pressure to get those spaces leased. And that's really the only area I've seen it's somebody who's owned a building for a very long time rather than a commercial developer. I've seen a little bit of this in projects. So we've been doing a lot of work on downtown San Jose. And what you see there are there are a lot of sites where they did not renew the leases for small businesses or whoever the occupants were because they were planning to do a big redevelopment of the site. And then that stalled out. And

And so now you have this big hole in activation. There's nothing happening there. Some of them are participating in those like very cool little pop-up types of programs and trying to do some creative things and doing some short-term leases to kind of weather this particular moment in time when nothing really works financially for housing development. But

That's really a big barrier for what do you do in those situations and what levers can the cities pull to be able to unlock some of those sites that are just tied up and may never really get redeveloped. But you've lost those tenants in the meantime. I think the other thing that sometimes happens is there are some older property owners that I have observed that are not that motivated to retenant their spaces because they're waiting for tenants.

The market's going to come back. I'm going to get a really great national tenant in a couple of years once things settle down. And it's just like any property owner. You always think your house is worth more than it is or your car is worth more than the Kelley Blue Book value. You're like, this estimate's a lie. Yeah. So I think there's a little bit of that psychology, too.

Daniel, I wanted to ask you about Berkeley specifically. One listener writes in to say,

I just want to ask you in a sort of magical way, if you could do something different with Berkeley, downtown Berkeley, the Shattuck Strip, those pieces, like what would you do that you think could be a positive change in this policy of the area?

I mean, you know, it's a it's sort of this is sort of a leading question and it's a hard it's a hard one to answer. I do want to say something about about the vacancy, which is that, you know, vacancy is a normal part of of markets. It is something that does take some time and often often to change. And vacancy is what makes change happen in the first place.

you know shattuck specifically or telegraph to some extent although telegraph has gotten a bit better recently you know these are places where the the the demand for local shopping has declined and of course the demand for movie theaters has declined uh i i want to come back to something sujata mentioned or was talking about which is the the potential for uh housing and for other uses i think that again you know i know i know this is a show about retail but the thing about

space is that space can be used for all kinds of things. And Alex was bringing up this issue of the extent to which existing policies may impede the transition of one space into another sort of space. And those sorts of things, although I don't know the details about Shattuck, they are operant in Berkeley as well. I think we need to try to enable more flexibility than we already have. And we do need to be thinking about things that we lack. And I've

I appreciate the extent to which Emeryville has done a good job of meeting its Reno requirements, but the fact is we have an undersupply of housing in the Bay Area, and that's the issue. We do not have an undersupply of retail. Right, right, right, right. Let's bring in Ray in Oakland. Hi there. My name's Ray. I live around Piedmont Avenue, a very vibrant shopping area.

My first degree in city planning, I was a city planner in London for over 15 years. So I spent a lot of my life trying to help create vibrant shopping high streets. So just a couple of points. One,

I think that we shouldn't be talking so much about retail, but about pedestrian traffic generation. And like several of the speakers have said, there are lots of different uses.

that generate the same, if not more pedestrian traffic than from retail stores. Dental surgeries, doctor's surgeries, gyms, all these things generate pedestrian traffic and make a, I call it a high street, especially that's my culture, a high street much more vibrant. So I think that's the first point.

The second thing is not all retail is created equal. And so we have this concept of primary, secondary, and tertiary shopping. And I think a lot of these developments are created with a...

primary shopping in mind, well, not everyone can afford those rents. So those are the two points I'd like to make. Ray, I love it. I mean, you know, Sujata, is it that American planning essentially went down like a bad rabbit hole? Is this what happened? Because it does seem to me, I mean, I haven't been to that many other countries recently, but it does seem like this problem's a little bit unique to here.

Yeah, I mean, well, I was thinking about this when I was in Barcelona last year because we got there and we didn't have the right adapter to be able to plug in our phones. The phone thingy. We brought our India adapter, not our Europe adapter. So we were in this neighborhood in Barcelona that wasn't in the middle of the city but was still in a very dense, walkable, transit-oriented place.

And we were able to just walk around the block and find two different little mom and pop hardware stores that had the part that we needed. And I tell this story a lot because I feel like that could never really happen in most U.S. cities, not even in San Francisco, because we just don't really have that same intensity of people. And I think a lot of times planners have this wish and desire to be able to create those spaces, but it really does take a tremendous amount of

of energy and investment in existing places and really accepting a lot of new development, being able to build out the transit that supports that walkable neighborhood. Because part of what makes ground floor urban places work is that you don't have cars everywhere. And so the combination of things that are really required to be able to do that, I don't know that we've been able to really go all the way there.

So I think it makes a lot of sense to really focus. Where are you going to really create that energy? It's going to be in places that already have those seeds of success. So places like Shattuck, places like college, places in downtown San Francisco or Clement Street that already have the bones of that, already have the people, they have the jobs, they have the activity nearby. It's much harder to do that.

in a site in, you know, Dublin that was an auto oriented suburb and you just have this opportunity to make do maybe do 100 units with 10,000 square feet of retail. I just don't know that that retail is going to thrive.

Yeah, it's just an anecdotal observation, but I feel like there's also been a kind of clumping, like wherever there's already some foot traffic, it's like, oh, and now there's tons of foot traffic there, right? Like it's like the winners are winning on the pedestrian traffic generation score. And it seems like it's getting harder for places to get to the early stages of where there's lots of people walking around, you know. Let's bring in Carlos in San Francisco. Welcome, Carlos.

Bye.

Hey, can you hear me? Go ahead. Go ahead. Yeah, I hear you. Thank you. Hey, I've been renting real estate for commercial use for cafes and small businesses for about 30 years. And I just see a trend where landlords just aren't seemingly interested in those longer leases. It used to be where you could get easily a 10-year lease.

Now landlords, they really just don't want it. It doesn't seem that they want to see more than three-year leases or five-year leases. And what I think they want is high rent for those short-term because they're not really necessarily looking, it seems, for these businesses to do well. They just want to get a really nice contract. And the contract with a higher per month rent really...

really shows like good performance for their buildings and good performance for their portfolios where they can go to the bank and have that you know um have that contract to maybe buy more properties and the landlords are you know they're not the neighborhood landlords that we used to have in san francisco they're more you see these more out-of-state landlords and

with real estate brokers running the show. It's completely different. And the old school landlords where the sign is on the door, this place is for rent, that just doesn't really exist anymore. Yeah. Carlos, how does that change your decision making as a small business owner?

Well, it just becomes harder and harder, and I don't see how it would work for other people. I started so young now. I'm looking at it like, I don't know how anybody would do it now, start a small business, because it's just too expensive. It's not going to last, and you can see that on Valencia Street.

None of these businesses are lasting five years. I mean, there's so many of them start and they're doomed from the beginning because the rent's just too expensive. Yeah, yeah.

I haven't Alex, how would you kind of address that as someone who is a broker? Yeah. So I think that really is about what, you know, certain landlords may have an interest in a shorter term. I mean, a common impact or a common reason for that is that you think there's going to be appreciation in the future. So why agree to a low rent for a long term now? And but it really depends on what kind of

landlord that is. If you're a landlord that's looking for the economic benefit of retail space, that might be in your interest. But in the subject of mixed-use projects, developers or owners often look at retail differently. They're not looking at the economic benefit. They're looking at the tertiary benefit or what does that do to our block, to our neighborhood. But I think that's more of a function of the market than

And this has been a historically challenging market. So I think it's more to do with that than necessarily a permanent change in the outlook of owners. So, Jack, if you were able to just –

Look back. It's 20 years from now. And you're looking back. We solved this problem somehow, right? Like we filled up a lot of this ground floor retail. Like what do you think like the pieces of that pie of like solving this look like? Like some amount got converted to housing or some other use. Some just got filled up with smaller businesses. Like where do you think like the answers may lie if we were to imagine we solved this?

Well, so I think about this more from like, where are we seeing demand? So for the programs that are being successfully matching storefronts to small businesses and artists, they're doing they are seeing that there's actually a lot of demand from those types of users. So that to me tells me something that there are certain types of uses that can work in these spaces and want these spaces, but they can only afford so much. So I think you have to go back to what we used to have,

which are these grant programs to redevelop these spaces and in some cases maybe subsidize the rents for some period of time for certain kinds of businesses so that you can create that stability. I think many property owners probably need to kind of see what Alex was saying, like what is the benefit to the block? What is the benefit to the neighborhood?

there's some education that probably needs to happen to kind of help them make that transition and not see it as being so risky. And I think like real estate folks tend to be a little bit of a herd mentality.

So if you start to see success in maybe human beings, not to put anybody on the spot. I think if you start to see success with certain types of interventions, then more people are going to come along. So I do think the market will solve for some of this. But I also think that that might take many, many years. And in the meantime, we're losing the opportunity to be able to attract people.

more small businesses, more community organizations, more things that people actually want to see in their neighborhoods and that make places function better. So I think there's a role here for government. There's a role for property owners. There's a role for

foundations and other funders to be able to step in and fill some of the gaps. Yeah. Did you want to chime in there? Yeah, I think another trend that we're seeing that's really a result of COVID, and I agree there is a herd mentality. You know, people in real estate are doing what others are doing. But one that we're seeing that is novel and it's really precipitated by COVID has been a move to

a fundamental change in how rent is structured for small businesses often, sometimes national tenants, but mostly small businesses, where developers are saying the value of the space is really dependent on what sales you can do out of it. If you do strong sales, the rent is strong. And so a lot of developers are agreeing to percentage rent leases where all

or some of the rent is based on the sales that you're doing rather than, you know, quote unquote market or what somebody next door is paying. And that is a fundamental change that I think is here to stay, but really took COVID to, I think, make that obvious and clear.

That's so interesting, too, right? Because it's sort of they're buying into the upside, basically, which maybe helps realign those incentives that seem so misaligned right now. You know, we've been talking about the challenges of filling up ground floor retail. We've been joined by Alex Seguess, who's a commercial real estate broker specializing in retail, senior vice president at CBRE. Thank you so much, Alex.

Thank you. We've also been joined by Daniel Chapman, who's a professor and chair of the Department of City and Regional Planning in the College of Environmental Design at UC Berkeley. Thank you so much, Daniel. Thank you. And we've been joined by Sujata Srivastava, who is chief policy officer at SPUR Nonprofit Public Policy Organization in the San Francisco Bay Area. Thank you so much for joining us, Sujata. Thank you, Alexis.

Susan writes in, final comment here. We need to plan for areas, needs, and people that will generate a vibe of energy and meeting people's needs. Cities need to make permitting more streamlined and affordable. I actually do think vibe-based planning actually seems like a good idea, though. I'm Alexis Madrigal. Stay tuned for another hour of Forum Ahead with Mina Kim.

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