SAN FRANCISCO — This iconic city of steep hills and striking bay views is also resilient, and its economy is finally emerging from the withering effects of the dot-com bust and 9/11 terrorist attacks.
The business climate here has strengthened, particularly in the last 12 months, buoyed by the city’s retail, financial and legal sectors and the second consecutive year of increased tourism, analysts said. Still, there are no expectations of a return to the late Nineties, when Internet start-ups in the Bay Area generated new wealth and consumer spending.
Among the most visible signs of San Francisco’s changing fortunes is Union Square, the city’s main retail neighborhood, clustered around a palm tree-bordered piazza and extending for 36 square blocks. Neiman Marcus is expanding and Nordstrom and Macy’s have spruced up. The area also has welcomed Swedish fashion-for-less chain H&M and Forever 21.
The improved economic forecast comes as Bloomingdale’s is set to open its first San Francisco store this fall, on Market Street downtown, in the expanded Westfield San Francisco Centre, where it will join Nordstrom and 111 new specialty stores. Upscale sportswear phenom Juicy Couture is to bow in August on nearby Grant Street, with European luxury purveyors Bottega Veneta and Hermès as neighbors. And Barneys New York continues to scout space in the city, a company spokeswoman said.
“San Francisco is on the upswing,” said Keitaro Matsuda, senior economist, Union Bank of California, citing the city’s 4.7 percent unemployment rate in January — the latest figure available — compared with 4.9 percent for all of California. Neither rate is seasonally adjusted.
A year ago, 5.6 percent of the city’s workforce was jobless, compared with 8 percent in 2003 and 3 percent in 2000.
Business and leisure travelers are key economic bellwethers here, generating one-third of the city’s retail sales, according to the office of Mayor Gavin Newsom. So there was anxiety when hotel occupancy rates plummeted to 65 percent in 2002 from an historic peak of 82 percent in 2000, the height of the dot-com rush, according to PKF Consulting, which advises the city’s visitors bureau.
Occupancy rates last year increased to 76.4 percent, a 4.1 percent boost from 2004, and the largest gain since 2002, PKF Consulting added. This year is the 100th anniversary of San Francisco’s greatest comeback — from the earthquake and fire that destroyed most of the city — and occupancy rates are expected to reach 78 percent.
“Even a small bump in the tourism economy can make a difference in San Francisco,” said Stephen Levy, director and senior economist with the Center for the Continuing Study of the California Economy, Palo Alto. He said the city, which has fewer than 800,000 people, is more dependent on tourists and conventioneers than other places in the nine-county Bay Area, including Oakland and San Jose.
Like most consumer spending in San Francisco, sales of women’s apparel tracked the falloff in visitors and has rebounded, according to California government statistics. In 2000, merchants sold a then-city record of $251.3 million worth of women’s clothing. By 2002, sales for the category fell almost 9.6 percent to $227 million, before heading upward. By 2004, women’s apparel sales set a new record of $257.7 million.
Final 2005 figures aren’t in, but women’s clothing sales were up 7.3 percent and 9.5 percent in the first and second quarters, respectively, compared with the same periods in the previous year. A state spokeswoman couldn’t provide quarterly dollar comparisons.
Other retail sectors took larger tumbles during the downturn: Men’s apparel sales dropped 18 percent in 2002 to $64.9 million from $74 million in 2000. Home furnishings sales fell 25 percent in 2002 to $397.5 million from $532.3 million in 2000.
The Union Square district took a hit as many
family-run retail shops, selling items such as cameras, luggage and decorative arts, began to go out of business, said real estate brokers and executives.
“There were so many retail space vacancies after the dot-com bust and 9/11 [that] it was easy to pick up retail leases relatively cheap,” said Nathan Nayman, executive director for the Committee on Jobs, a
coalition of some of San Francisco’s largest employers, including Levi Strauss & Co., Gap, Wells Fargo and Charles Schwab. “That’s not the case now.”
In the late Nineties, demand for retail space also was intense. “The joke was, if LVMH doesn’t want a space, call Gucci,” said Seth Nodelman, Union Square broker for Cushman-Wakefield.
Prada’s dot-com-era ambitions involved buying 185 Post Street, a block from the square, for $18.5 million in 1996. The Italian luxury fashion merchant never developed the property — even after hiring Dutch architect Rem Koolhaas. He designed a steel-sheathed, 10-story structure covered with round windows that was to be one of Prada’s signature stores. The company sold the property last year for $11 million to British real estate concern Grosvenor Group, which is seeking a retail tenant.
Across Post Street, Prada has kept a former Brooks Bros. store, which is vacant, and is three years into a 10-year lease, real estate brokers said. The company operates a store a block away on Geary Street, where neighbors include Gucci, Betsey Johnson and Lacoste.
“We’re evaluating potential growth opportunity in the market,” a Prada spokeswoman said. “The current location is doing well.”
Vikki Johnson, president of Johnson Hoke Ltd., a commercial real estate broker, said average retail rents in the Union Square area are in excess of $200 a square foot, about the same as in 1998, when the dot-com craze took off. Rents crested at more than $300 a square foot by early 2001. Johnson said rents fell in 2002 to less than $200 a square foot before starting to edge up.
“We’re right back to a very nice, healthier market, like we’ve springboarded from 1998 until now,” Johnson said, noting annual rent increases are about 4 percent.
Johnson said she has been in talks with Barneys to locate the luxury store in a space on Stockton Street once occupied by Joseph Magnin, a locally based contemporary fashion powerhouse that folded in 1984. A Barneys spokeswoman declined comment.
In Union Square, H&M opened a 43,000-square-foot store in December. It is the chain’s first West Coast location. Down the block, competitor Forever 21 opened in 2004 in a 27,500-square-foot space across from San Francisco-based Gap’s four-floor flagship at the corner of Market Street.
As newcomers face off, ensconced rivals are ratcheting up. At Macy’s on Union Square, which is the chain’s West Coast flagship, the fine jewelry, watch and handbag departments have been expanded and made easier to navigate. The front door has been
relocated from a side street to the plaza. The second-floor shoe department has been redesigned with a comfy living room-like feeling.
“On a busy Saturday, I can have 100 sales staff” in the shoe department, said Lori Randolph, the manager of Macy’s on Union Square, which she said is second in sales to the retailer’s Herald Square store in New York.
Neiman Marcus, with a glass-covered front at Geary and Stockton Streets, is renovating its entire 250,000-square-foot space. When completed this fall, the store will be the largest in the 35-store Dallas-based luxury chain, a company spokeswoman said.
Changes to Neiman’s include creating individual designer shops on the second floor with the ambience of boutiques for lines such as Valentino, YSL, Chado, Eskander and Donna Karan, said John Capizzi, vice president and general store manager.
“It’s all for the luxury customer who understands luxury,” Capizzi said.
Nordstrom, four blocks from the square, covers 350,000 square feet on Market Street. Four new in-store boutiques are being built for designer labels Chloé, Missoni, Donna Karan and Armani. A Nordstrom spokeswoman declined to give sales, but said the store is “in our top 10” in sales at the 155-store Seattle-based chain.
But Nordstrom isn’t the only San Francisco Centre tenant to post big numbers, according to a spokeswoman for the mall’s manager, Australia’s Westfield Group. She said sales among the 70 specialty stores, excluding Nordstrom, increased 7 percent last year to $659 a square foot, well above the industry average of $200 to $300 a square foot. “It’s among our best-performing portfolios in the U.S.,” the spokeswoman said.
Westfield also is developing a $440 million addition to the mall that will house the 357,740-square-foot Bloomingdale’s. The addition is expected to generate $600 million in annual sales and attract 25 million shoppers a year, according to a presentation prepared for local tourism officials by Steve Eimer, vice president of development for Westfield.
Richard Green, vice chairman of Westfield’s U.S. operations, said the Union Square retail zone is “vital … If you’re fortunate to figure out how to get in, it’s a must-be market.”