Costco-living: a case study for housing reform
Why is Costco building 800 residential units on top of an LA store?
I saw this post and couldn’t believe my eyes. Apparently, Costco is building a mixed use development in Los Angeles. The ground floor is of course a Costco, our beloved warehouse where there’s no such thing as less. Above it, is 800 units of housing.
I had so many questions. Does rent come with a Costco membership? Do I get cash back for buying a Costcondo? Is Costco getting into the affordable housing development game? Why is Costco building housing in LA?
Napkin Math
Based on Joe Cohen’s post on X, we get these numbers:
185,000 sqft of commercial (the Costco)
471,000 sqft of residential
4.5 floors of parking, extrapolated to 832,500 sqft
With some other rough numbers we guesstimate:
185,000 x $320 per sqft for stripmall level commercial = $59,200,000
471,000 x $250 per sqft for mid-rise residential = $117,750,000
832,000 x $143 per sqft for underground parking = $118,976,000
A mixed use building like this could cost around 300 million dollars, with the planned housing accounting for more than 1/3 of the total cost. Of course, these numbers are wildly inaccurate. However, it does help pose the question. Why would anyone, especially cost conscious Costco do this?
Build Housing or Don’t Build At All
The answer is that Costco of course isn’t doing this (rip Costcondos). They are the commercial tenant in a mixed use development by Thrive Living, who specializes in building mixed-use with many projects in California. Why they would do this instead of their typical strategy of standalone commercial space has to do with the weird situation that surrounds building anything in California.
Building in California is notoriously messy. Even before construction, there’s a maze of environmental and discretionary reviews that a developer must navigate. Construction is already risky. The additional cost at risk before building at all is a gamble not many are willing to take. This has lead to chronic underdevelopment and a severe lack of housing.
To incentivize residential construction, California has passed a number of bills that aim to increase the supply of housing. In previous posts we covered companies that take advantage of the ADU bill or the lot splitting SB9.
In this case, Thrive Living is leveraging AB2011, passed in 2022. This bill is designed to permit residential development in zones designated for commercial and retail use.
Going through the typical approval process would take months if not years of reviews where a developer can ultimately be denied. This is where AB2011 is clever in its incentives. By adding housing into the mix, the approval timeline goes from unknown to guaranteed.
AB2011 qualifying projects are exempt from environmental and discretionary reviews. Not only are approvals streamlined, they have deadlines. Jurisdictions must inform applicants of inconsistencies within 60 days, and process the review within 90 days, for projects with more than 150 units, 90 and 180 days respectively. If applicants are not notified within the timeline, then the project is deemed compliant with qualifying criteria. Which means instead of an unknown permitting timeline, the project can be approved within 3 or 6 months.
A typical Costco store makes an average of $526,000 a day. Delaying a store’s open date by 3 months could mean 30 million dollars of lost revenue. A Costco in the middle of LA is undoubtedly a lucrative location. For a developer, a guaranteed stable anchor tenant is a precious commodity. Costco is so stable that store closing news story was debunked by Snopes.
A “Perfect” Use Case for Modular
Take a look at proposed floorplan for the residential units below, notice anything odd?
All the units are the same rectangular shape, almost the dimensions that would fit on say… a flatbed truck.
Thrive Living, the developer behind this project, specializes in building low-income and affordable housing through modular design. Modular units are built in offsite factories, reducing construction impact and shorting timeframes. Just look at that crane go in the below video from one of their other projects.
Going modular not only speeds up the project, but mitigates the cost impact of another one of AB2011’s requirements. The bill requires the developer make standard a “prevailing wage” for onsite labor, with larger units requiring contractors to employ “construction craft employees”. All this points to the required use of union labor, which is typically more expensive than non-union. Modular units are built in the factory and shipped to site, dramatically reducing labor on site. With this approach, Thrive Living can fulfill the bills requirements while reducing cost.
A Case Study for Mixed Use
Much of the attention has been focused on Costco building housing. However, in researching this article, I came away impressed by Thrive Living’s strategy. The developer understands how to build for a community underserved by housing by unlocking underutilized real estate. By developing mixed use and unlocking locations for tenants like Costco, Thrive Living does something else. They ensure that these communities have access to job opportunities and affordable groceries.
I for one, would rather live above a Costco than a Whole Foods.