Fewer office workers and the reduced demand in emptier shopping areas in the wake of the COVID-19 pandemic created one of the highest retail vacancy rates in San Francisco’s recent history, though optimism can be found among the city’s luxury retail properties, where recent leasing and sales have buoyed an otherwise stalled market.

For evidence of the two worlds at play — a slowed market struggling with fewer shoppers and a more in-demand luxury segment that has maintained tenant and investment interest — take a look at Union Square, among the city's most prominent retail hubs.

A few blocks away from the Macy's flagship store that will soon close and a prominent mall that's made headlines for its empty storefronts, a 35,000-square-foot retail building has secured three new tenants in recent months, including two high-end jewelry companies: Bulgari and A. Lange & Söhne.

Union Square went from a 9% retail vacancy rate in 2019 to roughly 25% today, according to CoStar data, making it one of the hardest hit neighborhoods in San Francisco. That's higher than the overall city's retail vacancy rate of 20% after experiencing one of the sharpest declines in performance among major U.S. cities during the pandemic, according to CoStar analytics.

Union Square's "Post Street used to be completely empty after the pandemic," said Alex Sagues, first vice president at CBRE. "Now there's not much availability left, and that's been driven by luxury."

San Francisco's pandemic recovery has largely trailed national levels, in part due to the city's slowed return of in-office work. The city also saw residents move out at a high rate during the pandemic after San Francisco lost 6.3% of its population from July 2020 through July 2021, according to census data, the largest drop of any major American city.

Nationally, retail vacancy rates are hovering near historic lows of 4%, according to CoStar data, while store closings are down 20% from the past three years.

In and outside San Francisco, luxury retailers stand out against a backdrop of weaker brick-and-mortar demand, largely as a result of e-commence shopping during the pandemic, according to Nigel Hughes, senior director of market analytics at CoStar Group.

In-person shopping is important to customers of luxury brands, Hughes notes, with "VIP service key to the buying experience."

High-end Italian jeweler Bulgari is the latest such retail company that appears to be optimistic about San Francisco's retail hub after signing a 10-year deal for a new store at 200 Grant Ave., taking 6,000 square feet a few blocks from the company's former outpost in Union Square. The upscale maker of Italian designer jewelry, watches and accessories is the third retailer to sign a deal at the Grant Avenue building that's over a century old.

Watch designer A. Lange & Söhne signed a 3,400-square-foot lease at the building in December, after retailer Banana Republic leased 3,500 square feet in October.

“There are not a lot of areas that still offer what Union Square does,” said Sagues, noting luxury brands "want co-tenancy and to be around one another. Union Square has the highest concentration of these types of locations available.”

Bulgari’s new home is not the only building in San Francisco attracting luxury tenants. Chanel paid $63 million for a three-story building at 340 Post St. in 2022 and now occupies the entire 15,000-square-foot property. In 2023, luxury watch retailer Breitling leased 3,400 square feet at 299 Post St., a quarter mile from 200 Grant.

Luxury tenants are looking to fill the gaps left behind by more traditional retail shops that rely on day-to-day foot traffic, with upscale brands seeing increased demand nationwide. Luxury retail sales hit $75 billion in 2023, surpassing pre-pandemic levels, and are expected to grow to $83 billion by 2028, according to a report by JLL.

"The luxury retail boom shows no signs of slowing down," JLL said in the report last year. "As one of the first categories to rebound after COVID, these retailers benefited from a combination of persistent pent-up demand and robust retail, fueling even more growth in the past year."

The increase in sales resulted in upscale retailers leasing more than 650,000 square feet in the United States over the past year, according to JLL. California and New York represented more than half of new openings.

In a sign of New York demand, French luxury house Kering, parent of high-end brands Gucci and Balenciaga, paid $963 million for a 115,000-square-foot building on Fifth Avenue. in January. In Southern California, global mall giant Unibail-Rodamco-Westfield is creating a new luxury wing at Westfield Topanga near Los Angeles.

Luxury brands "make a lot of money" and don't face the same type of financial pressure that mid-tier stores do, according to Hughes, making them more resilient through economic downturns.

Also, personal income sharply rose last year with growth now surpassing pre-pandemic rates, according to data by the U.S. Treasury Department. This has "widened the pool of customers," according to Hughes.

San Francisco has historically relied on tourism to buoy the retail segment, though hospitality metrics continue to lag pre-pandemic levels, according to Emmy Hise, senior director of hospitality analytics at CoStar Group.

Still, the tourists that are visiting San Francisco since the pandemic are "affluent and shop at luxury stores," Hise said.

Before the pandemic, the largest share of international travelers came from China, and such visitors were among the most affluent travelers to San Francisco, according to Hise. Today, these visitors are returning to the city at less than half the rate they were in 2019.

As China continues to ease pandemic-related travel restrictions and visitors return at higher rates, it could provide an additional boost to local luxury brands, according to Hise.

In 2023, more than 23.1 million visitors generated $8.8 billion in city spending, an 18% increase from the previous year. That figure is expected to further increase in 2024, according to Hise.

Despite signs of optimism, Union Square is still in a deep state of recovery, CoStar data shows, as the region faces foot traffic levels that remain far below 2019 measurements. This is driven in part by remote work trends, crime concerns and a population decrease after residents relocated to more suburban areas, according to Sagues.

Among notable city retail casualties of late, Macy's plans to shut its flagship Union Square location as part of larger consolidation efforts. The news followed Nordstrom's closure of its longtime hub at the former San Francisco Centre last summer.

A few months after the closing, Trident Pacific Real Estate Group took control of the center after the mall's prior owner, Unibail-Rodamco-Westfield, surrendered the site to lenders. The prior owner had stopped making payments on its $588 million loan, citing fewer customers and crime concerns as top headwinds, Westfield confirmed to CoStar News.

In Union Square, "the loss of population during the pandemic, then the loss of office workers and tourists, all reduced activity and retail spending," said Hughes. "And the appallingly bad perception caused by crime and drug abuse is keeping shoppers from returning."

Bulgari's prior building at 212 Stockton St. is currently facing distress, with the property's joint venture owners — General Growth Properties and Ashkenazy Acquisitions Corp. — recently defaulting on the $53 million loan tied to the site.