Tuesday, October 24, 2017

What developers suggest for cities

From time to time it is very instructive to sit with economists and developers to learn how they see the world. For example at events of the Urban Land Institute (ULI) on the local, regional or national level such as the annual Fall Conference in Los Angeles.  Usually real estate experts package their action paradigms into neat phrases that everyone can easily understand.
ULI Fall Conference: LA motto: "The Future is Alive in Los

One of those phrases used to be "build it and they will come". For sure, the financial crash and the subsequent crisis in real estate has brought that to an end, if it wasn't outmoded long before then. The new motto is "wait until they come and then build it". Occasionally that leaves some local development officers scratching their heads when powerful companies are interested in relocateion and want a "product" (real estate lingo for a building or development that fits certain specifications) ready to move in. In 2016 when Nestle wanted to move its headquarters from Glendale, Ca to a new location near the east coast it was that year's corporate relocation frenzy. Alexandria, VA had all the attributes Nestle liked, except an appropriately sized building. The mighty company subsequently moved to Arlington, VA which had just the right size office tower sitting around empty.

Real estate developers will also tell you that a 600,000 sf office building of the type they commonly were built in the 1970s and 80s is usually a white elephant. An example of which a developer described in the usual flowery language as a building "more appropriate for soviet era Bukarest". Such a building is in serious need of catching up to modern times. It is predicated on large tenants that want huge flexible floor plates. At the time it didn't matter that the core area was far away from windows and that energy usage was high.
Nestle headquarters in Rosslyn (Image: Nestle)

Catching up to current real estate terms describes "products" so much in keeping with eyes on the street and LEED design that one could suspect that Jane Jacobs and Al Gore had performed brain transplants on the real estate industry. A state of the art real estate product usually means mixed-use and in the current market most likely apartments and not offices. Of course, with a lively streetfront, preferably with retail on the first floor. Still, the rule of waiting until they come is mostly applicable to office buildings because for apartments this rarely is an option. Few apartment builders have found a way to market their next project in a manner of the Tesla X: Have it fully subscribed and halfway funded by early takers. In that way market rate apartment buildings are risk takers and have become the pioneers for urban revitalization, especially in neighborhoods that the developers would see as authentic and near strong institutional or business "anchors". Lately developers are even embracing the word equity. One program of the ULI fall conference is titled: "Equity and Inclusion: Creating Conditions That Benefit Everyone". It is described this way:
The widespread revitalization and growth of cities and neighborhoods has been giving rise to a new interest in equity and inclusion. As cities strive to attract new people by creating memorable and sustainable places–through reuse of historic places, new construction, and thoughtful urban design—many lower-income people are being left out of the boom.
It is instructive to hear from developers how far they have come in expanding their view and their strategies way beyond their own "assets". When some dozen years back the mantra was "lifestyle" projects (another of those terms that became popular) they were often still located in the suburbs and just imitated the city. Developers now have expanded their view to "making places". But that, too has become more sophisticated. In the rapidly changing real estate marketplace "Generic places with chain stores that could be anywhere in the US" are not successful any longer. New place-making can't be interchangeable and must be local. This even bigger context is described by a new term developers now scream from the rooftops: "community". As in "the nicest mixed use lifestyle project won't work if it isn't part of and connected to the community". As in "the best project won't work if it isn't accepted by the community". As in the example of a developer who wanted to make a quick buck and filled a complex with clubs until everyone in the surrounding communities hated the development and the developer had to sell. The next buyer spent millions in doing nothing else than brainstorming with the communities what they wanted to see and get a concept entitled that the community supported. He sold after that 2-year community planning process was complete with a tidy profit. The developer hadn't moved a single wall but had made the development more valuable simply by having a community supported concept.
With today’s expanding focus on impact investing, millennial developers’ desire to do well and do good, and subsidies like New Markets Tax Creditsbecoming ever more competitive, impact development may represent one of the most significant new shifts shaping the landscape of America’s cities. (Next City 2015)

What does all this mean for Baltimore?

Baltimore is "authenticity central" and certainly in need of more equity. We have seen the conversion of old industrial and office buildings to residential use for a long time. The largest case maybe the old Bank of America tower downtown (formerly Nationsbank) with over 400 units.  The Bank of America Tower has been completed in 2016 and has still a long road towards being filled up. In real estate critical mass is another frequently used goal; in true fashion the same developer who converted the historic tower is now erecting a new tower of comparable size right across Light Street. The company does so in the hope that these two buildings can really create the heft needed to give the old financial district east of Charles Street the residential neighborhood feel that a few smaller and older conversions such as the Munsey building never accomplished. Thus, in apartment construction and multi-family housing the build it and they will come mantra is still in effect. This makes many fear a bubble that may soon burst not only in Baltimore but across the nation where downtown apartment construction has been red hot for some time. Downtown LA now offers some apartments for a year rent free if a multi-year lease can be had.
Pratt Street building with "fanny pack"

The office market has been weak ever since the financial crash in 2008 and, resulted in new office towers only being built when a specific tenant or client is asking for it. This is how Legg Mason got a tower in Harbor East or Exelon on HarborPoint, both unfortunately vacating sizable chunks of real estate in the traditional downtown. Baltimore has shown in many cases how to take historic office buildings and convert them into attractive apartments but a conversion of one of those bland klutzes of the 70s that line Pratt Street is a feat not yet accomplished here. A lone example of a modern office conversion is the Brexton Building complex on North Charles Street across from Brewers Art which is nearing completion right now.

The conversion of those large floor plate buildings is considerably more difficult than the conversion of the more slender buildings of old which were built before air conditioning with daylight and ventilation in mind. The uninspiring 70s office buildings of which so many populate the areas south of our historic downtown and some spots of the Charles Center urban renewal were all built speculatively under the old motto of "build and they will come" and all with a focus on initial cost instead of operating cost. They are bland so that they can fit many molds and needs but nobody cared about the long-term. That has changed with the investor now often being the tenant as well. How stunning interior change can look is on display at the new Pandoras headquarters on Pratt Street. The exterior change is much harder. The recent advent of retail "fanny-packs" in the shape of shallow first floor additions on space that used to be occupied by extra wide sidewalks is a modest attempt to make those buildings more appealing. More comprehensive approaches are tried in Tysons Corner and other hotbeds of outmoded office towers.
Stovall Street, Alexandria VA
office building before conversion

Real estate, like almost anything in a "market economy", is driven by available capital. Unfortunately, the reasonable motto to wait until they come before one builds a large new structure is often cast in the wind by vagabonding capital in search of profit. Much of it is currently funneled into real estate because there are few other lucrative investment options. Baltimore as a class B or C market has  only recently been "discovered" by foreign investors since the class A markets have become overheated to a point that a return on investment is questionable due to inflated costs that outstrip what even those markets can bear. Thus speculation is still as strong element of the real estate market, even if the rules of engagement have become much more community friendly.
Rendering of the Stovall Street building converted into
over 500 apartments

It would be great if a good deal of this capital could be bundled into social investment funds that use the capital to rebuild our neighborhoods with equity. Doing well by doing good is not a new idea. In fact it was also Jimmy Rouse's motto and his Columbia is to this day a viable urban experiment. In Baltiore first Bill Struever and now Thibault Mannekin try to follow the same motto. The RF Reinvestment Fund that fueled a lot of the revitalization of Barclay is a social investment fund and and an example that "social impact development" potentially can be done responsibly. But don't hold your breath, even if touted as the latest, these new trends are still nascent and the world of real estate has also always been a world where dreams are sold as reality.

Klaus Philipsen, FAIA

Next City: Connecting Real Estate Developers to Meaningful Social Change

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