As we’ve reported in past updates, there are seven pending pieces of legislation to tighten formula retail controls and several other policy changes have been adopted within the past year. Before this rush of new regulation, new chain retail stores were prohibited from opening in several neighborhoods: Hayes Valley, North Beach, and Chinatown. In other Neighborhood Commercial Districts (“NCD”), new formula retail uses are allowed only if the Planning Commission approves them as a Conditional Use. Only a few areas are exempt from formula retail restrictions—notably downtown along with industrial and formerly industrial areas on the City’s eastern side.
Last year, the Planning Commission, Board of Appeals and Board of Supervisors tightened the definition of formula retail, expanded the geographic scope of formula retail controls, and moved toward an objective, numeric limit on new formula retail in one neighborhood. Specifically, under Supervisor Kim’s interim zoning regulations extend formula retail restrictions downtown for the first time; they require a conditional use for formula retail in Mid-Market. In the Upper Market NCD, the Planning Commission also adopted a policy to recommend disapproval of any formula retailer that brings the concentration of formula retail to 20 percent or more of total linear store frontage within a 300-foot radius.
In deciding an appeal of a proposed store, the Board of Appeals effectively altered the definition of formula retail. The Planning Code defines formula retail as a standardized retail business with more than eleven locations in the United States. The Board of Appeals decided that spaces a formula retailer has leased but not yet occupied also count toward this threshold. Pending legislation—some tailored to specific neighborhoods, others citywide in scope—would further extend this definition to apply to a retailer with more than 11 locations worldwide, or any establishment that is more than 50 percent owned by a formula retailer.
Faced with so many proposals, the Planning Commission put the brakes on all proposals to allow time for a comprehensive study of the issue. The first portion of that study will be presented by the Planning Commission today. Among its key conclusions:
- Formula retail is especially concentrated in commercial or mixed-use districts where conditional use approval is not required. This includes downtown, the waterfront, and a handful of shopping centers scattered across the City. In these districts, formula retailers make up 25 percent of all retail establishments and occupy 53 percent of all retail square footage.
- Commercial districts with formula retail restrictions have lower concentrations of chain retail: only 10 percent of all establishments and 24 percent of retail square footage. The report concludes that regulations likely influence the lower concentration, but “other factors” – the prevalence of formula retails, smaller customer bases, and fewer large commercial spaces – also play a role.
- The impacts of formula retailers are hard to generalize. A major chain retail store can serve as an anchor that brings new customers that increase sales at nearby stores. This can also cause rents to increase. On the other hand, formula retailers can detract from the distinctiveness of a district and cause a decrease in sales and rents and increased vacancies.
- Broader economic conditions are the main driver of rents and vacancies in neighborhood commercial districts, i.e. increases in rent do not track approvals or disapprovals of formula retail. That said, formula retail controls may create some lower-cost opportunities for local entrepreneurs. However, this demand is primarily for small spaces: 80 percent of local stores are smaller than 3,000 square feet. Formula retail controls could contribute to long-term vacancy of larger spaces, which can be a drag on the surrounding district.
- Although the report includes information about wages and benefits in the retail sector as a whole, it does not provide meaningful comparisons of formula versus local retail. It notes that wages offered by both—on average—are similar, but this generalization masks large differences between different types of stores. It notes that benefits like paid sick leave and healthcare are less common in retail than other sectors. Benefits are more common in large (99 percent) and mid-sized companies (92 percent) than in small ones (72 percent), but these figures are not specific to the retail sector.
The next phase of study will look at formula retail at the neighborhood level and evaluate how it correlates with other “neighborhood and economic factors.” This will include case studies of three specific neighborhoods to see how formula retail controls affect storefront vacancy rates, rents, retail sales and aesthetic character. Selection criteria for the neighborhood case studies will be discussed at today’s hearing. The second phase of the report is scheduled for completion in late March, with Planning Commission policy recommendations to follow in April.
The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.