> Local bookstores, delis, cafes, specialty shops, and so on, (a) use "expensive land", and (b) are not, usually, run "from the same building you live in".

Living over a shop like that is normal where I live, which is far from rural; I've been to many small cafes and similar that were clearly someone's (barely) converted home. Of course if you have dumb zoning it may make that impossible, but, uh, don't do that then.

> I'm talking about beloved shops in major cities

So what's over those shops if not living space?

> replaced by expensive real estate getting them demolished to build whatever luxury mega-crap, and driving up rents contributing to gentrification

"gentrification" is a spook. Making a place nicer is a good thing. The only reason nice places are unaffordable is because you build too few of them.