"We've got to figure out a lot of things," Jamas Gwilliam, managing director of Merlone Geier Partners, told Lookout Santa Cruz after the Capitola City Council approved zoning changes for the Capitola Mall in March. "Our main priority is making sure that the operating businesses can operate extremely well and we can provide them with the best environment."
In the same March 2026 story, Gwilliam said the company had no timeline or target date for a project application. The City adopted the ordinance on its second reading on March 26, 2026. The City's most recent Capitola Mall FAQ, updated in June 2026, still says Merlone Geier "does not have an active redevelopment proposal" and is "not pursuing a specific project currently."
If you're weighing a home near 41st Avenue, Clares Street or Capitola Road, that gap matters more than the headline number. The rezoning gave the people who own the block the right to build housing. It didn't require anyone to build it, and every incentive written into the new code points to change that comes in phases and on the owners' schedule.
How a 46-acre block ended up with 1,777 planned homes
The mall block is all the property between Clares Street, 41st Avenue and Capitola Road. It includes Target, Macy's, Sears, Takara, Olive Garden, Ross, Citibank and Bank of America. Under state law, the whole city has to plan for 1,336 new homes. The City's FAQ gives the mall block a total of 1,777 units in Capitola's Housing Element sites inventory, and 1,422 of them are market-rate.
One site ended up planned for more homes than the whole city is required to plan for, and a feasibility test is what put them there. The City's first draft in November 2023 put mostly affordable units on six mall parcels. The state Department of Housing and Community Development responded that an owner "would not receive a fair rate of return" on a project that was 65% below-market. The economic analysis that followed found a developer needed about four market-rate homes for every affordable one: 80% market-rate, 15% low-income and 5% moderate-income. To reach its affordable-housing target, Capitola had to plan for a lot more market-rate housing on the block.
So 1,777 is the number of homes the math says a developer would need in order to justify the affordable ones. It's planning capacity, not a project. A 2019 Merlone Geier concept for 637 homes and 339,000 square feet of commercial space never went forward, and it isn't the current plan.
Three ways to build, and only one is all housing
The council approved three "tiers" of development. A developer picks the one that pencils best. As Lookout reported, they break down like this:
| Tier | What it allows | Height |
|---|---|---|
| Residential only | Housing across the core and perimeter | 75 feet in the core; about six stories in the perimeter buffer |
| Hotel plus commercial | A 120-room hotel, 3,600 sq ft of meeting space, 35,000 sq ft of commercial | 85 feet on the main site; 65 feet in the perimeter, with a hotel exception |
| Commercial only | 200,000 sq ft of commercial, no hotel | Same limits as the hotel tier |
The perimeter buffer is 75 feet deep along 41st Avenue and Capitola Road. Along Clares Street, which has more homes facing it, it's 125 feet. If you're looking at homes on or near Clares, that's the setback between your street and whatever eventually gets built.
The commercial-only tier gives an owner extra height in exchange for commercial space, with no housing required at all.
Why City Hall wants a hotel
Capitola's tax structure explains its push for the hotel tier. The City FAQ lays out the split. Of the 1% property tax the county collects, the City receives about 7.5% on average. Sales tax is 9.25%, and the City receives 1.5% of it. Hotels pay a 12% transient occupancy tax on gross revenue, and all of it goes to the City.
The FAQ also says new housing "comes with a cost" in police, public works and administration. It describes a hotel as something that "could have a significant benefit to the City's budget." The City expects the redevelopment to have less commercial space than the mall does today. Its economic consultant judged that only 25,000 to 35,000 square feet of new retail would be feasible, and only alongside a hotel.
Before the vote, Vice Mayor Gerry Jensen raised a concern: a new hotel could prompt the state to change how transient occupancy tax is distributed. He also spoke about how hard it is to plan for a project with no conceptual design. The City is shaping a project it can't see, for an owner that hasn't proposed one, and the City's own budget leans toward the option that includes the fewest homes.
The block has more than one owner
Merlone Geier owns 32 of the 46 acres. Macy's, Target, Bank of America, Ross and Olive Garden aren't on its land. The City says those businesses would stay open under a future Merlone Geier redevelopment, which it expects to happen in phases. Within the core, lease terms and parking agreements keep the Kohl's store, its parking lots and part of the main mall out of the housing plan.
That split ownership came up again on October 8, when the council unanimously adopted the 41st Avenue, Clares Street and Capitola Road Corridor Plan, which was prepared with design firm SWA Group. The Santa Cruz Sentinel reported that Councilmember Melinda Orbach noted redevelopment along Clares Street isn't expected soon. Many parcels there, including Macy's, Olive Garden and Ross, belong to several different owners, and Brown Ranch Marketplace across the street isn't expected to redevelop soon either. If improvements wait until each parcel redevelops, she said, they could arrive piecemeal. Her motion moved a study of narrowing Clares Street for bike lanes back into the main plan. Staff had shifted it to the appendix after survey pushback. The plan also adds two midblock pedestrian crossings on Clares.
The plan changes turn lanes on 41st Avenue too. It keeps the southbound turn lane at 1440 41st Ave., which staff said businesses depend on for access. It removes the northbound left turn lane at 2121 41st Ave., which police reported as unsafe. If you're picturing your daily drive from a home off 41st, these details will affect it sooner than any building will.
What is actually changing on the ground
Some changes are smaller and already scheduled. In July 2026, crews repaved 41st Avenue overnight from Clares Street to Cory Street, with plans for new lane striping, signs and bike-lane bollards. Concrete was poured outside Pizza My Heart for a future gateway sign or statue. Inside the mall, Nashville Fire Chicken moved from Scotts Valley into the food court in June, Good Times reported.
The nearest new housing with a real schedule isn't at the mall at all. Capitola Manor, a 52-unit affordable rental project from MidPen Housing at 1098 38th Avenue, had a building permit application in as of a March 2026 City report. A May 2026 California Tax Credit Allocation Committee staff report forecast construction starting November 2026 and finishing May 2028.
Just past the city line, in unincorporated Live Oak, things look different. A five-story, 57-unit builder's remedy project at 841 Capitola Road was approved by the Board of Supervisors on February 10, 2026. Residents then sued over whether it qualified, the Santa Cruz Sentinel reported. Under the builder's remedy, a jurisdiction that falls out of compliance with its housing element can face projects of almost any height or density, as long as some units are affordable. The City FAQ names that risk as a reason Capitola had to finish the mall rezoning. Inside city limits, the mall block now has objective standards that any future application will be reviewed against. No application has been filed under them as of the City's June update.
Capitola's September numbers in light of all this
Here are the Santa Cruz County Association of REALTORS® September 2026 figures for Capitola:
| September 2026 | Capitola single-family | Capitola condo/townhome | County single-family |
|---|---|---|---|
| Sales | 4 | 2 | 125 |
| Median sale price | $1,820,000 | $766,500 | $1,118,500 |
| Price per sq ft | $1,045 | $581 | $716 |
| Avg. lot size | 3,877 sq ft | 784 sq ft | 33,205 sq ft |
| Active inventory | 20 | 13 | 478 |
| Months of inventory | 3.8 | 3.9 | 3.7 |
Four single-family sales in September 2026 can't support any conclusion about trend. The structure of the market is clearer. In Capitola, a detached home on a small lot sold for about $1,045 a square foot that month, while attached homes sold for about $581. The mall block is planned for the attached kind. The City expects mid-rise buildings over or wrapped around parking garages, at roughly 48 units an acre. Whatever gets built will add to Capitola's supply of attached homes on a timeline nobody has filed. The scarcity behind the single-family price per square foot comes from small detached lots, and the zoning doesn't add any of those.
Questions buyers ask about the mall
Has anyone filed to redevelop Capitola Mall? As of the City's June 2026 FAQ update, Merlone Geier had no active redevelopment proposal. Before writing an offer, check the City's planning page for anything filed since.
Could a hotel be built instead of housing? The zoning allows a tier with a 120-room hotel and 35,000 square feet of commercial space, and a commercial-only tier with no hotel.
Who provides water and sewer to the mall site? The City of Santa Cruz Water Department provides water, and the Santa Cruz County Sanitation District provides sewer. Capitola doesn't run either utility.
If you're looking at a home within a few blocks of the mall, I can walk you through what the corridor plan and the three zoning tiers could mean for that particular street, and how the property would hold up whether the block redevelops in five years or twenty. Kathleen Manning. Let's Connect.
This article is general information, not legal, tax or financial advice. Consult a qualified professional about your situation.
