Starboard Commercial Real Estate

Hans Hansson | November 28, 2005

The recent fight of neighborhood store owners to keep Home Depot from opening a store in San Francisco points out the bigger fear of all neighborhood retailers, what's going to happen when a retail chain decides to open up in their neighborhood? In the case of Home Depot they would open a store in the very spot where an equally large hardware store, "Goodman's Lumber", had existed for over 40 years. The site has been vacant for over ten years with a devastating effect on the remaining retailers around the site as well as the safety issues that have been brought about by having such a large site being vacant for so long.

Retail chains will tell you that they bring more traffic to neighborhoods and therefore all businesses gain. Neighborhood store owners that would be in direct competition with them tell you that they are not able to compete to survive.

A number of neighborhoods now have restrictions on allowing chain retailers to come into certain communities. A recent example of a store that ultimately failed to get approval was the new Trader Joes that was scheduled to open up at Sanchez and Market Streets. This store would have been designed under a new concept for Trader Joes called an 'Urban Store'. It would have been smaller (approx. 5,000 square feet) relying on foot traffic with limited parking. This site is off the traffic flow of Castro Street itself and past most of the strong retail blocks of Market Street to Noe Street. Yet, the store failed to receive the necessary support and approval to move forward.

Now Supervisor Duffy is attempting to rally support for more independent uses of the site, including an independent market & several specialty stores or even another independent restaurant site.

In the end the problem comes back to rent. How much the landlord expects to achieve against how much the tenant is willing to pay. Today, to be in any high traffic area in the city, most major streets are seeing rents in the five to seven dollar per month, per square foot range. Assuming an average store is 1,200 square feet, you are looking at monthly rent of $6000 to $8,500. In addition, the net charges to cover taxes and insurance, utilities and janitorial pushes those rent numbers up by an additional 25%. This makes the real retailer's rent fall between $8,600 and $10,600 per month. A retailer needs to pay his rent, to be profitable he needs to have it in his cash register within three working days and if they have not made it after five working days they are headed out of business. That means that an average store has to do $2,900 to $3,500 a day to remain profitable. If a store is open for ten hours that means that the store has to make $290 to $350 an hour. This is why it is so difficult for an independent store to survive today. Yet even with these retail chain restrictions there are still very few vacancies. Overall, vacancy in most neighborhoods of San Francisco is less than 4%.

What neighborhood stores need to survive is "buying bodies." That means they need more and more traffic flow to support themselves. Chains such as Trader Joes, Starbucks and Peets bring traffic flow. People seek these stores out which in turn create traffic flow to the adjacent businesses.

I understand the nervousness of the independent merchant but effectively trying to zone chains out is not in their best interest in the long run.
Posted 14 years, 3 months ago on November 28, 2005
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