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/

Chattanooga Big Time – Updated 10/1/19

I just got wind this morning that the 111,000 office building at 1301 Riverfront Parkway has traded and if the rumor is true it sold for $200,000 above it’s $17,800,000 asking price.

For those not familiar with the property 1301 is a large, multistory, multi-tenant office property whose anchor tenant, The State of Tennessee, had 11 years remaining on ~58% of the building. Aesthetically it is fairly typical office park type property, however, the seller kept it in excellent condition. It’s proximity to downtown and to the future redeveloping Alston / West End site make it very attractive.

Trading at $18m would put it at only $162 per square foot, seemingly a very fair price for a high quality property. With a claimed Cap Rate of 8.5% at asking it also represented an excellent income opportunity.

The trick for Chattanooga, of course, was that this property was an outlier. An anomaly. Where else in the city is there a similar property? This made it harder for buyers to make any sort of comparison to validate the value proposition. If you are considering buying one of many it’s much easier to get comfortable because you can point to all the others and say “see those have a similar value”. When you have one there can be a bit of a feeling of vertigo when trying to confirm valuation.

With only a vague rumor to go on we have no way to determine the buyer and their motivation. My suspicion is that this will turn out to be an out of town and likely out of state buyer. The commercial market nationally is being squeezed hard for any yield. So just posting this property on a national level would bring interested buyers to the city. Again this is good news for Chattanooga. People who may never have looked at the city before are now aware of its potential and will want to find a way into the market. Bad news is we had only one.

I will update as details are made public.

Update 10/1/19:

Looks like it was actually sold at asking. While not as impressive as if it was sold above asking the buyers enthusiasm for the city is the real news. This kind of enthusiasm will move Chattanooga a long ways.

https://www.timesfreepress.com/news/business/aroundregion/story/2019/sep/30/riverfront-parkway-building-sells-178-million/504776/

5 Tips for Vetting a Contractor

**This is the first Guest Post provided by real estate professionals from across Chattanooga and around the country**

No matter what specific type of real estate investing you pursue, it will inevitably involve hiring contractors to maintain or improve the property at some point. There will come a time to bring on PROFESSIONAL contractors to add value or secure the existing value. Whether the investment strategy is a quick turnaround or longterm, the profitability of them will largely depend on the effectiveness of the contractors selected.    

As property owners, you’ll know that the major costs typically come in the form of unwanted gifts from Mother Nature—Rain. Moisture problems are typically the most common, beyond major destruction from fire or vandalism. This can cause mold, making the property inhabitable, and accelerate the decay of building materials. Hopefully it stops there, but Mother Nature can also shift causing structural problem. 

Equally as common, investors are simply faced with property that is in desperate need of a cosmetic facelift. Whether it’s outdated décor, decaying paint or wood, overgrown greenery, crumbling parking lots, etc. getting the right contractors to advise and execute can make or break an investment. Here’s a list of a few preliminary vetting strategies to ensure you’re dealing with a PROFESSIONAL contractor:

Contractor’s License:  It doesn’t take much in regards to barriers of entry to become a small residential contractor. This is not the case for commercial projects. A contractor’s license is required to bid or execute on any project $25,000 and above. Request a copy of the license to ensure you, as the property owner, do not subject yourself to legal ramifications. Check out this link to ensure they have the correct license for the project. 

Equipment & Plan: Ask the contractor what type of equipment will be used for the job. This will require them to explain how they’ll approach the job and ensure they have a strategy for completing on time and on budget. This is especially important when minimizing disruption to the flow of the property or other contractors’ schedules is a priority. 

Insurance: Protect your investment at all costs. You’ll want to request a certificate of insurance from the contractor to be attached with the proposal. If selected, ask to have your name/company be put as the certificate holder and as additionally insured on the policy.  Ensure the limits are adequate for the project size. 

References: Ask for at least three addresses and contact information for RECENTLY completed projects for similar scopes of work. Talk is cheap, double check they have the experience and expertise necessary to complete your project. The lowest bidder should not always be the winner. 

Have a written Statement of Work or Statement of Objectives: Underbidding a job to get a contractor’s foot in the door on a large project is common. If the work to be completed is not written down in detail, you’re exposing yourself to large change orders.  

Nick Murray is the owner of the local CertaPro Painting Business and available for all your painting needs. Give him a call to get a great – and fast – paint job.   Direct: 859-512-7464  Office: 423-414-1252  Website: https://chattanooga.certapro.com/ 

Fall Forward

August is nearly over and things have clearly been busy. I am back at it after an extended pseudo vacation in the high mountains of Colorado, which I highly recommend to all.

For the Fall I am announcing a few new additions to the blog which I think will help to extend the value and interest. First will be guest posts from professionals across the commercial real estate spectrum from investors to brokers and third party vendors. The goal being to provide valuable insight and ideas well beyond my experience. Second, I am going to add a new section to discuss and consider topics specific to Urban Planning and Design. My goal here is to provide a forum for discussions on local and national design considerations and topics. Ranging from density and car based architecture to streetscape and pedestrian oriented design. Third I am working on adding a podcast to the site which I hope to expand into interviews and discussions on all things commercial and city related.

Additionally it was brought to my attention that a number of you do not have subscriptions to the Times and as such miss out on the posts regarding local news stories. In order to make these posts more useful to everyone I will be adding general discussion of the posted articles and then proving a link at the end of the post if you want to reference the specific article. Hopefully this will provide a more cohesive reading experience for everyone.

I am very excited to be expanding the offerings and very much looking forward to your feedback. As always email your comments, feedback, suggestions and thoughts to info@chacre.com and thank you for reading. – M.D.

More and More…and More

This project has been in the works for a long while so it’s timing on coming to market with so much other product is just the luck of the draw.

It’s not clear what their original purchase price was for the old Cannon Equipment site but given the requisite brownfield cleanup I would suspect it was good. That should allow them to weather the current saturated market.

https://www.timesfreepress.com/news/business/aroundregion/story/2019/aug/01/more-riverfront-apartments-coming-early-2020/500314/

It’s worth revisiting the estimate noted at the ULI conference last fall that “it could easily take five years to reach anything close to full lease-up.” That means every other project that comes to market extends that time frame. Short of an unprecedented demographic influx of renters to downtown there’s going to be room to grow for a while.

If there is a silver lining here it’s that anyone coming into the market will need to provide a better price point or more unique product because more of the same isn’t going to cut it. So, hopefully, in a couple years maybe we will see some really interesting and creative residential solutions. https://weburbanist.com/2013/09/04/zaha-hadids-apartment-block-overlooking-nyc-high-line/