Both grocers and commercial developments face challenges

In 2022, the City Council approved a mixed-use development that will replace the current Draeger’s building, and it will consist of 10 below-market-rate residential units and 104,000 square feet of office space. The council approved the project on the condition that at least 17,000 square feet of space is also allotted for a grocery store. 

Lane Partners currently owns the property and is also the developer that plans to demolish the current building and construct the new structure. Lane Partners Principal Marcus Gilmour said the firm worked closely with Draeger’s to figure out ways the store could remain in the new building, though it would have to operate in about 17,000 square feet of space, compared to its current 60,000 square footage. 

“We will be working with the community and city to fill that space in the short term,” Gilmour said, adding that tenants for short- and long-term use are still yet to be determined. “It’s one thing to have a coffee shop close its doors, but when you have a grocery store close its doors, it’s a different situation. It’s unique.”

While the long-term use is designated for a grocery store, in the short term, the building could potentially house other retail businesses. 

While many residents, including Mayor Rob Newsom, have lamented the closure of stores like Draeger’s, Mark Lucchesi, a retired 25-year store manager at Mollie Stone’s Market, said it’s not surprising, given lucrative development deals and increasing competition from grocery chains like Safeway and Trader Joe’s.

“There are more opportunities to make money in condos and apartments than canned goods,” Lucchesi said.

The Mollie Stone’s site in Palo Alto will soon house two new buildings, one of them reaching 17 stories. 

“The landscape has become so saturated, and the pie is only so big. Small grocers just don’t make the profit like they used to,” Lucchesi said. “All the gas stations have little grocery stores in them, so does Walgreens. There’s so much competition, and Safeway, Trader Joe’s, Costco … they’re all stepping up their game, bringing in more healthy foods and moving with the times.”

Regionally-focused stores like Draeger’s and Mollie Stone’s are often known for their specialized departments, such as experienced butchers, and that knowledge is just not in high demand anymore, he added. Cost-of-living increases, as well as industrywide changes, mean grocery workers are often part time and can’t pursue the trade as a long-term career. 

Mandating a grocery business in the new building could be a setback for many mixed-use developers, given the industry landscape, but Gilmour said the allotted square footage shouldn’t affect the development’s progress significantly. Instead, the sluggish recovery of office space is proving more consequential, and while the commercial market has improved over the past year, securing finances remains a challenge. That means a construction start date has yet to be determined.

“[There are] three reasons we don’t have a hard date,” Gilmour said. “We don’t have a building permit, the construction financing environment … remains challenging, and the third reason is the general leasing velocity and overall demand from office tenants for new office space is depressed.”

Numerous developers working on mixed-use projects in San Mateo, including Block 21 and a development adjacent to the Hayward Park Caltrain station, have sought extension requests on their entitlement approvals as a result of the tough lending landscape. 

“We’re heading in the right direction, but we’re still seeing the impact of work from home and then also the general interest rate environment,” Gilmour said.