Why Not Flip Retail to Residential?

I wasn’t surprised by last week’s announcement that the Sears store in the Janss Marketplace in Thousand Oaks will soon close. I walked into that store late one weekday afternoon a few months ago and said to my son, “Look at this! There’s only half a dozen customers in the entire place.” As we walked deeper into the store, I realized I was wrong and it was worse. Those half dozen people were not customers but store clerks. The two of us appeared to be the only patrons. It’s not a good look when an entire big box store has fewer customers than a standard pop-up kiosk. Unfortunately, retail stores continue to suffer and closings have become common. Besides the 100 Sears and related Kmart stores that will shutter soon, other recent high-profile casualties include all 700-some Toys ‘R’ Us outlets. But as you can tell just by driving around the Valley area, all kinds of lower-profile chains and mom-and-pop shops are dead or dying, too. The bloodletting is especially intense in strip shopping centers. What is more surprising is this: Why haven’t we figured out what to do with all that space? One slap-your-forehead obvious answer is housing. As everyone knows, we have a housing shortage. One of the reasons for that shortage is lack of land or buildable space throughout the Los Angeles area. And with all that zombie retail area opening up, why can’t we simply do a little switcheroo and convert old and unwanted retail space into new and desperately needed residential? It should be easy, right? After all, the utilities already are in place. And most shopping centers are sited on well-trafficked streets, so it’s not as if new apartments or condos would disrupt neighborhoods. Developers might tell you that maybe it’s obvious, but it’s not easy. For one thing, it’s not cheap to tear down an old shopping center and build residential units. An apartment project may not pencil out if it is a small-scale one that would fit in the little footprint of a strip shopping center. Beyond that, dealing with the long rezoning process and other regulations make it even more expensive and therefore all but un-doable. So what would help? A hand from governments. But they don’t seem particularly accommodating. It would be nice if state and local officials reduced or even eliminated the need for environmental reviews. And it would be helpful if they expedited the zoning change process for those projects changing from retail to residential. But they seem reluctant. As a result, remolding retail space into housing remains cumbersome and expensive. The result is more of what we’ve already got. Old retail space generally is not being transformed into what we need most: housing. What are landlords doing with their growing inventory of unused retail space? They’re reimagining it as best they can. In recent years in the Valley area, we’ve seen proposals to transform old stores into classrooms, an aquarium and a family fun center, in varying degrees of success. As we reported in our June 11 issue, the owner of the Northridge Fashion Center has started marketing 45,000 square feet of what used to be retail space on the second-floor into creative office space. Good idea, but you have to wonder: How quickly would that space have been snapped up if it were converted into residential? Maybe they wouldn’t need to market it much at all. Alas, it appears that the loss of retail tenants is continuing. According to a report last week, retail vacancy rate nationwide reached 8.6 percent in the second quarter, up from 8.4 percent in the first. The hit is especially hard on strip malls, which sustained their worst quarter in nine years as their vacancy rate went up to10.2 percent. At the same time, the housing crisis deepens. As pointed out in May in our Valley Economic Forecast, produced by the economists at California Lutheran University’s Center for Economic Forecasting and Research, the lack of housing supply has turbocharged home prices in the Valley area beyond even the Los Angeles regional average. A median-priced house in the San Fernando Valley is $680,000, the economists said, up nearly 45 percent in only 10 years and nearly 280 percent in 20 years. It just seems so obvious that unused retail space should be reused into residential. And it’s such a shame that it isn’t. Charles Crumpley is editor and publisher of the Business Journal. He can be reached at [email protected].