Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Friday, March 09, 2018

Further evidence of DC being an international/national real estate market

At a City Council hearing maybe 13 or 14 years ago, when people were complaining about property taxes "forcing" legacy businesses out of business, I had a realization that the problem had to do with the nature of the DC commercial real estate market being shaped by extra-normal market forces.

Skanska Construction SignSkansa is a Swedish firm active in constructing, financing, and owning buildings in major US real estate markets.

Foreign firms invest in the DC real estate market for many reasons, not strictly on the basis of direct economic returns. To wit, the market involved international and national developers and financiers, and their business calculations were not made strictly on the basis of local market conditions, but to park capital safely overseas, because economic returns were better than in own-country markets, for diversification, etc.

Significant foreign presence in the Central Business District real estate market reshapes the taxation of all commercial properties.  What this did though is reshape the local property tax assessment regime, so that in effect, at least within DC, most commercial real estate, regardless of location, is valued as if it could become a big office building owned by a pension fund or insurance company. This is the case whether or not most neighborhood commercial real estate markets were decidedly local, with local owners and locally-owned businesses.

And large actors trickle down and reshape "local" submarkets serving regional audiences as they expand their reach.  Increasingly, what were once "neighborhood" real estate markets like Dupont Circle, Cleveland Park, and Friendship Heights have been "reproduced" because of the presence of national and international firms ("Problematic outcomes as real estate investment trusts buy more "high street" retail real estate," 2015) like Acacia, Federal Realty, and Grosvenor--a British company for whom real estate ownership has made the family the wealthiest in Britain.

Even local submarkets (as opposed to regionally relevant submarkets) are not immune.  Plus, as larger regionally active firms run out of properties to develop in larger submarkets, they shift downward to the next ladder on the commercial district/town center scale, in the process reproducing the market conditions in those places.  Think Takoma (Rock Creek Property) or Fort Totten (JBG).

The ability to build housing and bigger buildings is another stressor on valuation.  This is further exacerbated in the smaller sub markets like Petworth, by the fact that commercially zoned property can be taller (65 feet) and mixed use with housing, so this puts property under pressure too, and because most of the neighborhood districts don't have requirements for first floor retail use, the commercial and retail nature of the districts is threatened with serious change.

Testimonies.  I testified about this for a few years running, and in 2007 was quoted in an article by Post writer Paul Schwartzman on the subject, "Feeling the Pinch Of D.C.'s Prosperity," and had a letter to the editor in response to the article, "Tax Policy Hurts D.C.'s Local Businesses."

These entries are representative of the argument:

- "Avoiding the real problem with DC's property tax assessment methodologies," 2007
- "Testimony -- Historic Neighborhood Retail Business Property Tax Relief Act," 2006
- "Forcing Displacement by the disconnection of tax assessment models from public policy goals," 2005
- "Displacement of retail businesses through increasing property tax assessments," 2005

I stopped testifying when I figured out that the City Council/City Government wasn't interested in addressing this in a systematic way, but was more enthralled about helping "legacy businesses" ("Revisiting the issue of neighborhood commercial district property tax methodologies," 2013) and failing to recognize that this was and is a systemic problem equally problematic for new and existing businesses that aren't decades old.

DC real estate promoted at MIPEM international property exhibition.  The Capitalize DC real estate promotion organization sent out a press release about how they are promoting the Greater DC real estate market at the world's leading international property marketing exhibition, called MIPEM, in Cannes, France.  From the press release:
Capitalize DC, a collaborative regional consortium formed by the Northern Virginia Association of Realtors®, Greater Capital Area Association of Realtors® and District of Columbia Association of Realtors®, will be part of the growing USA pavilion, hosted by the National Association of Realtors®, the United States' largest real estate trade organization. NAR and Capitalize DC will be among the 3,100 exhibiting companies at the 2018 event. ...

"MIPIM provides a unique opportunity to showcase local property markets on a global scale," continued Mendenhall. "While Class A asset prices in many large markets have surpassed pre-crisis levels, Realtors® in many middle- and smaller-tier markets stand to benefit from the increased interest from foreign commercial property investors. Further, the current interest in industrial and logistics properties due to the growth of online shopping, creates opportunities in markets not traditionally identified as a destination for foreign investment."

The Washington, DC /Northern Virginia/Montgomery County (MD) markets will be featured in the USA pavilion along with Arizona, Illinois, Missouri, Nevada, North Carolina, Rhode Island and Washington State, as well as other metro areas such as Beverly Hills/Greater Los Angeles, Coastal Carolina/Myrtle Beach and San Antonio. Markets participating in the USA "zone."
I guarantee you, the actors that matter already know about the value of and the opportunities within the Greater DC commercial real estate market.

And as discussed above, increased participation by national and international actors in local markets can have negative consequences, unless a city's planners and taxation officials take forward steps to mitigate them.

One more effect: the cost of property/rents for nonprofits and arts groups.  As discussed in a number of entries including "BTMFBA: the best way to ward off artist or retail displacement is to buy the building," in a highly charged real estate market, "nonmarket" actors can't compete/afford property.  The solution is community development corporations focused on buying and holding properties for these kinds of uses.

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At 11:01 AM, Anonymous charlie said...

Look at what Vancouver is doing; they just implemented a vacant house charge in addition to the foreign taxation.

New Zealand is also putting in restrictions. Many countries have this (Mexico, Denmark) etc. Portugal is an interesting case in that they doing the opposite -- giving your a "green card" + EU benefits if you buy a property worth more than 500L euros.

In DC, the only place you see this is Georgetown where you have some very expensive vacant houses.

You do see a lot of absentee landlords in DC -- in my building we have 5 -- as the transfer taxes make it easier to lease than to sell and realize the gains.

Again, big big picture: We wanted asset price inflation after 2008 and we are getting it. Great if you own an asset! Not so great for everybody else.

At 2:58 PM, Blogger Richard Layman said...

Well, I was referring more to commercial property.

You've mentioned before people becoming "rentier" rather than selling their smaller condos as they move up and out.

Mostly, I don't think the impact of foreign buyers is very significant in DC.

In DC, the basic problem is simple:

1. Demand to live in the city has increased significantly.

2. But when most of the city was built, there wasn't great demand, so the properties are comparatively small and mostly single family.

3. Even when doing infill, it's comparatively small and doesn't create enough units to meet demand.

+ those pesky opportunity costs.

4. Because demand is greater than supply, prices continue to escalate.

And yes, it's awesome except for property tax escalation for the people already here.

Only by doing all kinds of measures to stoke housing production can there be much impact, and even then it's not going to produce "cheaper" housing except over multi decade periods.

DK if you saw a Huntington Condo garden apartment complex is selling out in favor of intensification. They didn't need 100% of the owners, only 70%. But something like that is virtually impossible in DC when it comes to single family housing, unless it is purchased over decades, like the rowhouses that were on the 1000 block of 3rd St. Now the block is two big apartment buildings, one under construction.

At 2:59 PM, Blogger Richard Layman said...

oh, we have the vacant house charge already, the property taxes are 5x the occupied rate. But there are many ways to get around it.

Still, I think the reason we are seeing some housing turnover in our neighborhood of houses that had been vacant for many years, is partially a result.

At 4:38 PM, Blogger Richard Layman said...

JBG Smith sees DC as a sellers market. Local investors stop buying because foreign investors are driving prices up, beyond profitable operation.


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