High San Francisco rents challenge SMB optimism

December 4th, 2014

High San Francisco rents challenge SMB optimism

Owning the building allows small and mid-sized business owners to control occupancy costs

“Rising rents paired with historically low interest rates make a great case for exploring building purchase options. TMC can help you find the best financing package for your business.” — David Griffis, TMC SVP

As published in the San Francisco Business Times

An improving economy will trigger both hiring and capital spending among small business owners, who are at their most optimistic since 2008, but rising rents remain a top concern among those in San Francisco.

SF rents Retail rents in San Francisco’s prime shopping district has increased by more than 30 percent over the past year. More small business owners anticipate higher revenues throughout the next 12 months, according to the latest Wells Fargo/Gallup Small Business Index. Owners are at their most optimistic point since the Great Recession, with the small business index score increasing to positive 58 – the highest it has been since 2008.

“As the economy improves and the unemployment rate drops, people have more money to spend,” said Regina Dick-Endrizzi, the executive director of San Francisco’s Office of Small Business. “In general, there is a lot of optimism among small businesses, and we see businesses on a daily basis that are wanting to open, having new and exciting ideas. The city is still a place where entrepreneurs with a lot of ingenuity find a great place to start their business.”

Small-business owners are more optimistic about their companies’ finances for 2015, with more than 70 percent expecting overall stability to be “very” or “somewhat” good over the next 12 months, up from 66 percent in the third quarter.

Most small business owners plan to invest in their companies throughout the next year, increasing the amount of money they allocate for capital spending. That investment will come in the form of increased hiring – 26 percent of owners reported plans to increase the number of jobs at their companies, a 6 percent increase from July 2014.

“The latest index scores show that small business owners are becoming more confident about the future,” said Lisa Stevens, head of regional banking sales and marketing and small business and regional bank executive for the Pacific Midwest region at Wells Fargo. “With steady improvements in the operating environment and the economy, small businesses in general are making great strides, are in a better financial position and are seeing more opportunities to invest in their business for the long-term.”

Despite the improving economy, small business owners in San Francisco are gritting their teeth as rents continue to skyrocket. The average rent for office space in the city is climbing, showing no signs of slowing down. The average commercial rent in San Francisco hit $59.28 earlier this year, a 14 percent year-over-year increase. Demand from technology companies, coupled with limited supply, are factors fueling the fire.

“There are challenges with the growing economy, especially with commercial real estate, so there is still some concern coming from businesses,” Dick-Endrizzi said, who also mentioned that worry among merchant associations about high vacancy rates during the recession have all but disappeared.

Union Square retail rents soared to an average of $650 per square foot per year, marking the area as the sixth most expensive retail market in the United States, following New York City’s Upper Fifth Avenue, Times Square, Madison Avenue and L.A.’s Rodeo Drive. Retail vacancy in Union Square is less than 2 percent, with small businesses competing with luxury retailers for some of the top spots. The city’s Post Street is directly behind Union Square as the seventh most expensive retail market in the U.S. Average rents there rose 16.5 percent year-over-year to $495 per square foot per year.

Bright spots remain, however, especially in a city that provides small businesses a leg up on some of their big-box competitors. Chain store laws have become a major headache for companies with more than 11 outlets, despite recent efforts to reach some sort of compromise. Dick-Endrizzi said this is yet another way the city supports its local businesses.

“San Francisco is attached to its neighborhood corridors and wants to keep diversity among the businesses within them,” she said. “(Chain store) policies are in the DNA of San Francisco … they are an indirect way of supporting small businesses.”

Other highlights from the Wells Fargo/Gallup Small Business Score fourth-quarter report:

  • 71 percent of small business owners expect their overall financial health to be very or somewhat good over the next 12 months, up from 66 percent in the third quarter of 2014
  • Hiring is expected to increase – more than 25 percent of business owners plan on increasing the number of jobs at their companies, up from 20 percent in July 2014
  • More business owners will invest in their companies throughout the next year as they expect to increase the amount of money they allocate for capital spending
  • 51 percent of small business owners anticipate positive revenue forecasts, expecting their company’s revenue to increase a little or a lot
  • Main challenges among small businesses: Not being able to pay employees, paying bills, going out of business and attracting customers and new business