A downtown San Francisco McDonald’s closed its doors this week, with ownership labeling the city a "challenge" because of conditions like high office vacancies and a lack of tourism — all "irrespective of price point."
"Office building vacancies, the environmental atmosphere of downtown sidewalks and a tepid return by tourists and conventioneers all drove the decision," Scott Rodrick of Rodrick Management Group told the San Francisco Business Times.
"The economics of running a franchised restaurant in San Francisco continue to be a challenge, particularly in a downtown that is impacted by high office building vacancy rates and visitor trends that have not recovered since the pandemic," he added. "My Front Street location, without the benefit of parking and a drive-through, amplified the challenge."
The Front Street McDonald’s location stood for 30 years, occupying the space of a former Golden Gate Bank. Employees have found positions at other McDonald’s in the city — some of which Roderick owns.
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He insisted that the issue was not cost-related but instead the "level of vibrancy," noting that his other locations have recovered as the surrounding areas returned to some level of pre-pandemic normalcy.
Roderick said that the downtown location "was not sustainable for us in the short or medium term," and closing the location felt like "a gut punch."
The Business Times reported that a "handful" of downtown buildings have changed ownership at "steep discount" in what it labeled a "full-on buyer’s market."
McDonald’s has kept its eye on California after the state announced it would institute a minimum wage hike, which the fast-food giant warned would "hurt" its franchisees. The hike gives fast-food workers a baseline pay of $20 per hour, effective on April 1, 2024.
The company’s CEO, Chris Kempczinski, warned executives that the law could affect pricing, though he "can’t say" exactly how much impact it would have.
"Certainly, there’s going to be some element of that that does need to be worked through with higher pricing," he said during a McDonald's earnings call earlier this week. "There’s also going to be things that I know the franchisees and our teams there are going to be looking at around productivity."
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"How all of that plays out, there will certainly be a hit in the short term to franchisee cash flow in California; tough to know exactly what that hit will be because of some of the mitigation efforts," he added.
The potential pricing pressure is hitting an area that is already struggling under the weight of an emptying business district, which one study labeled an "urban doom loop" that saw workforces shifting away from the office towards more work-from-home schemes.
The paper found that New York City office values dropped 39% over the long run due to shorter lease terms and cheaper rents offered to retain or attract tenants. The total decline in the city’s commercial office value might total just over half a billion dollars in the short term and a little under half a billion dollars in the long run.
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San Francisco is facing a similar plight, as commercial real estate services firm CBRE found that the city’s offices have a vacancy rate of nearly 30%, an amount more than seven times its pre-pandemic level.
At one San Francisco high-rise office building located at 350 California Street, the vacancy rate is about 75%, and as a result its value has fallen from about $300 million in 2019 to about $60 million to $67.5 million today – a decline of about 80% in value.
FOX Business’s Eric Revell contributed to this report.
