I like EnviroTO's suggestion: respectful rehabbing of what exists, an infill station for better access to transit, and community enhancements ie, more services, recreational activities for youth, and just providing residents with things to do. Redevelopment can't, and shouldn't be the only tool to improve neighbourhoods.
I guess time will tell on how well the Regent Park redevelopment goes. Although I think it's fair to say that the TCHC is moving more towards a 'rip down and start from scratch with mixed-income units' approach as opposed to a rehab approach (ref: Regent Park, Don Mount, Lawrence Heights, etc). I would imagine that the TCHC would likely want a similar approach here, especially given the condition of a lot of the buildings.
Why do people advocate station spacing of 1 -2km then?
Because by and large when it is ~1-2km stop spacing the spaces in between the stations are low-rise, low density development. If there is higher density around a specific midblock area, and it makes financial and planning sense to put in a station, I say go for it.