Incentives and Development

If you find yourself in a fair fightyou didn’t plan your mission properly.”

– Colonel David Hackworth

Let’s begin this post by laying out that there is no such thing as a level playing field. Someone always has an advantage. Whether it’s information, capital, experience, motivation or even patience everyone has a different base and set of criteria they’re working with.

Now let’s get into the world of incentives and their effect on development.

Collins English Dictionary defines tax incentives as : “A tax incentive is a government measure that is intended to encourage individuals and businesses to spend money or to save money by reducing the amount of tax that they have to pay.”

Not all incentives are tax based but the definition helps to set the stage for how incentives work. They’re used to encourage specific activities desired by those providing the incentive.

Cities use them to overcome real or perceived obstacles to entice developers to build specific buildings in a desired area. Chattanooga used tax incentives to draw developers to start building residential units in the downtown core. With 6000 units built in five years and at least 2000 more in process I’d say those were successful. Would residential have been developed without those tax breaks? Very likely yes but at a different timeline and without the focus provided by what is a pseudo public / private partnership.

So are they fair? In a word, no but that’s not the goal, nor is it a cities obligation to be fair. Cities, ideally, are interested in the best possible outcome for everyone. Obviously there are plenty of stories of incentives being taken advantage of by less than scrupulous individuals but our point here is not to address criminals. So, cities are able to bend the rules in order to get something they want.

Incentives are used extensively in affordable housing development. Affordable housing projects are notoriously difficult to make a return on investment – without incentives. The forced cap on income limits the viability and interest from developers. There is a small subset of developers, however, who have been able to build up a very good business focusing on affordable housing by mastering the incentives, both federal and local, that can be leveraged to finance a project.

So, as you look around a city and see all the distinct elements that have come together realize that some things have been given a little nudge in order to be built the way they are. It all goes into making up the cities we live in and shape the world around us.

Wise Acreage

Short advice on real estate and life

Obstacles are those frightful things you see when you take your eyes off the goal. – Henry Ford

Just because you’re being taught a lesson doesn’t mean your learning. – M.D. McKee

Failure and invention are inseparable twins. – Anonymous

“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” – Franklin D. Roosevelt

“In any market, in any country, there are developers who make money. So I say all of this doom and gloom, but there will always be people who make money, because people always want homes.” – Sarah Beeny

The Downsides of an Upmarket

Or why a winning market can be a losing proposition.

Bloomberg Businessweek’s latest issue (Oct 28th) has a very interesting national map of average home price, by county, compared to median income around the country. Noting in the opening “Home prices in the US are up 25% in five years, according to the S&P CoreLogic Case-Shiller index”. It also details which states have the ability to implement rent control and details on a few cities that have already implemented rent control. This brought up for me all the issues that arise as a market heats up. Those things that make it harder to buy and sell and less attractive to be in the countries hottest markets.

Keeping it ‘Affordable’

From a tenants perspective rent control seems rather like a nice idea. Limiting the increases in rents can help keep the cost of living more in line with incomes in expensive communities. From the investment perspective rent control can have a chilling effect on investment and development.

Consider that the value of investment multifamily is directly linked to the income generated from the property and in rent controlled cities the municipality is saying “you cannot raise the rent”. The byproduct of which, in theory, is to keep a lid on the valuations of those same properties. Another stark result of rent control is the chilling effect on investment and development of new multifamily properties. This type of economic subsidy has the perverse effect of keeping housing stock low and thus rents high. It also reduces the number of investors willing to consider acquiring an asset in a rent controlled city thus reducing the market demand for these assets.

“Sure I’ll Sell my Property…”

Another, more hidden, issue that arises in hot markets is that there just isn’t much that is available to buy. When markets heat up, prices go up and as owners we all enjoy that, but the availability of properties goes down. Towards the peak of hot markets it can be hard to find anything even listed for sale. This has a chilling effect on the volume of transactions.

Keep in mind that the system of commercial real estate ownership is structured in such a way that once you have equity in a property and decide to sell you are going to want to exchange your equity from that initial property into another, via the 1031 exchange process, to avoid taxes. This, by its very nature, requires you to exchange into a more expensive property, which when the market has ample options can look like a good idea. You can trade up to a larger, better cash flowing property.

The difficulty arises when the market has few options that merit consideration. This then puts the brakes on an owners willingness to sell as they are aware that finding replacement properties is unlikely. This can, in time, cause a slowdown in the market as exchange buyers are sidelined, leaving only those cash rich buyers able to participate.

This kind of market necessarily benefits the likes of private equity investors who are not tied to disposition in order to purchase. This change in the makeup of the buyers can also push pricing well out of reach of local investors. A well capitalized private equity fund that is looking to buy up nice assets will, undoubtedly, have a wider price target and deeper pockets than just about any local buyer. This pushes prices up even further and keeps local buyers waiting for a correction. A natural part of the cycle but not a fun one if you are looking to sell your 5,000sf strip mall and buy into a 10,000sf one.

This is a very insidious side effect that is currently taking shape in many western markets (CO; UT; etc) and has already affected nearly $20m in transactions for me personally. I can only imagine the ripple effect. Factoring that my deals would have yielded four direct transactions and likely at least that many again for those buyers and sellers on the other side of these deals. I know that at least one of the buyers was an exchange out of another sale where their buyer was an exchange buyer. It’s easy to get lost in a weird mirror world with a long chain of contingent exchange deals.

Keep in mind that on a macro level this is just money moving around and none of it is new money coming into the market. An economist likely would say this is an indicator of some type. I would simply speculate that it is another indicator of markets that have peaked.

The silver lining to this, at least initially, is that smaller buyers are forced into considering less than desirable assets and how they can be upgraded to increase their value. Included in this effort is the repositioning of dated office buildings and old industrial sites into residential, which from a city’s perspective is a boon.

Aesthetically Challenged

Hot markets also have an effect on the buildings being developed. As prices rise they’re not usually uniform, meaning ground prices can rise faster than finished buildings. This discord (along with labor and materials costs) can have a rather ‘ugly’ effect on development.

Look closely at any hot market and you will see the phenomenon of newer buildings using every last square foot allowed by code as leasable / saleable space. This happens in response to high ground prices in relation to the finished market price for a given space. We can call it ‘squeezing’, since the developer is trying to ‘squeeze’ every last dime out of a building site. This type of building has the serious side effect of creating large and architecturally repulsive boxes. Places that have maximal saleable space and minimal aesthetic value.

The precedent set by these projects can have long lasting effects on a city as well since these buildings contribute to the overall feel and sense of place created in a city. Canyons of crappy boxes do not make a place anyone wants to spend much time.

And Then What…

What is being seen in many of the markets that have experienced incredible price growth in the past decade (San Francisco; SLC; NYC; Boulder; Denver; etc) is a strange decoupling of the financial preconceptions underpinning commercial real estate as an investment.

There is a point, financially, where an investment doesn’t make sense. Typically each individual investor determines their desired return and focuses on securing assets that deliver that return. In hot markets the prices are shoved upwards and it is not unusual to see capitalization rates of 3% and lower. I have worked on a number of deals where the actual cap rate was negative. Meaning it was going to cost the buyer money every month to acquire the property. So why would an investor buy such an asset?

In short, these investors want into a market so badly that they decide that other factors are of greater importance than the property acting as a cash flowing asset. There can be outsized appreciation in a particular market that, when considered over the holding period of a property, can offset a lack of cash flow. For instance if a market is blasting along and producing 10%+ appreciation year over year and the property is only producing 1% cash flow, an investor can justify it saying they’ll get they’re value at sale. If rents are rising at a similar clip a buyer can bet on the future cash flow. It is a bet and is very reliant upon an investors time horizon.

There are also those individuals and companies who are no longer looking at commercial property as an investment but are looking for a trophy. Every city has these buyers / owners and they typically retain the most visible properties in a given market. They do not care much what the cash flow is or will be. They want to be able to say to people: “That is my building”. These buyers can make a mess of markets when the proportion of them becomes dominant. Because they are not tied to economic drivers in pricing their buildings they will typically trade at prices where there is zero investment value for a buyer. From one ego to another.

Who is Actually Making Money Then:

Value-add investors are the ones making money in these markets. Those with creativity, backing and a taste for risk who are able to consider what a particular property could be and then make it happen. The most successful of these are developers with a strong financial grounding. The margins are very thin and these types are able to carve out profits in places the typical investor doesn’t even look. Can there be another two stories of residential added to a particular building; can you take an old transfer building and make it into a food hall. These are the types of value add that are yielding returns.

Not a path for the faint of heart as investors of this ilk are able to buy properties at market prices and add enough value that when they sell they make a healthy return. If they bet wrong they’re likely filing for bankruptcy as the numbers are substantial and the pressure intense.

Hot or Not

Hot markets can be great for making money, if you’re in the right place with the right tools at the right time. They can also be infuriating when things do not work. Understanding that, just because a part of a market is rocketing along doesn’t mean you’ll be able to grab a piece of it is critical. You will miss more waves than you ever catch.

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Wise Acreage

Short Advice on Real Estate and Life

Cash is King

If you want to know your worth in this world make a list of the people who will starve when you dieAnonymous

All human knowledge is uncertain, inexact and partial.Bertrand Russell

No one ever washed a rental car…(Ownership is critical)Anonymous

Always take the high road. It’s far less crowded.Warren Buffett

Thoughts on How The Built Environment Shapes us

We often talk about how to buy and sell, how to evaluate a particular property or find the best site for a business, but let’s pause for a moment and consider how the built environment affects us. There are both obvious cause and effect elements and more subtle situations that shape how we think and act without us even realizing it.

“Architecture is like a soundtrack that we’re not even fully aware is playing. It sends us subconscious messages about how to feel and what to expect.”

– Architect John Cary

From the micro environment of the way a particular office is laid out to the macro view of how a city’s streets are oriented, the effects on us are continuous and not always obvious.

There are the obvious conditions we can all observe and note the immediate effect, such as air quality, light, green space, water quality, safety and mobility, and there are the not so obvious conditions of things like blank walls, multiple lanes of traffic, high speeds and pedestrian crosswalks.

All of these (and many more) contribute to the ‘feel’ of a city. How does it feel to be in a city, to walk down its streets, to go about day to day errands and to enjoy an evening out.

The better it ‘feels’ the more time you will spend, the more time you spend, the more money you spend and the more you will identify and feel at home. The converse is also true. We have all driven through areas, and even entire cities, where we saw nothing that would entice us out of our cars. Nothing that made us want to stop but more often places that made us want to hurry up and get past.

Houston…(though it could be almost anywhere in the US)

There is an entire language around architecture and planning that is required learning for all nascent designers, however, thorough training in the application of this language seems to have been neglected. We all know good architecture when we see it. We know good spaces when we are in them. We may not even be conscious of it, but after leaving, realize that we relaxed in those spaces.

“We shape our buildings, and afterwards our buildings shape us.”

– Winston Churchill

Let’s start with where many people are headed when they get into their cars in the morning, the office:

The average American spends more than 90% of their life indoors or roughly 21 out of every 24 hours. The kicker is that many spend the remaining 3hrs a day in their cars but that’s another topic. For now we can look a little closer at these spaces where most of us spend the majority of our lives.

” I believe you have my stapler.”

Just looking at the above photo will evoke a feeling for most people. Not that we can put our finger on all of the specific elements that we find distasteful but we all come away with a feeling of dread and anxiety when considering day after day in such a place.

It’s even difficult to list all of the obvious issues in this all too typical office environment: no natural light, no air circulation, ambient noise level, lack of personal space, beige everywhere, fluorescent lights, constant visual distraction and on and on.

All of these elements present workers with an environment rife with distraction; where getting up and going to the bathroom is the only way to find a quiet moment alone. Interestingly, this typical office layout was rebranded as the ‘open office’ in the late 90’s and early 2000’s and had some color added:

“We are all leveraging hyperlocal onboarding tactics to capture the low hanging fruit and capitalize on its excess capacity.”

Spending more than 40 hours, almost 1/4 of our lives per week, in such an environment is going to have an effect. An effect we are still just beginning to understand.

Let’s move on to the next most popular place for people to gather in an average week: the road. A typical road is designed to move as many cars as quickly as possible from place to place.

“The line of traffic advancing towards the rising sun looked like a procession of the returning dead. Every one of them, solitaries in clean shirts, smoking, checking mirrors to see if their reflections were still there, wore dark glasses.”

― Iain Sinclair
Nowhere USA

These roads are not designed for you to spend any time in the surrounding area. Get along. Don’t linger. Piles of signs vying for your attention at 50 mph (no one is going the speed limit). The average American will spend more than three hours per week in this kind of an environment; doing battle to get errands done. The effect is substantial and not considered by those designing these wastelands.

These roads by their very nature create a sense of impatience in drivers that elevates anxiety and fosters everyone’s favorite disembodied state: road rage. The key is understanding that everything experienced on roads and areas is undesirable, if not repellent. So, our unconscious reaction is to hurry, to push to get through it and away from it. Someone pulling out of a drive that forces us to even dab the brakes can send most people into a state of rage.

Next let’s look at the typical American home, the suburban dream. While there’s been plenty of discussion and articles talking about everyone moving to the cities, do not be fooled by the vision of everyone living in high rise condos or brownstones on leafy, tree lined streets. Cities quickly expand their borders to include as much land as they want, generally called sprawl. The vast majority of this sprawl is made up of a startlingly repetitive model of endless three bedroom three bath boxes with names like “The Kitridge” or “Country Rambler”. Names trying hard to draw the perfect home picture and not let you look too closely at what six months ago was a cow field.

“Dollar for dollar, no other society approaches the United States in terms of the number of square feet per person, the number of baths per bedroom, the number of appliances in the kitchen, the quality of the climate control, and the convenience of the garage.”

– Andres Duany
Marsha, Marsha, Marsha.

The average American home has more than doubled in size in the last fifty years and is now closing in on 3,000 square feet. Larger than many barns. The reasons behind this are legion, but we will maintain our focus on the design effect this has on people. When your home is larger, nicer and everything can be delivered to you, why would you leave this cocoon? More and more people are choosing not to. Remote work, home based businesses, flex time, all of these save us the stress of venturing out into the world.

“Unique layout and distinct curb appeal!”

When you do have to leave the safety of the home, we are immediately confronted with a maze of streets and byways that would make a lab rat retreat. The unnecessary complexity of these neighborhoods can precipitate anxiety even before reaching the ‘feeder’ roads that take us to work or the mall.

If it’s such a chore to simply get out of your neighborhood, it becomes a brake to action, to human interaction and can have substantial detrimental effects. The social ramifications of this type of cul de sac environment are finally being understood and many are pushing back against it, but the vast majority still view this as their ultimate badge of success. The American Dream.

Lastly, let’s look at the design implications in downtowns and how good design can make a place ‘feel’ better. From a design perspective we’re looking to answer the simple question, “is there a ‘There’ there?” Is there a reason to be there? Not a business reason, but one that draws you in and makes you want to spend time, even live there.

“[Cities] are not like suburbs, only denser. They differ from towns and suburbs in basic ways, and one of these is that cities are, by definition, full of strangers.”

― Jane Jacobs

As we did above let’s start with some examples of when cities fail the people who live in them.

Downtown Houston

Houston is widely and roundly derided as one of the ugliest cities in the world. It suffers from a substantial and growing poor and homeless population, as well as a complete lack of formal zoning regulations. For all the difficulty developers struggle through in order to abide by zoning in most cities, Houston is a postcard from the other side of what can happen with a complete abdication of civic input into its built environment.

Zoning in many downtowns is necessarily more complex than outer regions of a city; following the idea that greater care and focus needs to be taken when more people are packed into smaller spaces. Does this make building more complex and expensive? Certainly. But this additional scrutiny will, hopefully, provide a better outcome for the city as a whole.

So how does a lack of civic direction affect the feel or attractiveness of a downtown? Much in the same way as was noted previously, but in a far more concentrated way. Fundamentally, zoning is the municipal way to say to the rest of the world, “we have a vision for how we want the city to grow and how we do not want it to grow.” They are directives about how big a building you can build and where on your property you can build it. Without this, or any substitute, a city is simply abdicating it’s vision of itself to the market. This is a prescription for a race to the bottom and Houston sits a proof of this failure in management.

“Listening to mayor after mayor and how they explained their idea of a successful city, it became very clear that both the best measure of a thriving place and perhaps the best contributor to a thriving place was street life: walkability.”

– Jeff Speck

The elements of what makes a city like Houston ‘feel’ awful generally boil down to a fairly straightforward idea: has the city been built with people in mind or as a factory? When cities are built for people, they attract and retain people. Conversely, when they are built as factories, they repel people. Much like the picture of the office space above, people may put up with it in trade for money, but they will not spend a moment of additional time there. Successful cities provide so much that you neither need, nor want to leave them.

As you look around at a city, take note of what you see and ask, “was this built for people or machines (cars, etc)?” You will quickly see the specific elements of great cities: wide sidewalks, tree lined streets, traffic calming, benches you’d actually sit on, clusters of small interesting shops, but most importantly, you will see other people.

As humans we enjoy places that make us feel good. Places that feel safe and welcoming. While there is an entire language for the creation of these spaces, most of us simply say we like a place without understanding the elements that make it up. Most people, frankly, do not need to learn this language, but for designers, builders and developers it should be mandatory. These are the people creating our cities, towns and homes and allowing all of it to be built to the most ‘cost effective’ option. Developing in this way creates places no one wants to be.

Further Reading;

There are some excellent sources to further your understanding of how the built environment shapes us. Here are just a few (Disclosure: I am an Amazon Affiliate and if you buy from the links below I will make millions and retire to Boca):

I noted that there is an entire language around building that should be compulsory for all who build and the dictionary for that language is Christopher Alexander et al’s tome ‘A Pattern Language’. This is a reference book not an armchair read (except for the seriously nerdy among us) but it is an invaluable addition to understanding why some places work and others fail.

Maybe the most foundational work that should be required reading for everyone who lives in a city is Jane Jacobs ‘The Death and Life of Great American Cities’

From the unapologetic urbanist Andres Duany comes the seminal work on what has gone wrong in American cities in the past fifty years and more importantly how to fix it: ‘Suburban Nation’.

Also, from Duany is ‘The Smart Growth Manual’ which is a handy reference for understanding the principles for smart growth and lays them out in a simple reference format. Each principle is given a page with an example image and detailed text outlining the goal of the principle.

From one of Duany’s co-authors on Suburban Nation and the Smart Growth Manual, Jeff Speck brings us the ‘Walkable City’, which is a great read on how cities in the US can work to improve their citizens experience by focusing on the principles of walkability.

Moving away from the urban planning vein, the cognitive neuroscientist Colin Ellard’s excellent book ‘Places of the Heart’ takes an indepth look at how the places we occupy affect us and shape our thinking. A fascinating and dense read, I highly recommend this book if you are looking to get deep into the relationship of humans to their built environment.

We Can Do Better

Please stop building this garbage:

Proposed Foundry Flats Apartment Building

I’m not even sure where to start. It’s an office building. It’s literally the cheapest thing you an build. It is utterly devoid of any aesthetic value. It looks like a prison. Really? You think people will want to live here? Are you high? Who let this crap get through.

The Edge Apartments at 422 Vine St

For ‘The Edge’ apartment building they added some paint and variable skin to this but it’s still about as interesting as a block of concrete. This is an utter waste and creates an awful experience for the entire area. Walking by these huge blank faces is cold and repulsive. Not even awnings. Absolutely no street value.

Yes there are constraints and restrictions and requirements. Just like every other city on the planet. So, why exactly is this worthless garbage being built? I would venture that it’s what happens when apartments are built to a ‘bottom line’ on a proforma rather than being built to perform for the residents and the city. With the market for apartment buildings being so overblown nationally these will endure for quite a while with little to no further investment. Meaning we will be looking at these blank, featureless prison faces for the next twenty or more years.

Here are a couple examples of apartments that could have been built instead of this cheap crap:

None of these are difficult from a building standpoint and they bring the entire area around them up in aesthetic value. They’re additive.

Enough with the ‘bottom line building’. With 6000 + units being built in the last five years it’s time for Chattanooga to lead the charge and push projects of actual civic value. We have beds now we need vision.

Unique buildings have always commanded a premium. So the money excuse is a weak one. So, who is going to step up and actually give us something to be proud of. Something the rest of the country will see and say ‘WOW!’ Look at what they’re doing in Chattanooga. Something that will add value to the city rather than just using our infrastructure to enrich the owners.

Stop building crap.

North Shore Condos on Frazier

12 – 14 Frazier Ave

If you’ve walked down Frazier in the last couple years you’ve likely seen the shell of the building just of Market next to Locals Only and wondered what they’re going to do with it. Well, the rumors were right and it’s going to be retail and condos.

The Times is reporting that the units will be priced from under $500,000 to $1,200,000 and that parking has yet to be sorted out but will not be garaged. Provided they can sell all the units the developer should do alright as they bought the property in 2014 for ~$1,030,000. Add in five years of carrying costs and that’ll take a bite out of profits.

https://www.timesfreepress.com/news/business/aroundregion/story/2019/oct/16/new-north-shore-condos-plannedpreservatigrohi/505969/

The North Shore is certainly doing a nice job of producing smaller projects. Projects of a scale that seem to fit more in the area. At least at the moment. I am aware of at least three projects in the rumor or planning phase that are looking to have more than 150 units each but they’re all at least a year or two away.

The smaller, boutique, projects can provide an excellent counterpoint to the larger ones and in my experience tend to draw higher prices and a sense of exclusivity, provided they’re done well.

More Apartments & Retail Downtown

The project at 3rd and Walnut downtown that will transform one of Unum’s underutilized parking lots into 151 apartments, 12 townhomes and a pile of retail space has begun. It’s expected to start leasing by the fall of next year. Even on the heels of ~6,000 new units downtown having been brought to market in the last four years and multiple projects reporting less than 75% occupancy the SC developer breaking ground noted “We think there is a lot of pent up demand for apartments downtown.”

I’d sure love to have a look at the tea leaves they’re reading.

From an urban infill standpoint however, this project will help substantially to fill in a major gap in the downtown experience. When walking off the South side of the bridge down Walnut St you have one block and then you are left stranded in a huge sea of parking lots with little of interest to invite people further or connect them to the rest of downtown.

Provided these guys hustle to fill the retail and are able to enliven this stretch the project will be a strong addition to the downtown experience.

We shall see how the lease up goes. I certainly hope they’re seeing the right indicators as we have plenty of vacant retail space already.

https://www.timesfreepress.com/news/business/aroundregion/story/2019/oct/14/work-one-biggest-mixed-use-projects-chattanoogas-downtown-begin-soon-near-unum/505792/

The project is garnering National press as well:

https://www.multihousingnews.com/post/massive-river-rock-project-breaks-ground-in-chattanooga/

The Quality Problem

If you’ve been around the built environment for longer than ten years you have no doubt begun to notice a subtle or even not so subtle degradation in the quality of construction and workmanship. I think there in an interesting confluence of issues that is contributing to this degradation that are worth picking apart in order to understand buildings better:

  • Labor Issues
  • Materials costs
  • Land costs
  • Comodification of real estate

Labor Issues:

In just about every housing market across the country there is a shortage of skilled labor. This shortage causes huge issues not just in residential building but in commercial as well. Talk with any developer and you will hear stories of entire crews not showing up on an job site because another job offered them more money. Workers understand the market is tight and they’re looking to take advantage.

The reasons behind this shortage are many and complex but boil down to one simple idea: there are not enough people who know how to build things. The result is a focus on speed to completion of jobs. Craftsmanship, is now double or triple the cost as workers have to ‘make up’ for losing out on other jobs. And when tempted by a ‘grass is greener’ offer to make more in a shorter period for doing less they’re going to take it.

Material Costs:

The increase in material costs is particularly evident in larger jobs though still quite relevant on smaller ones. If you’re building a 50,000sf office building and your drywall costs go up by $0.50/sf that can sink the viability of a project. Builders have little remedy except to pass on the increased costs to developers and thus the project cost is increased. The other not so obvious trend is trying to do more with less and I don’t mean in the good way. I mean in the half-assed way. Reducing the use of the ‘expensive’ material and using a poor and cheap substitute. This invariable leads to a reduction in the durability of systems and buildings in general.

Increasing material costs squeeze everything else unless the market pricing increases to accommodate – which it never does. So, builders find ways to do the same thing with less. Less concrete; less real wood; less copper; and on and on. All of this leads to a drop in durability of the end product.

Land Costs:

On the heels and sometimes ahead of the cost increases in materials is the cost of land. If the cost of land is out of proportion to the market price for a finished product the difference has to come out somewhere.

This squeeze is a huge contributor to seeing really poorly built buildings in really expensive areas. It’s really just a math problem: If the market price for office space is $200 psf and build costs for office are $100psf that leaves only $100psf for all other costs and profit. So, if land is over that and the project is still being done it’s coming out somewhere.

Comodification of Real Estate:

The shift from residential and commercial being long hold to being just another asset has created an urgency that reduces quality in building substantially.

While this is far more evident in residential we do see it rearing its head in the commercial world more and more. Thanks in large part to HGTV and a slew of companies herding people into ‘fix-and-flips’ the idea that there is quick money to be made in real estate has made for some atrocious buildings.

This quick turn idea is only one part of the equation, however, from the top we see private equity and hedge funds getting into real estate. These firms have little interest in the quality or workmanship and view property as a short term asset.

The shorter the term the more corners that will be cut. A ‘flipper’ will cheap out just about everything as long as it looks good. The private equity / hedge funds will do their best to ‘keep a lid on costs’ a euphemism for doing the cheapest repairs possible. Ones that will likely last only as long as their ownership.

And so:

There are a myriad of social shifts; economic incentives; and political considerations that go along with these that are too complex to get into but the above provide some insight into the shifting landscape of the built environment.

There is also the contention that this shift has pushed innovation and creative solutions forward dramatically and that cannot be overlooked. The shift from stick built homes to factory built homes is maybe the best example. The speed and quality produced in factories cannot be matched in onsite building. Not to mention the massive gains in efficiency of factory built homes but quality is an issue with these as well for many of the same reasons.

As you do your due diligence look closely and consider the durability of the systems in the property. Not just for the term of your ownership for the long term. Better quality works better now and lasts longer. Damn now I sound like my grandfather.

Don’t Blink or You’ll Miss it – Development Update

The rate of development projects doesn’t seem to be slowing or even catching it’s breath. You could even make a pretty strong case that it’s accelerating. If there is a recession coming there is zero sense of any slowdown here.

In an attempt to keep a loose grip on what is happening here is a brief on the projects that have come out in the news recently:

Unum dumps excess space onto the downtown market:

On Thursday Oct 3rd the Times reported that Unum will be leasing out a “sizable amount of space” in their ‘Home Office West’ tower. They estimated the total at 168,100sf with 8,100sf of retail and the balance as office.

This is a substantial addition to the downtown market for office and may further push down the value of other office – at least those buildings that cannot be converted to another use – I’m looking at you 817 Broad St., ~24,000sf office building listed for $1.8m; vacant with no parking.

Nippon Paint and the Future of East Chatt:

Following on the heels of the announcement that the Nippon Paint company is in negotiations to build a 270,000sf manufacturing complex on the former Harriet Tubman site the city announced today that it is working to create a Tax Increment District around the site. This in theory should spur continued investment and development around the site further transforming East Chattanooga. This is a great idea and farsighted move especially seeing how the Opportunity Zone designation just skipped right over East Chatt.

Southside Change Gets Rolling:

The city’s major overhaul of the South Broad District is getting going with a bang thanks to the $1m plan to update West 26th Street between Market and Broad St. West 26th is and will be the major cross neighborhood connector for the South Broad area and will set a great precedent for future development while also drawing further attention and investment to the area. Provided the new ballpark plan ever gets rolling this entire area should see substantial changes.

Chestnut Flats Adds Affordable Apartments to Downtown:

The recently completed 199 unit apartment building at 1400 Chestnut was done as HUD affordable project limiting renters to those making less than 60% of the average median income (AMI). This is a great diversification to all of the high end apartment projects being done already and in planning. Affordable housing – actually having a range of housing – is a critical component of a thriving economy.

The comments from Mayor Burke are of particular interest in this article including the closing comments regarding downtown and growth:

“The downtown housing market is strong,” he said. “I have investors coming in to see me on a regular basis who say we need more apartments. Occupancy is still strong and prices are rising.”

This would seem to run in the face of multiple news bits over the past few months detailing numerous projects being half full. Time will tell who had their hand on the pulse. The future is very clear when you look back at it.

Bullish on Chattanooga:

The buyer of the 1301 Riverfront Building has also set sights on rehabilitating the Lupton Building downtown. Taking advantage of the Opportunity Zone designation to convert what has been the self storage and vacant office building into a hostel, creative office space and retail.

“I think Chattanooga is a fantastic market and we’d love to be up there more” – Dave Cordera, founder of Atlanta’s Greenleaf Partners.

Here is someone with the long view to do good work in the city. He notes that his is a family company and that they are long term holders. There are exactly the type of stakeholder that downtown will benefit from. People with a long and thoughtful view and a sense of the potential. Looking forward to see what else they jump into.

Highland Park Project Proposed for Lucey Boiler Site:

The changes and projects in the Highland Park neighborhood continue at a breakneck pace with the proposed redevelopment of the Lucey Boiler site, in the 900 block of Holtzclaw. On first review this looks like another good project that will continue the updating and rebuilding of one of Chattanooga’s historic neighborhoods. We shall see what comes out in the wash and how the market receives it but I think this is a great little project. More like this will continue to spur change and interest in upgrading and remaking Highland Park.

More Northshore Condos….:

Having recently broken ground on the 26 unit ‘The Fairpoint’ condo project on Fairpoint St in Northshore, the Fletcher Bright Co recently submitted plans to replace the decades old Nikki’s Restaurant on Cherokee with another 52 unit project. Initial drawings look about like everything else that’s been built. Uninspiring. This project has been rumored to be in the works for quite a while but the location is still a bit fringe. While the views of downtown likely will be picture worthy the proximity to traffic on Cherokee and Hwy 27 will create a base level of noise that unless mitigated will have a substantial detriment to the quality of life. I doubt very much you’ll find people lounging on their decks. Regardless this is another vote for the value of the Northshore. Clearly there is appeal and demand to live in the area.

More South Broad Project News:

Continuing the sweeping changes happening in the South Broad neighborhood Knoxville’s Neyland Apartment Associates is proposing a huge project that will add upwards of 300 apartments; 76 townhomes and substantial retail space along South Broad. Add this to the new Publix on Broad; the redevelopment of downtown St Elmo; and the new neighborhood already built on North St Elmo Ave and you have the makings of monumental change. Much like the area just to the North across Chattanooga Creek, this entire neighborhood should be bracing for the kind of change that happens only once in a hundred years. I am hopeful that Neyland will apply thoughtful design principles and build something unique and interesting. Though I am not holding my breath.

The New West End

Last year Jimmy White and Hiren Desai bought the 112 acre Alston manufacturing site from GE for $30,000,000. Which at first sounds like quite a chunk of change until you get into the numbers and realize that they paid only $6.15 per square foot of dirt for the property. An exceptional price for what is a cleaned manufacturing site.

Deal details aside it’s excellent that these guys bought the property and are doing the development. Having their local experience and being rooted in the city will prove invaluable not only in getting the project done but in developing a project that is reflective of the city and it’s values.

Patience may be their most valuable asset since the project is projected to take 20-25 years to reach full completion. Not a fly by night undertaking. At completion it will roughly double the current geographic size of downtown, adding ~150,000sf of office; ~440 residential units; and ~92,000sf or retail and dining in the initial ten years alone.

Retaining Dover, Kohl and Partners (https://www.doverkohl.com/) to draw up the plans the preliminary concepts look well thought out and very much in keeping with the city’s aesthetic.

The site plan provides for the overlay of a traditional street grid and what they’re calling a “car-optional” focus. Meaning you can have a car but it is not required to get around the neighborhood as it’s designed in a compact style.

Some of the noteworthy design ideas already laid out in the plan include a stormwater management solution that utilizes a canal through the heart of the project. Providing a very unique and aesthetically pleasing way to deal with the natural runoff from the site. The plan for the Food Hall and music venue are particularly interesting as well as they look to reuse a good portion of the old steel structure of the warehouses on the site while adding that cool factor with a huge neon city sign and open gathering area.

The concept of the food hall is one I think the city is long overdue for and likely will embrace as if it had grown right out of the fabric of the area. These are fantastic social areas that draw large numbers of people and provide excellent activation for an area.

A few ideas I had while reviewing the current iteration of the plan would be to add more pedestrian only areas (streets and alleyways). The city has already proven these to be very attractive to residents through the alley art program spearheaded by River City Company. In addition these provide intimate spaces that are human sized and have a safe feeling. Away from the threat and noise of cars and trucks.

Good examples are Pearl St in Boulder, and just about any downtown in Western Europe, see the pics:

Downtown Boulder’s Pearl St Mall
Stavanger Norway
Dublin Ireland

You can see that in each of these cases you could get a car – or firetruck – down these streets if required but that the streets would be primarily for people and bicycles.

Another idea was regarding the design in general – and one I have wondered about in all the new buildings since moving to this city – is that the architecture does not embrace the basic environmental facts of the city. Most notably this is the South, it is hot in the summer and it rains more than Portland Oregon.

I would suggest a design for the retail, the buildings first floors, to protect people from the inevitable conditions and provide a refuge. This will encourage people to be out and about regardless of the conditions.

While all of the following pics are all from Bologna, Italy, there are similar walkways in Florida, Louisiana and throughout the South.

Bologna Covered Walkway
Bologna Covered Walkway

Building the streets like this from the get go would provide not only a very unique experience it will keep the streets activated regardless of the environmental conditions. As a potential development benefit, depending on the agreement with the city regarding the sidewalk the area above any such covered walkway can be utilized for additional office or residential spaces.

A couple other thoughts I had while digging into the site design are to create a riverfront that allows the average person to interact with the river. Because of the steep banks along the river it is not easy or inviting for people to interact with it. Which is a shame as it is one of the defining features of the city. By example the area that integrates this best is in front of the aquarium. The grandstand style concrete steps and pathway that fronts the river allows people to get close and even touch it. This can can be invaluable in stitching the river into the everyday for people.

Additionally I would suggest that the road parallelling the river be designated a pedestrian focused right of way; boardwalk or even something like what the Dutch have called ‘woonerf’ streets. Places where all modes of transport are given equal priority. Meaning all traffic is at a walking pace or below. This helps weave the neighborhood into the greenspace fronting the river and makes it a natural extension for everyone to access without difficulty.

Lastly as the blocks and streets are laid out I would encourage the design of the majority of retail spaces to be on the smaller side – under 2,000sf. This has a tremendous benefit in enlivening the area by creating a varied and intricate fabric of diversified retail. In the last decade retail has had to admit that the only way it competes with online is via experience. Creating entire districts with tens and even hundreds of different shops provides a tremendously engaging area that people will want to visit even if they’re not planning to shop.

I had thought it could be cool to expand the canal idea into something like a Venice of the South but the corresponding development issues this raises may not be worth the cost.

Overall I have a great deal of enthusiasm for the future of this project. It’s easy to see this project evolving into one of the most interesting developments anywhere in the South and it will certainly increase Chattanooga’s visibility and desirability as a place to live, work and play.

ULI: Is Membership Worth It?

The Urban Land Institute (ULI) is the oldest group of land use professionals in the world. It has a long history of advising on specific development projects and pulling together groups of experts to provide guidance on complex development issues.

Membership has two levels: ‘Associate’ and ‘Full’ with the Associate level running $492 per year and the Full running $1220. So, not cheap.

So, is it worth it?

I’d say that depends on your focus. If you work for a public entity (think city planning and zoning office) that deals in land use ULI can prove invaluable in exposing you to solutions and people that can advise on difficult urban issues.

If you work for yourself and are flipping houses but have an interest in getting into larger development deals I’d say maybe try it for a year and see what value you get from it.

If you are a private developer of any volume I would suggest that it is nearly obligatory. For networking, sourcing new and innovative solutions and helping to keep tabs on the changing demands and issues with the market.

If you are a budding developer look to their extensive bookstore and educational offerings that can provide the foundation for successful projects. These are not cheap but they’re of a very high quality and one educational course alone can prove worth your membership.

I believe the key to the value however is that it’s not a transactional one. You will reap the true value of the membership over a longer period of time in the relationships and access to knowledge that are provided by the group.

The yearly Fall Meeting starts tomorrow in Washington DC and is a huge gathering with piles of workshops and lectures on numerous topics.

So, is membership in ULI worth it? Yes, if you work in development / land use. The connections and ideas are invaluable.

ULI Americas Website: https://americas.uli.org/