Hunton Retail Law Resource

Over the course of the last few years, applications to convert existing retail buildings into residential use have surged throughout the country.  While zoning conversions have existed for decades, the pandemic accelerated commercial to residential zoning conversions. Across many urban areas and downtowns, a similar trend has emerged: too many vacant or struggling retail centers and too little housing, especially affordable multifamily buildings.  As many Americans continue to work from home and shop online, the demand for offices and in-person retail decline while demand for housing continues to surge.

Private investors and city/county planners alike are seeing an opportunity to address the housing crisis and possibly revitalize vacant downtown areas.  Renters are looking for closer proximity to downtown areas and to live amongst mixed use development.  However, converting  retail to residential is not always simple.  Many local zoning ordinances prohibit residential use in commercial/retail districts.  Rezoning applications can be quite costly and require public hearings, where local citizens may speak out in opposition to multifamily developments due to concerns over increased traffic and burdens on surrounding school systems.  Local governments are often reluctant to permit ground floor residential use citing danger concerns for ground floor residential tenants.

Jurisdictions across the country are enacting programs and rewriting their zoning codes to simplify commercial to residential conversions.  In 2024, Washington, DC enacted the “Housing in Downtown” program to encourage developers to convert commercial buildings to multifamily residential via a 20-year tax abatement.  Champaign, Illinois and Grand Rapids, Michigan amended their zoning codes to permit ground floor residential.  San Francisco created design guidelines for more attractive ground floor residential units.

One particular retail use appears ripe for conversion to residential—indoor malls. Malls are often located in desirable areas with easy accessibility, making them attractive sites for redevelopment.  In Milwaukee, Wisconsin, developers converted Grand Avenue Mall into two apartment complexes complete with high-end amenities including a gym and pickleball courts.  The converted mall retains some original mall retail aspects and a food hall, so residents of the apartment complexes have access to food and shops without going outside.  In Providence, Rhode Island, developers converted portions of the Arcade Mall – America’s oldest indoor shopping mall – into 48 “microapartments.” And in Plano, Texas, developers transformed Collin Creek Mall into a mixed-use community with 2,300 apartments all while retaining the original structure of the mall.

Buying and redeveloping a mall is a complicated transaction.  In addition to zoning hurdles mentioned above, malls often have development covenants or restrictive easement agreements (REAs) between anchor tenants and mall owners. Any change in use of the mall often requires consent from all parties to an REA or similar agreement.  Additionally, developers will need to address existing retail tenant lease agreements and coordinate with mall management on existing tenant structure. From a building perspective, significant structural upgrades are often necessary to make existing mall structures livable.  The complicated real estate deal notwithstanding, many developers have concluded mall redevelopment is worth it.  We are likely to continue to see this trend continue, with many ageing malls repurposed into multifamily residential or mixed-use centers that include residential components.