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.

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.

The project is garnering National press as well:

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.