Five real estate development experts discuss trends in redevelopment in the United States: where the opportunities lie, what kinds of properties are strong candidates for adaptive use, what sources of financing are available, how redevelopment dovetails with sustainable design, and what the future may hold.
Contributing their expertise are Stephen B. Friedman, president of S.B. Friedman & Company in Chicago and chair of ULI’s Urban Development/Mixed Use Council (Purple Flight); Brian M. Leary, president and CEO of Atlanta BeltLine Inc. in Atlanta; James Ratkovich, CEO of James Ratkovich & Associates Inc. in Pasadena, California, and chair of ULI’s Urban Development/Mixed Use Council (Green Flight); Gregory N. Senkevitch, principal of AGN Realty Partners LLC in Morristown, New Jersey, and chair of ULI’s Urban Development/Mixed Use Council (Bronze Flight); and Alex Twining, president and CEO of Twining Properties in New York City and chair of ULI’s Urban Development/Mixed Use Council (Red Flight).
Where are the redevelopment opportunities today?
Alex Twining: The opportunities today involve weaving back together the cities that were either never completed or that were changed in the wrong way by destructive urban renewal policies in the 20th century. That may mean bringing back active retail on the ground floor, bringing back apartments or offices upstairs, or ideally a mix of all three. People want to live in walkable urban environments again. The ideal spots within cities are where there is excellent access to mass transit.
Brian M. Leary: The redevelopment opportunities today exist where quality-of-life infrastructure is in place already or on the way. By quality-of-life infrastructure I mean places that give people the ability to choose from different modes of transportation based on price, convenience, and environmental considerations; offer plenty of green space and recreational opportunities; and provide access to cultural and historical resources. This pause in the market is giving us the opportunity to recheck priorities and see where quality of life has been maintained even in this downturn. Those places that provide a 24-hour, mixed-use, thriving community environment are going to maintain value and quality of life and continue to attract people and businesses in good times and in bad.
James Ratkovich: New transit-oriented developments [TODs] offer a lot of opportunity. For example, while I was serving on an Urban Land Institute TOD taskforce in Charlotte, the federal government announced that it is awarding stimulus funds to develop high-speed rail between Charlotte and Raleigh-Durham. There are several developers in Charlotte that already have projects lined up for new transit stations—very large mixed-use projects. They have funding for these projects; they just don’t have the rail yet. Once the rail connections to the suburban communities are made, we’re going to see new development around both the downtown and the suburban transit nodes.
Stephen B. Friedman: In the Chicago region, we think the condo market will revive fairly soon, both in the greater downtown area and in the suburban town centers that are transit linked. Starting in 2012, 2013, 2014, there will be more opportunities in the latter for new infill development, but there will also be opportunities in the next two or three years for people to take over stalled projects from developers who have run out of capital.
Gregory N. Senkevitch: Everything that we are looking at now is a redo of a prior plan, one that had higher price points on everything—retail, office, residential. Nowadays, the only way you can get investors to consider a multifamily property or even a multifamily component of a mixed-use project is to go rental. In a majority of cases, we’re stepping into a transaction where the existing owners have a cost basis that was based on selling condos at $600 to $700 a square foot [$6,500 to $7,500 per sq m]. They overpaid for the land or they overpaid for the approvals, and now they’ve got to go back and downscale the project, and the only way to get it done is as a rental. In a majority of cases, the rental market is strong and deep enough, and it can work, but the existing ownership has to write down their basis in the project by at least 60 percent for it to even look viable to any other investors.
What types of properties offer prime opportunities for redevelopment?
Senkevitch: A neighborhood shopping center that has lost its supermarket or drugstore tenant is a prime candidate for adaptive use. Here you have a structure that’s one level with a lot of surface parking and multiple exit points. In some cases, the exits are even covered. Those can make great medical facilities, physical rehabilitation facilities, hospital facilities, doctors’ practices, senior citizens’ centers. These uses don’t require a lot of windows.
Ratkvoich: In California and Hawaii, my company is looking at some opportunities in old hospitals. The California Hospital Facilities Seismic Safety Act passed in 1994 requires hospitals to meet incredibly high seismic safety standards. There are a number of old, vacant hospital facilities that are well located and it’s not economically feasible to turn them back into hospitals. So in many of those cases, we’re going to see some type of adaptive use, whether it’s converting them into medical office buildings or housing, or student or seniors’ housing.
How are redevelopment projects being financed, and what are some of the challenges?
Friedman: I see a public role in a lot of projects, and I expect that will continue. My firm uses tax increment financing, and we are seeing a lot of new-markets tax credits projects. The Chicago Development Fund, a nonprofit corporation controlled by the city of Chicago, uses new-markets tax credits for industrial expansion loans and for community facilities such as charter schools and job training centers, as well as grocery stores. We are seeing a major push to use new-markets tax credits to build grocery stores in what are called food deserts—areas that may be served by fast-food outlets but have little or no access to grocery stores and healthy food options.
Leary: The biggest tool that the Atlanta Beltline is using is a tax increment financing district that at full capacity will generate about $1.5 billion of bonding capacity that can then be spent within the district for transit, trails, parks, affordable housing, and development incentives. Also, local dollars can be used for matching federal grants. Over the past 50 years, the federal government has been fairly consistent in providing an 80 percent match to a local contribution of 20 percent of a project’s total cost. Now, with competition as fierce as it is and the economy in the state that it is in, those percentages are changing. From what we are hearing, a local contribution of 30 to 50 percent makes a project much more competitive in garnering federal dollars. The Atlanta Beltline also relies on philanthropic support from individuals, corporations, and private foundations. We can leverage those funds to access matching but they also allow us to move quickly in terms of land acquisition or construction.
Twining: There is a glimmer of hope in the residential sector because there is some HUD [U.S. Department of Housing and Urban Development] financing for rental housing. The office market is tougher. New office development projects really only work if you have a lead tenant with good credit ready to occupy the majority of the building. Those are especially difficult in urban areas because the buildings are often too large to be anchored by one tenant. Usually in urban areas, ground-floor retail is a small enough piece of the overall project that it’s not going to make or break the financing potential. Often institutional investors who have mostly invested in suburban areas where housing, office, and retail are all separated don’t understand why anyone would bother with the complications required to put retail on the ground floor of an office building. However, sophisticated urban investors recognize that an exciting mix of retailers on the ground floor can add value to all of the space upstairs.
Senkevitch: The days of the 130-acre [53-ha], multiyear, multiphased, multimillion-square-foot mixed-use development on former industrial sites at the far end of the city—those days are over for a while because they can’t get financed. But I’m optimistic that the smaller projects will get done across America in those markets where developers can show that there is demand for residential rental units with a small component of retail or a municipal or medical use. These will be projects that can get done in a discrete time frame, so investors understand how they can get in and out, and they can make their bet for 36 to 48 months, with a 24-month development cycle.
What role does sustainable design have in redevelopment projects now and in the near future?
Twining: Urban mixed-use development near transit nodes is massively sustainable in comparison to stand-alone suburban office parks and housing subdivisions. Until recently, the U.S. Green Building Council’s LEED [Leadership in Energy and Environmental Design] rating system did not give proper credit to urban mixed use at transit nodes. You used to be able to get a LEED certification for an office building in the desert that you drove your Humvee to—if you put solar collectors on the building. Gradually, the LEED system is changing to recognize that a location accessible to mass transit is more important. The next challenge is streamlining the LEED system to reward the recycling and adaptive use of existing buildings. Currently, it is far easier to secure LEED status on a new building than an existing building.
Ratkovich: We hear a lot about tenants who want to be in green buildings, we hear about developers who are developing green buildings, but there are still some obstacles to overcome. If you are in southern California, for example, and the local code requires you to develop a project with a lower parking ratio than your competition because you are within a certain radius of the light-rail station, then you may be at a competitive disadvantage in the marketplace. Even if they want to be green, tenants and corporate owners also want a building that is competitive in every way with all of the other buildings in that market. So there still has to be greater buy-in from the tenants. Also, as developers, we are always concerned about the economic impact of green initiatives. Only recently have we started to see statistics on the long-term investment viability of building green. What was formerly a 17 to 20 percent premium to build green is now almost insignificant—around 2 to 4 percent. The payback is now much sooner and more substantial.
What other trends in redevelopment do you see?
Friedman: In the Chicago region, we still have strong population growth, and in the Milwaukee area, there should still be condo demand and backfill demand due to the age structure of the population. The trend may not be as great as it was in the last ten years, but a significant percentage is likely to move. There will be enough demand for housing that they can sell their houses—as long as developers don’t overbuild new single-family housing. There will be some contraction in the size and price of condo units in the next round of development, however, because people have taken hits on their housing values and stock portfolios. The rental market is still struggling because those in the younger generation, the millennials, aren’t getting jobs and so many are still living with their parents. As soon as they get jobs, however, the rental market will strengthen. We are still seeing quite a bit of rental development and stalled condo projects converting to rental, and some are performing quite well, especially the high-amenity, exciting projects.
Ratkovich: There has been a significant amount of deferred maintenance in the hospitality industry. As new money comes into that sector, we will see a lot of work done on rehabilitating hotels, and hopefully that will be a catalyst for development in the immediate area. I also see new redevelopment opportunities around sports and recreation in urban areas. Take a look at what the Staples Center has done in downtown Los Angeles—a world-class arena surrounded by housing and entertainment uses. These urban entertainment-driven opportunities create a great residual effect on the surrounding community when done right.
Leary: Sustainability is a trend that’s going to become much more mainstream. Higher-density TODs are inherently more efficient. It takes fewer miles of pipe to serve 400 people living in an apartment building than it does to serve the same number of people in single-family homes on quarter-acre [0.1-ha] lots. A police car has to travel fewer miles to protect those 400 people. And redeveloping cities to add the quality-of-life infrastructure that’s missing in many postwar metropolises makes sense from a health perspective as well. In many areas, we have a health epidemic, with rising rates of childhood obesity and adult-onset diabetes. A lot of those things can be traced to the built environment. People are starting to gather data on the advantages of compact transit-oriented development, and more people understand that it really makes sense.
Senkevitch: As we start pulling out of this economic downturn, corporations are going to put into effect repositioning plans. Buying and redeveloping existing office buildings will likely offer significant price advantages compared to new construction. Those companies that strike early by acquiring distressed properties and taking advantage of the current relatively low construction costs will get a distinct pricing advantage. Distressed properties aren’t likely to be as big a bargain as they were in the early 1990s, but it’s likely they will be better bargains than they are now.