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Web Squeezes Out Apparel Firms

The success of Web startups in San Francisco is coming at a steep price to the local garment industry.

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SAN FRANCISCO — Nancy McAndrew, owner of the knitwear firm Nan Alexander here, has a tough road ahead. Faced with a 400 percent increase in rent in an industry where she can't even pass on an increase in the price of cashmere to her customers, she has scaled back dramatically and is moving to a dreary part of town. The reason for the rent hike, which is typical of apparel manufacturing areas all over the city, is a simple exercise in industrial Darwinism: the invasion of the dot-coms.

 

This is ground zero for the Internet, and Web companies are thriving. But their success is coming at a steep price to the local garment industry.

 

In fact, the outbreak of dot-coms is likely to put an end to the current landscape of apparel manufacturing in Northern California, according to industry analysts. Neighborhoods here have already changed dramatically in the past two years with the birth and explosive growth of Web companies.

 

Lining some of the city's most industrialized areas are newly polished neighborhoods of brightly painted condominiums. Young executives bike to work and eat at trendy bistros surrounded by gutted out buildings that have yet to be converted.

 

Dot-coms, flush with venture capital money, have infiltrated industrial areas where the apparel industry is concentrated and forced rental rates to triple, quadruple and, in some cases, quintuple.

 

Rental rates in San Francisco's South of Market area, known as SoMa, have gone from $18 per square foot to between $45 and $60 per square foot per year, according to real estate company figures.

 

The Bay Area, which includes San Francisco and Oakland, is home to about 160 apparel manufacturers, including Esprit de Corp., Jessica McClintock, Byer California, Levi Strauss & Co. and Gap Inc. There are also an estimated 400 contractors in the area.

 

Larger makers like Jessica McClintock, which owns its own building and property, probably won't be affected, but smaller to midsized manufacturers and contractors who lease space will be hit hard.

 

Approximately 70 percent of all apparel manufacturing is done in the SoMa corridor, a four-square-mile area bordered by Market Street and Townsend from First to 12th Streets, according to Randall Harris, executive director of the San Francisco Fashion Industries, which has 250 members, including manufacturers, contractors and associates.

 

"We are smack dab in the middle of dot-com world, and it is only a matter of time," warned Harris. "In two to three years, when the [current] leases are up, 75 to 80 percent of all of these companies will be up against the wall."

 

He estimated that up to 24 contractors and manufacturers have already closed their doors.
"The scary part of the problem isn't how many have already been hurt," said Harris. "There may be several dozen who don't even know yet because they are a year away from their leases being up."

 

Bill Benton, a broker with CB Richard Ellis who represents tech and dot-com companies, predicted that apparel companies will move further south out of the city, though they are somewhat restricted because other cities are also catching on to the dot-com mania.

 

"They [apparel companies] can't play the dot-com game: buying space at any cost," said Benton. "They clearly have to leave SoMa because there's no way that they can afford to stay."
Harris noted that many companies are simply selling out or retiring, while still others are looking for a way to stay in business either by sharing space or moving.

 

"There used to be places where they could go -- like South San Francisco, Brisbane or Oakland," Harris said. "But now there is no place left to go in the Bay Area."

 

He pointed to another issue restricting movement: San Francisco is geographically more bound than Southern California.

 

Another issue companies face is the lack of mobility in their workforce. Most apparel companies employ immigrants who live in San Francisco and who can't afford to pay more for transportation.

 

Los Angeles, the largest garment employment center in the country, has not experienced the same influx of Internet companies, according to Jack Kyser, chief economist of the Los Angeles County Economic Development Corp.

 

The apparel industry in Los Angeles is home to 110,000 garment workers. Los Angeles County has 68.4 percent, or 4,352, of California's apparel firms, which total 6,364, according to the Census Bureau.

 

"There is more of a risk of Los Angeles companies transferring cut-and-sew operations to Mexico than there is of being run down by dot-coms," Kyser added.

 

San Francisco's proximity to the nucleus of Silicon Valley makes it a natural nesting spot for Web firms.

 

Even the former San Francisco Fashion Center, which struggled for 4 1/2 years to fill the space with apparel tenants, has gotten into the act. The 750,000- square-foot building, which was foreclosed on in August 1995 and closed to the fashion world, currently houses hundreds of dot-com and high tech companies.

 

The fate of the industry lies in the hands of the small contractors and manufacturers.
Andres Van Dam, owner of Van Tisse, a ready-to-wear company, recently renegotiated his lease for a year at a 50 percent increase.

 

Van Dam, who has been at the same location for 13 years, said that he may have to "pack it in" when his lease expires unless he can find a place nearby.

 

"We don't have the latitude to go to other places because our employees live in San Francisco," said Van Dam. His employees are also very specialized and hard to replace.
Rents are increasing on average from 30 cents to 50 cents a foot to $2.50 to $3 a foot, Van Dam said.

 

"Three dollars for a dot-com company with seed money from venture capitalists means nothing," he said. "But $3 for a contractor or manufacturer signals you can't make it."

 

Van Dam, who leases 13,500 square feet and pulls in $1.5 million in sales, said that he is in "a real jam." When his lease is up in May 2001, Van Dam expects his rent to double again.

 

"That puts me on the borderline of making money and not making money.

 

McAndrew, the owner of Nan Alexander, isn't giving up without a fight.

 

She has been forced out of her building in the SoMa area due to skyrocketing rents, but she has found another location.

 

McAndrew moved to a new 3,500-square-foot space on Third Street in 1996 and has been paying a monthly rent of $2,500. She received a notice from her landlord last month, stating that rent was increasing to $10,000.

 

She found space at Hunter's Point, formerly a Naval shipyard. She is reducing her space to 2,000 square feet and selling three of her four state-of-the-art Stoll knitting machines. The move will also impact her volume, which was $750,000 last year. She expects to do $500,000 this year as a result of the disruptions, and move, which will shut her down for two months.

 

"There should be a voice," McAndrew said. "It was the small manufacturer that kept San Francisco going at one time. Progress is great, but they ought to give us a break."

 

One solution would be to devote 85 percent of a building to dot-coms at higher rents and leave 15 percent to manufacturers, she said. But her landlord isn't interested.

 

So she has chosen a long, dark warehouse in one of the worst areas outside of the city.

 

In the new place, she is worried about the safety of her employees as well as her buyers. "I used to encourage my customers to come in and see my place to see how we ran it. But now am I going to take them down to a warehouse?" she asked.

 

"I refuse to go out of business," she said. "If I have to go to an area where there are rats, so help me. I've worked too hard to give it all up."