Innovation in Silicon Valley: Megaproject to combine dealership with housing

Editor's note: This report has been clarified to reflect that the full proposal has yet to be submitted to city officials.

Longtime California dealer Adam Simms has a familiar and growing problem: He needs to upgrade a store in Silicon Valley, where the dirt below is worth more than the thriving business above.

His creative solution is not for those with a thin wallet or an aversion to risk: It's a $279 million project that can be summed up as "go big and go home."

Welcome to tomorrow's Toyota of Walnut Creek, a world away from the busy but dated dealership in the heart of Silicon Valley.

If all goes according to plan, it will become a modern 165,000-square-foot full- service Toyota store by 2026. It will more than double its service bays to 54, including eight for quick-lane operations, and will have nearly 800 display and storage parking spaces for inventory on about 7.5 acres of prime downtown real estate.

But another revamped Toyota store is not the story — it's what is planned to rise above it that makes Toyota of Walnut Creek so interesting.

Atop the two-story dealership and a nearby inventory parking structure are planned to be 400-plus units of much- needed rental housing, green space, swimming pools, recreational areas and more than 400 parking spaces for residents — built where today exists nothing but sky.

If the mammoth project is approved by local officials, the all-in price tag would likely make Toyota of Walnut Creek one of the most expensive auto dealership developments in the U.S. But, says Simms, co-owner of Price Simms Auto Group, going big and going up is the only way to affordably upgrade the aging store as the land grows more and more expensive.

"We're going to continue to get more and more challenged at maintaining presence with these brands as real estate prices escalate," Simms, a former AutoNation executive, told Automotive News. "So instead of just thinking horizontal, we've got to start thinking about multidimensional, and that's what this project really represents."

Even an auto group as successful as Price Simms — it sold more than 20,000 vehicles last year and is ranked No. 95 on Automotive News' 2020 list of top dealership groups — couldn't afford to take on a project such as this alone. It has partnered with Open Road Capital and three development companies with experience in multifamily housing and mixed-use projects to bring the Walnut Creek vision to the table.

For the dealership, the situation is critical. Even though Toyota of Walnut Creek is a high-volume store, it's also among just 9 percent of Toyota dealerships in the nation that are out of compliance with the brand's 17-year-old Image II facilities program. The existing facility is "deficient in the number of service bays and deficient in the way it appears," explained Dennis Thornhill, vice president of retail market development for Toyota Motor North America.

Thornhill lived nearby and used to call on the Walnut Creek dealership when he worked in Toyota's San Francisco region. "I don't know if you've ever seen the current facility, but it's, it's ... it's not good," he said, adding praise for the results Price Simms has been able to generate with the outdated and undersized facility since purchasing it in 2017.

"The previous dealer did make attempts to make it right and [upgrade the] facility" but huge real estate costs prevented its renovation, Thornhill said.

Currently, Toyota of Walnut Creek is profitable and generates in excess of $100 million in annual sales, according to Price Simms.

As it sits now, the dealership's facility rent is around 10 percent of its gross profits, Simms said. If it were to remain only a dealership and brought up to the standard of Toyota's 2004 Image II program, the rent would be between 20 and 25 percent of gross profits generated. But if the multiuse development plan is approved, Simms said the dealership "will be able to keep our rent factor under 10 percent of gross profits generated."

The same vexing finances plague housing, explained Stephen Scanlon, a partner with Real, one of the project's developers. Were developers to simply purchase the Toyota store, level it and replace it with multifamily housing, the rental rates required to cover the costs of the real estate would be exorbitant. But by sharing the underlying ground, the dealership's rents and those of prospective residents above are subsidized by each other.

"Right now in California, there's an acute housing shortage, and rents are continuing to rise," Scanlon said. The dealership's location is a prime spot for housing because it's a five-minute walk to the Walnut Creek Bay Area Rapid Transit station.

Thornhill said Toyota is supporting the mixed-use proposal because it retains the brand's presence in a central hub of the fast-growing city. "To be able to retain a car dealership in an area that's going through a big urban development like this, versus moving the dealership out or away," he said. "I mean, where do they go?"

While the $279 million project has been presented to local officials, it awaits several layers of approval before the first shovel can be turned. A full comprehensive proposal has yet to be submitted to city officials, pending approval of land-use changes.

One of the first hurdles will be to win special zoning from the City of Walnut Creek, Scanlon said. While initial feedback from the city has been good, he said, it will take more than a year for a final decision to get the project properly zoned — a process complicated by a recently completed rezoning of the area to spur revitalization. He remains hopeful of winning local approval because he believes the size and scope is sufficient to encourage other projects.

"If you were to list all the wishes that the city had when they created the rezoning and put the vision behind the plan, we check all the boxes," Scanlon said.

"That was the thing that the city was always looking for, a vector to catalyze [that area] and make it go. And Toyota of Walnut Creek will be that thing."

If the project is given the green light, Toyota of Walnut Creek will move to nearby temporary facilities for construction to begin. Simms said the dealership is prepared to spend a few years operating in a construction zone while the new facility is built, utilizing nearby parcels for inventory storage and off-site non-customer-facing work.
While multifamily housing is what is proposed, Scanlon said he and the other developers on the project are remaining flexible in case city leaders determine they would prefer another use for what's above the dealership. Developers are seeking the broadest entitlement possible for the project in initial meetings with the city, he said.

"The goal is ultimately to create an asset that works for Toyota of Walnut Creek in the immediate future, is flexible and repurposable and ... also something that works within the community," Scanlon said. "As things evolve, the community retains the asset, the assets are purchasable, and the tax base doesn't go away."

Living near a busy dealership might seem less than ideal. But for those who may one day live atop Toyota of Walnut Creek, developers and architects have taken steps to separate home life above from the hustle and bustle below. For example, the entrances for the dealership and the housing would be on opposite sides of the block.

The proposed layout would also put at least three floors of separation — an office floor and two floors of parking — between the enclosed service department and the first bedroom overhead.

The situation is similar with the nearby inventory structure, which would feature almost 100 housing units above what essentially will be a multistory parking garage.

"As we started looking at the design, clearly there was a need to isolate and separate," explained Rick Ferrara, an automotive principal at Gensler, the world's largest architecture, design and planning firm. San Francisco- based Gensler, which designed the Toyota of Walnut Creek proposal, also is the main dealership architectural firm for Toyota Motor North America.

"One of the things that we quickly identified is that this property has two front edges, so one is assigned to the dealership and the other is to the residences. So while they exist in verticality together, in a horizontal level, they're separate," Ferrara explained. "If we do everything right, most of the residents won't have to appreciate that the tenant downstairs is a car dealership."

Going up isn't new to automotive retailing. Urban dealerships have been using vertical development for years as a way to increase display and operational space when available land is at a premium. But unlike the plan in Walnut Creek, the upper floors of vertical urban auto dealerships don't bring outside revenue to the business, said Ferrara, whose firm has designed a number of multifloor dealerships across the continent.

"The big difference is that we're going vertical on many of these [projects] to get our parking capacity. So what we're doing is effectively building land in the air at a great multiplier from what a surface parking lot costs," Ferrara said.

"Sometimes that's because there simply is no other land available or it's so far away from the dealership that operationally, it's a nonstarter."

But Ferrara said the Walnut Creek proposal has the ability "to stack another income source on top" of the dealership instead of just being a way to build inventory space.

While the proposal for Toyota of Walnut Creek might be the largest such mixed-use development in the country, it wasn't the first — and it likely won't be the last.

"This is certainly a trend that we expect to see in the next decade in urban centers," said Erin Kerrigan, founder and managing director of Kerrigan Advisors in Irvine, Calif., which assists dealers with buy-sell transactions.

"It has to be quite an urban setting for that to pencil because it's very expensive to go vertical, but certainly, we've seen examples of that."

Kerrigan said dealers in Honolulu, New York, Los Angeles and Toronto already have had housing of one form or another above their stores "100 percent driven by land values." She said that as dealerships and automakers reconsider how big their store footprints need to be in a post-COVID-19 digital retailing world, mixed-use developments such as Toyota of Walnut Creek might become more common — but probably only in certain areas.

"Real estate prices continue to rise, and because of the historically low interest rates, we're seeing a lot of asset inflation right now," she said.

"It's an interesting time to take a lot of risk on real estate."