Land Lines
President’s Message: Make Way for Mixed Use
By George W. McCarthy, January 3, 2023
Excerpts
To confront the affordable housing crisis, we need to do three things, at a minimum. First, we must defend and preserve our current stock of affordable housing. Second, we must identify and fix systemic problems that impede our ability to produce new housing. Third, we need to identify and cultivate new opportunities, incentives, and approaches that expand our productive potential and facilitate production.
For my part, I’ll offer a contribution to the third category, a land-centric approach with great potential to expand production: adaptive reuse of commercial buildings.
According to the commerce industry organization ICSC, there are 115,857 shopping centers in the United States. This includes 1,220 large malls (with an average of around 900,000 square feet of retail space and 70 acres of land); 68,936 strip malls (averaging 13,000 feet of retail space and two acres of land); and thousands of other discount centers, factory outlets, and neighborhood centers (accounting for more than 4 billion square feet of retail space and 400,000 acres of land). Real estate insiders have long predicted that one-quarter of large U.S. malls were at risk of closing, and the pandemic only accelerated this decline.
Crisis and opportunity are frequent bedfellows. The retail crisis offers what might be our best opportunity to solve the housing crisis. For example, in the San Francisco Bay Area, one of the toughest housing markets in the country, Peter Calthorpe estimates that we could build a quarter of a million new housing units by repurposing underutilized retail space along a single roadway—El Camino Real—that runs some 40 miles from San Jose to San Francisco through 16 municipalities. This would help alleviate the severe housing shortage in the region, and it would create sufficient residential density to support public transit, contributing to state and national efforts to mitigate the climate crisis.
As I’ve noted before, redevelopment is much harder than development on greenfield sites. One needs to undo whatever had been done on the site, while orienting multiple stakeholders with different interests toward a shared vision. To make matters worse, there are significant manmade roadblocks. First, adverse fiscal incentives interfere with jurisdictions’ willingness to consider changing land uses. Commercial property generates a big share of local revenue, not only through property taxes, but also through the local share of the sales tax and other fees and charges. Residential redevelopment might replace only a small share of the lost revenue. Second, redevelopment projects are difficult to finance. New visionary projects might excite developers; they signal uncertainty and risk for lenders and underwriters. Third, redeveloping a commercial corridor into residential or mixed-use requires zoning changes, which are notoriously fraught. In the case of El Camino Real, 16 zoning boards would need to approve rezoning for the project to proceed. While it might not require unanimous participation among all 16 cities and towns, a critical mass would be needed for the redevelopment to manifest its potential.
Just because it is hard does not mean redeveloping commercial properties into higher-density, mixed-use developments cannot be done. Each of the noted obstacles can be overcome, and all have been overcome in other places. For example, one of the largest development projects in the country, the Tysons Partnership in Tysons, Virginia, is redeveloping a 2,700+-acre commercial district into a transit-friendly, mixed-use development. The project has been underway for more than a decade and already includes 11 multifamily residential buildings. The Partnership plans to quadruple the residential population of the formerly prototypical “edge city,” which housed around 25,000 people but employed around 125,000.
In Memphis, a Sears distribution center that was abandoned for almost three decades was redeveloped into a “vertical urban village” called Crosstown Concourse. The 10-story building on 16 acres of land now hosts a charter school, a performing arts center, more than 600,000 square feet of commercial space, and 270 apartments. It is already catalyzing new development in the neighborhoods that surround it.
Outside of Seattle, developers are building a new anchor tenant for the suburban Alderwood Mall—300 apartments with underground parking. This will compensate for the loss of their former anchor, Sears; provide much-needed housing in a hugely stressed housing market; and provide a base of consumers to shop in the remaining stores in the struggling mall.
…There are hundreds and hundreds of underutilized commercial corridors across the country. If we could redevelop them as medium-density, mixed-use developments, we could put a huge dent in the current national housing deficit. There is also no shortage of abandoned or underutilized commercial buildings like Sears Crosstown; half-vacant commercial districts like Tysons; and struggling or abandoned megamalls like Alderwood that offer similar prime opportunities for redevelopment.
By my very conservative estimates, if we redevelop 20 percent of these commercial sites to low- to medium-density mixed-use standards (10 homes per acre), we could add 1.1 million new housing units and preserve millions of square feet of commercial space with a better shot at vibrancy. If we redevelop 25 percent of the sites at 15 homes per acre, we could add 2.1 million housing units. And if we could redevelop 30 percent of the sites at 20 homes per acre, we could add 3.4 million new housing units.
This is not a technical challenge. We need to simplify the process to facilitate scaled redevelopment and establish new, more effective public-private partnerships to get it done. The public sector needs to step up to de-risk projects through accelerated permitting, co-financing, and smart financial incentives. The private sector needs to quit trying to build on virgin land and find more creative ways to redevelop obsolete sites.
So let’s pursue this strategy, along with single-family zoning reform and affordable housing preservation, and see if we can resolve the national housing crisis once and for all.
George W. McCarthy is president and CEO of the Lincoln Institute of Land Policy.
Comment:
George McCarthy of LILP has come up with an innovative idea – the conversion of obsolete, land- extensive commercial sites into mixed use, more intensive development.
This idea actually came to mind by Portland METRO planners back in 2004, when two Common Ground OR/WA officers, Tom Gihring and Kris Nelson, were engaged by METRO to study the anticipated effects of a land value tax (LVT) in six commercial corridors in the Portland urban region. Why a change in the property tax system to LVT as a catalyst for redevelopment? Because of the built-in incentives to release underutilized land holdings and invest in new construction.
Let’s take a look at one of the corridors – a stretch of SE 82nd Avenue crossing the Clackamas county line. It contains the most auto-dependent, land-extensive uses of all six corridors, as well as the largest number of independent surface parking lots and vacant sites. If not in absolute decline in 2004, it was definitely lacking in new building investment.
Of the 231 total parcels in the study area, 84 percent met the criterion for vacant & underutilized. The average lot size, 48,500 square feet, is by far the largest, at nearly double the overall average, particularly in the shopping center, vehicle sales, and surface parking land use classes. The average lot size of a shopping center is about 265,000 square feet. At mid-rise building density, that’s large enough to contain 300 dwelling units and 60,000 sq. ft. of commercial space.
Oregon’s conventional property tax system applies an equal tax rate on assessed land and improvement values. Because vacant lots have no improvement values, the tax bills are extremely low, averaging less than $18,000 annually in the 82nd Avenue corridor. Changing to a split rate where the tax rate on improvement value is reduced by 50 percent, and the land rate raised proportionately, the tax burden would shift upwards to $28,000. If all vacant & underutilized lots were redeveloped into mixed use buildings as described above, the tax burden under the conventional system would rise abruptly commensurate with the high tax on building value, whereas the tax levy under the LVT with a reduced building rate would be less. The mean tax levy on redeveloped large lots shifts downward from $31,000 to $23,000.
The incentive effect is clear – to discourage land holding and encourage building investment. LVT would provide the financial incentives needed to help President McCarthy achieve his vision.
Tom Gihring, Research Director
Common Ground OR-WA
