There are two absolute truths in US real estate today:
- We have too much retail and, suburban office space.
- We do not have enough housing, nor are we producing enough.
These two problems should be complementary in that each one provides a potential solution to the other. If, for example we found ourselves in a situation of over or under supply across all product types, it would be a more substantial problem. There has been some evidence lately of underutilized and obsolete retail and suburban office projects being converted to mixed use which includes residential. Emily Nonko of The Wall Street Journal wrote about this recently:
Other developers hoping to redevelop dead and dying corporate office parks are coming to similar realizations as the shortage of affordable housing spreads throughout the country.
Many of these developers also are looking at ways they can create downtown-style districts with a mix of office and retail. But these can be tougher sells as employers flock from these types of office campuses to downtowns and suburban shopping centers get clobbered by online retail.
Some of these master-planned developments have also been criticized for having an ersatz quality similar to the faux city in the 1998 movie “The Truman Show.” Even the best ones can’t match the vibrancy of a thriving downtown.
But suburban developments have popular downtowns licked when it comes to affordable housing, something that is in scarce supply in New York, Boston, San Francisco and other cities. The housing crisis in cities has become “suburbia’s opportunity to participate in the new urban movement,” said Jonathan Miller, chief executive of Miller Samuel Inc., a real-estate appraisal firm.
Mr. Miller has tracked “unusually high” residential sales volume in some of New York’s suburbs, which he says is a reaction to prohibitively high real-estate prices in New York City. “We’re seeing consumers take a different look at the suburban market,” Mr. Miller said.
IMO, Jonathan Miller is absolutely correct that the affordable housing crisis coupled with vacant retail and office parks should be an opportunity for suburbia to attract some younger people away from the cities. However, this can often be a painful process and take years to come to fruition. Most municipalities rely heavily on retail and office campuses for their tax base. Many of these municipalities are already stretched incredibly thin and having that tax base diminish further could have catastrophic budget implications. In many cases, city officials would rather bury their heads in the sand and pretend that commercial and retail tenants will return someday rather than face the facts that something needs to change.
Housing doesn’t provide nearly the tax revenue that businesses do, especially in a state like California that has Prop 13. As a result, cities are often unwilling to give up any commercial space to convert to residential since it represents to them a permanent decrease in recurring tax revenue. However, this is classic short term thinking. Converting a vacant office park or retail center into a mixed use project brings more potential consumers/employees to the remaining commercial space which allows those business to be more viable. Eventually this will pull in more businesses in immediately surrounding areas because there are rooftops to support them and an employment base nearby. If done correctly, it creates a positive feedback loop that can be incredibly beneficial to cities if only they are willing to address the problem rather than wish it away. In a perfect world, this process would happen a lot quicker, but at least it seems to be starting in some places.
