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Houses R Us How Empty Retail Buildings Could Turn Into Housing

A bill in the California legislature seeks to rezone abandoned retail spaces into housing. What would that mean for the housing market?

June 9, 2021
June 9, 2021
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California is leading the way with innovative ideas that could finally alleviate the persistent housing crunch in the U.S.

Necessity was the mother of invention for the Golden State.

To meet projected housing needs, it’s estimated California needs to build 100,000 housing units per year… in addition to the 80,000 units it builds over average per year.

That is already a herculean task. But when you factor in material shortages, shipping delays, cost inflation, and a weakened (albeit recovering) labor force, it looks pretty close to impossible.

Meanwhile, the pandemic caused many retailers to shift online and close brick-and-mortar retail locations. Research and advisory firm Coresight Research reported that 8,741 stores closed in 2020, and over 10,000 are expected to close in 2021.

By 2025, store closures could reach 100,000 as online sales continue to increase the share of total retail sales.

What's in this Article?

               Out with the old, in the with the new      




               But not everyone is a fan      




               What would retail-to-residential conversions mean for home buyers?      




               Will this make homes more affordable?      




Retail to housing: Out with the old, in with the new

Recognizing these trends, the California state legislature is considering SB6, known as the Neighborhood Homes Act. The bill would “allow cities to approve, through an expedited process, the reuse of infill property zoned for retail and office space for residential construction.”

In plain English: The bill would make it easier to turn an abandoned Toys R Us building into housing.

In fact, the senate floor analysis specifically mentions “shopping malls, strip malls and ‘big box’ retail stores … like Sears, K-Mart, and Toys R Us.”

Now, they aren’t going to just slap a mailbox in front of an empty strip mall and call it housing. This is the government we’re talking about -- there are some rules.

Most notably:

  • A housing development project cannot be adjacent to a parcel zoned for industrial use.
  • Developments can be mixed-use, but 50% or more of the square footage must be devoted to residential uses.
  • An unspecified percentage of units must have affordable cost or rent for lower income households.
  • Projects cannot include hotels or transient lodging, and must have a minimum rental term of 30 days.
  • If passed, The Neighborhood Homes Act would only be in effect until January 1, 2029.

The bill passed through the state senate on a 32-6 vote in May and is now in the house assembly. If signed into law, it would be one of the first of its kind in the nation and perhaps catalyze a push to repurpose empty retail lots.

But not everyone is a fan

SB6 was clearly a hit in the state senate, but several cities and housing associations have signed on to oppose the legislation.

Opponents point out that the bill contradicts a United States Supreme Court ruling from 1926 (Village of Euclid v. Ambler Realty Company) that gives zoning power to local governments in order to maintain public health. They also claim the bill “undermines planning decisions made by local officials” and could increase density in areas with insufficient infrastructure.

What would retail-to-housing conversions mean for home buyers?

We’ll have to keep an eye on SB6 as it navigates through California state houses. But given the overwhelming support in the state senate, it seems to be on a promising trajectory. If it does pass, it could provide a much-needed pressure valve for California’s growing housing shortage.

Why does this matter for the other 49 states? Because what happens in California rarely stays in California.

The state has been a frontrunner in passing legislation that is eventually adopted elsewhere.

And housing shortages and brick-and-mortar retail closures aren’t unique to California. Housing inventory hit a 10-year low in 2020 and is struggling to bounce back. As a result, prices are up and home buying competition is fierce.

Supply needs all the help it can get. And with 100,000 retail spaces estimated to go empty by 2025, repurposing abandoned Toys R Us buildings into housing could give buyers some breathing room.

Will this make homes more affordable?

This legislation could make homes less expensive by increasing supply, but don’t expect anything soon. It could take years for states to adopt these policies and start building new housing units.

If you’re in the market to buy, it’s certainly worth continuing with your plans rather than waiting for the abandoned K-Mart down the street to be converted to condos.

Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.

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