In an economy with too many shopping centers and office buildings, but not enough homes, industrial or other types of real estate, developers have a simple solution: Tear down retail and build something else.
During the last two quarters, developers and investors have acquired retail centers in all markets in the Bay Area with plans to redevelop them into more viable assets.
“There has been a knee-jerk reaction to reposition these assets, because there’s a lot of uncertainty about how things are going to shake out in this new environment,” Kam Schroeder from the brokerage Newmark said.
Old-style department stores, such as Macy’s and JCPenney, have been a prime target of redevelopers since they have fared worse than daily needs retail during the pandemic and subsequent inflation. They were experiencing a downtrend trend before, and the shutdowns due to COVID-19 accelerated the decline in sales. Also, consumers are prioritizing essential spending over discretionary due to inflation, according to a report by Marcus and Milichap.
“The declining prospect of indoor malls and single-use retail centers has been evident since the late 1990s, and it was recently solidified following the pandemic as we saw shifting consumer behaviors towards e-commerce and discounted retailers,” Jay Roman from the brokerage Nai Norcal, said.
The Daly City Planning Commission unanimously approved a proposal to build 214 apartments on the site of the previously occupied Burlington Coat Factory at the Westlake Mall in June. The project would be the second housing development at the Westlake Shopping Center. The owner, New York-based Kimco Realty, has already received approvals to build 179 apartments to replace a 55,630-square-foot retail and office complex at 10 Park Plaza Drive.
“Currently investors are looking to secure retail centers that will unlock value and meet
consumers rapidly changing demands,” Roman said. “These emerging retail opportunities are becoming the most valuable asset class in the post-pandemic landscape. By repositioning aging, vacant or under-utilized properties, investors can redevelop these centers into mixed-use properties addressing the housing crisis.”
Another example of retail conversion into housing is Oakland-based Riaz Capital tearing down a recently acquired shopping center across the street from the southern part of UC Berkeley to build more than 100 units of housing. The plan calls for the developer to tear down two residential buildings with the addresses 2306 and 2310 Ellsworth Street. The properties would be merged together to create enough space for a seven-story apartment building that would house 127 residential units.
UC Berkeley has come under fire recently for not having enough housing available for its students. The university is facing a lawsuit after student groups argued the university keeps raising enrollment totals without properly analyzing how it will affect housing.
Some other examples of redevelopment into housing are proposals at The Maplewood Plaza in San Jose and a Fremont shopping center at 33900 Paseo Padre Parkway.
“There is such a need for affordable housing, so we’re seeing a push for zoning changes to promote development of mix-up affordable housing with ground floor retail,” Ronald Reyes Jr. from Nai Norcal, said.
In Sacramento, state lawmakers have passed AB 2011 and SB 6, two companion bills that remove rezoning requirements for residential development on former office and retail properties and which supporters argue could eventually lead to the creation of millions of new housing units.
“Today we are taking a monumental step in our efforts to turn our housing crisis in a different direction,” Assemblymemer Buffy Wicks (D-Oakland), who authored AB 2011, said in a statement.
While the demand for housing is well documented, the land under retail center can work for other types of projects. The Bayfield Center in San Leandro was acquired earlier this summer for $71 per square foot, and now has plans to transform it into a nearly 1-million-square-foot life science campus.
The life science space represents one corner of the larger office market that has found traction post pandemic. The Bay Area is one of the top life science markets in the country: With nearly 34 million square feet of life science properties, the region has the largest inventory of life science space compared with 10 other U.S. submarkets, according to a new Colliers report.
Life science tasks require employees work on-site at labs, while many other employees continue to work remotely.
While projects to redevelop retail into more in-demand space could help address a need, developers might want to exercise caution, according to Newmark’s Schroeder.
“In concept it makes sense, but the challenge with a lot of the conversions is can you justify the cost?” he said. “It’s very costly and hard to get done, not to say it hasn’t been done in some markets. But I think the opportunities are limited and very costly. There’s just a ton that goes into it to make it a viable conversion play.”
While questioning the feasibility of undertaking redevelopments, Schroeder agreed with Roman that e-commerce presents a long-term challenge to in-person retail.
“That’s the challenge with big-box retailers, it’s so easy to just click on something and have it delivered to your door,” he said. “With clothing and things you want to try, I still think there is a need for that. I think retailers are rethinking things and having their physical locations as part of their marketing.”
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Commercial
San Francisco
East Bay mall to morph into life science campus
Commercial
San Francisco
East Bay mall to morph into life science campus