Can free rent revive downtown San Francisco?

There’s a buzz of energy in downtown San Francisco from a source that has been missing for years: occupied storefronts.

One of those shops is Paper Son Coffee, a roaster with flavors popular among Latin and Asian American communities that has been operating in the South of Market neighborhood since June. Before that, the space had been empty for nearly three years.

“People who work or live in the neighborhood stop in and are like, ‘Wow, there is something here!’” said Alexander Pong, an owner of Paper Son. “They’re excited.”

Paper Son is part of an initiative to help San Francisco return to the days before it became a devastating example of what could go wrong with U.S. cities during the pandemic. The company was chosen to participate in Vacant to Vibrant, a program initiated last year by the city’s mayor, London Breed, to fill empty space downtown, which largely makes up several blocks straddling Market Street in the Financial District and South of Market neighborhoods. Downtown San Francisco has the highest concentration of vacant storefronts in the city.

“Retail rents have historically been very high in the Financial District,” said Santino DeRose, a principal at Maven Commercial, a real estate brokerage with offices in San Francisco and Chicago. “But now these businesses have the ability to get their feet wet and determine whether their concepts are viable in those locations.”

Under the program, city and business leaders provide free rent for up to six months as well as other funding for business expenses and incentives like technical and business permit assistance, to entrepreneurs who want to set up shop in empty spaces, many of which are on the ground floor of office buildings.

The hope is that these pop-up operations will pay rent and sign longer leases after the free-rent period is over, and that their presence will regenerate foot traffic in the area.

Some 850 entrepreneurs initially applied for a slot, and 17 businesses were chosen to occupy nine storefront spaces in the fall. Out of those businesses, seven extended their leases and now pay rent. Eleven businesses were selected in May for the program’s second cohort, which started operating their storefronts this summer.

For Hilary Passman, owner of Devil’s Teeth Baking Co., a breakfast and lunch cafe known for its bacon, egg and cheese sandwiches made with buttermilk biscuits, Vacant to Vibrant represented a rare opportunity: to open a store at One Embarcadero Center, a sprawling four-building office complex in the Financial District that includes shops, restaurants and entertainment venues.

It is the third Devil’s Teeth location in the city, and Passman went on to sign a five-year lease with the building’s landlord, BXP, a large office building owner formerly known as Boston Properties.

“I always wanted to be downtown — prepandemic, it was busy, vibrant and energetic,” said Passman, who worked downtown as a lawyer before starting Devil’s Teeth in the city’s Outer Sunset district in 2011. “But back then, superbig landlords didn’t want to talk to a tiny little bakery.”

Those same landlords are talking now. San Francisco leaders had hoped that a wave of investment in artificial intelligence startups would help revitalize the office market, but storefronts on the ground floor remained quiet. The city’s office vacancy rate hit 33.7%, a record high, in the second quarter this year, according to JLL, a commercial real estate brokerage. That’s one of the bleakest office markets in the nation, which has an average vacancy rate of about 22%.

For the moment, however, San Francisco has a silver lining in Vacant to Vibrant.

Rod Diehl, the BXP executive vice president who oversees its West Coast properties, said the pop-up strategy was good not just for local business owners to test their concepts and explore growth opportunities, but also for office leasing efforts. Aside from Devil’s Teeth, BXP signed long leases with three other graduates of the Vacant to Vibrant program.

Beyond free rent, which is typically given for three months with a possibility for another three months, Vacant to Vibrant provides up to $12,000 to the businesses to help cover insurance and other expenses. The program also offers grants up to $5,000 for building owners to cover costs for tenant improvements in the spaces as well as for other expenses like utilities.

Most of the selected businesses are small operators that already have a following online or whose products and services can lure shoppers out of their homes.

For the first group, program officials selected equal numbers of food and beverage, retail and arts, and nightlife and entertainment endeavors. But food and beverage operations responded better to market conditions, officials said, and the second group is weighted toward those tenants. Going forward, the program will bring in new pop-ups on a one-off basis.

While the program has ushered in new excitement for the city’s economic recovery, some businesses say that foot traffic isn’t up enough to sign a long-term lease.

Preethi Narayanan, who with her partner, opened Koolfi Creamery, an Indian-inspired ice cream shop, in South of Market in June, said “the jury is still out” on whether she would extend her lease after the free-rent period.

“It’s not as crowded as before the pandemic,” said Narayanan, who previously worked downtown as a transportation planner. Still, she said she was hopeful that more businesses opening nearby would attract more people.

In addition to filling empty storefronts, the program has the opportunity to bring in a fresher and more localized downtown shopping vibe, said Laurel Arvanitidis, director for business development at San Francisco’s Office of Economic and Workplace Development. Her organization manages the program along with SF New Deal, a nonprofit that pursues public-private partnerships to provide grants and other assistance for small business development.

“I think during the first round of pop-ups, landlords were hoping the economy was going to magically reappear and that a Starbucks would come in after three months,” Arvanitidis said. “But these businesses are creating excitement in upper stories of offices and residential buildings in a way that the landlords are enthusiastic about.”

To help the tenants who signed long-term leases succeed, BXP is initially charging rent based on revenues instead of a fixed monthly amount. That’s the type of deal that Julian Prince Dash said he wished he’d had.

In 2006, Dash founded Holy Stitch, a business that combines education and sewing to revive the manufacture of jeans in San Francisco. His business was in the first Vacant to Vibrant cohort, but at the end of six months of free rent, the landlord wanted $23,000 per month. The rent was eventually lowered to around $15,000 per month late in negotiations, but on a month-to-month basis, which created too much uncertainty for Dash, he said.

“I don’t have any reservations about the experience,” Dash said. “After six months, you hopefully are a successful business and are able to afford a nice spot downtown. But that part of the plan didn’t pan out.”

Holy Stitch is now occupying space on Market Street as part of another program funded by the Office of Economic and Workplace Development.

In addition to the Vacant to Vibrant program — which received $1 million from the city initially and is set to receive another $1 million for the current fiscal year, which began July 1 — the city is directing nearly $2 million toward a similar pop-up program. This new program would help businesses occupy larger empty spaces along Powell Street, as crime and other retail pressures have driven out several retailers, including Anthropologie, Banana Republic and Crate &Barrel, in the Union Square area.

Victor Gonzalez, an entrepreneur who founded GCS Agency to stage showings for artists, is embracing the opportunity to get a foothold downtown despite the city’s challenges. When he opened a storefront as part of the first Vacant to Vibrant cohort in the Financial District last year, he immediately knew that he wanted to stay there as long as possible. He has since signed a three-year lease.

“San Francisco is no stranger to big booms and busts,” he said. “So if we’re in the midst of a bust, what’s next? It’s a boom. And I want to be positioned to be part of it.”

This article originally appeared in The New York Times.

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