One of San Francisco's highest-profile mall landlords is cutting ties with its namesake property as part of its effort to shed U.S. retail real estate, blaming the city's deteriorating retail market for speeding the process.
Unibail-Rodamco-Westfield, the owner behind the Westfield San Francisco Centre, has stopped making payments on its $588 million loan as foot traffic to and around downtown San Francisco has been lower and there are concerns about crime. The landlord and its partner, Brookfield Properties, have begun transferring control of the mall at 845-865 Market St., Westfield confirmed to CoStar News, meaning the owners will ultimately surrender the prominent retail property to its lenders.
“Given the challenging operating conditions in downtown San Francisco, which have led to declines in sales, occupancy and foot traffic, we have made the difficult decision to begin the process to transfer management of the shopping center to our lender to allow them to appoint a receiver to operate the property going forward,” the Los Angeles-based company said in a statement.
Paris-based Unibail is selling off its retail assets across the country. Walking away from Westfield San Francisco Centre speeds the process of reducing its American presence, but in this case at the disadvantage of not lining up a buyer.
The mall was largely empty Monday afternoon with only a few overseas tourists milling about and the basement food hall nearly deserted. The escalators snaking through the multilevel space of departing anchor tenant Nordstrom carried no one, a stark contrast from the years leading up to the pandemic when tourists or nearby office workers would populate the mall's shops and restaurants at all hours of the day.
Westfield has either owned or operated the 1.25 million-square-foot mall for more than two decades, and a company spokesperson said it has been "investing significantly over that time in the vitality of the property."
The mall’s commercial mortgage-backed securities loan has multiple lenders — Wells Fargo services the loan while JPMorgan Chase originated it — and was set to mature in August 2026, according to CoStar data.
The Westfield San Francisco Centre was put on a watchlist last month as a result of declining occupancy and lack of potential tenants to fill a handful of soon-to-be-vacant spaces.
Mall in Distress
While the downtown mall has struggled to regain momentum lost to the pandemic, its challenges have compounded in recent months as some of its largest tenants have decided to permanently close their longstanding spaces.
Nordstrom, for example, made public last month its decision not to renew leases for its outposts at the San Francisco Centre and a nearby Nordstrom Rack at 901 Market St. The company has been in the downtown mall with its 312,000-square-foot flagship since the 1980s and leased about 45,500 square feet from landlord Hudson Pacific Properties for its off-price offshoot for about a decade, according to CoStar data.
"The planned closure of Nordstrom underscores the deteriorating situation in downtown San Francisco," a Westfield spokesperson told CoStar News at the time of the announced closing. "A growing number of retailers and businesses are leaving the area due to the unsafe conditions for customers, retailers, and employees, coupled with the fact that these significant issues are preventing an economic recovery of the area.”
The impending closing will leave San Francisco Centre at about 55% occupancy, well below the 93% average across the rest of Westfield's national retail portfolio.
What's more, Nordstrom's pending departure isn't the end. Century Theater's 52,000-square-foot lease expires in September, and H&M's deal for about 25,300 square feet in the mall only runs through January 2024. Both tenants have yet to renew.
San Francisco Centre generated roughly $455 million in sales in 2019 before the pandemic. By 2022, sales had dropped by about a third to less than $300 million between January and December, according to Westfield. Foot traffic at the mall has also fallen to about 5.6 million visits for full-year 2022 compared to the 9.7 million visits through all of 2019, a more than 42% drop.
By comparison, foot traffic across the rest of Westfield's retail properties in the United States fell by less than 2% between the same period.
Downtown's Deepening Woes
Even the sidewalks and streets outside the mall were a hollowed version of the bustling activity that once took place throughout the area. While pedestrians used to crowd in front of the mall's main entrance waiting to cross the Market Street thoroughfare, aside from the occasional bicyclist, mostly empty buses and a handful of people heading to the nearby transit station are the main source of action these days.
That lack of activity has meant the retail landscape outside the mall isn't faring much better.
Since the start of the pandemic, retailers such as Gap, Amazon Go, Athleta, Crate & Barrel, Target, Abercrombie & Fitch, The Container Store, CVS, Walgreens and others have closed their locations in and around downtown San Francisco as pandemic-driven shifts drained the city's foot traffic populations and left nearby office buildings largely vacant.
Retail vacancy rates in downtown San Francisco have shot up to surpass 18%, according to CoStar data, and tepid leasing activity hasn't been enough to help fill it. The lack of downtown activity has meant San Francisco officials now expect a nearly $800 million deficit in the city's budget.
San Francisco aside, Westfield is facing its own financial distress. The mall landlord is working with its lender after missing a January payment on a $195 million loan for its Valencia Town Center in Santa Clarita, California. It also gave up four Florida malls earlier in the pandemic after defaulting on several multimillion-dollar loans.
Westfield parent Unibail released plans last year to sell off its U.S. retail portfolio to focus on its European properties and limit the financial pain it has endured for some of its more challenging properties across the country. After finalizing some deals, its national retail footprint now includes fewer than 20 properties.
"This has been something that has been coming for some time," Mayor London Breed said in a statement. "We’ve had numerous conversations with Westfield about the future of this site, and it’s been clear that they did not have a long-term commitment to San Francisco as they look to withdraw entirely from the United States market."