A short point about why eliminating single family zoning won't result in a rise in "affordable housing" (any time soon)

I've already written about this, in response to initial coverage about how Minneapolis is setting the stage to eliminate single family zoning, to increase the opportunity for more housing in what are now single family residential zones.

But the New York Times just ran another article ("Cities Start to Question an American Ideal: A House With a Yard on Every Lot") along with an editorial ("A City's Bold Housing Plan").

The NYT article shows images of various cities, and how much of the land is zoned single family.  For the DC graphic, blue is rowhouse and multiunit, red is single family.

1.  First, while seemingly a huge change in policy it's not really enough to lead to substantive change, in that you need a broader range of housing types, beyond even duplexes and triplexes.  You need smaller apartment buildings, plexes of various sorts (e.g., housing types in Cleveland, Boston, Montreal) along with even larger buildings.

But this could seriously change neighborhood character, so it has to be planned.

End unit new construction rowhouse on 5th Street NW in Petworth.



2.  More importantly, it will take decades.  Because individual property owners lack the capital and motivation to do this on their own.

So it will only come about as properties come on the market and are sold to flippers who will do the conversion.  And assembling multiple lots is probably beyond the desire for quick return, meaning that smaller apartment buildings won't ever get developed.

3.  And potential owners have to be willing to live in a shared building.

4.  And the financial system, in particular mortgage finance companies, have to be willing to fund mortgages of such properties.

5.  But at the same time, the new housing units won't be affordable, because it's constructed at today's prices for land, labor, and materials, and profit.

We have a "natural experiment" for this in what were called R4 districts in DC (I don't know the new categorization), which are rowhouse districts.  Rowhouse properties comprise much of the city's core

It is legal to divide them into two dwellings without special zoning review.  (Although I argue that larger buildings ought to be allowed to become more than two units, if appropriate.)

What firms are doing is buying rowhouses and adding a floor and digging out the basement to make two bigger units.

Such as this property on 13th Street NW in Columbia Heights.


Each unit is being marketed "in the $800,000s".

That's not affordable.  But it does add a unit of housing.

6.  You still need market demand to drive small property developers to do this.  When the tv show "Rehab Addict" used to feature house rehabilitations in Minneapolis, I was surprised at how cheap the houses were--sometimes as little as $1, when bought from the city.

Granted it will be cheaper to buy the property and do the rehab in a weaker real estate market.

But at the end of the day someone still has to be willing to buy the property.

7.  And to get a mortgage the property will need to be able to be appraised high enough to get a mortgage, which is hard when you can buy single family units for less than the cost of a rehabilitated now half of a duplex.

In weak real estate markets like Minneapolis or Baltimore, you don't have the pricing premium necessary to drive such property development.

You need serious subsidy.

In Seattle or DC it's a different story.

(Not) Understanding how retail chains make property decisions: Baltimore, Starbucks, and Salon Magazine

Salon has an article ("Black history bulldozed for another Starbucks: Against the new Baltimore" about how Starbucks is destroying black history in Baltimore, because they are moving into locations that had been black businesses--which happens to not be true, but makes for a less punchy headline.

But the reality is maybe more complicated, or at least different from how it's portrayed in the article--although the article is written in a fashion that I have a hard time interpreting.

Starbucks in DC at 3rd Street and Pennsylvania Avenue SE.

Although it happens that the word "bulldoze" isn't meant literally, it is true that "Starbucks can bulldoze" historic buildings in favor of new construction.

But remember that Starbucks doesn't own properties for the most part.  They are tenants.  So the key actor is the developer, who owns and develops properties.

The other thing I learned about Starbucks (and other chains)--besides "how every commercial district needs one as the solution"* (and this has been supported by the economists at Zillow, who fail to recognize that a Starbucks location is a follower of success not the creator of success, see "Confirmed: Starbucks knows the next hot neighborhood" and "Zillow says homes close to a Starbucks rise in value more quickly," San Jose Mercury-News), is that at the level of the market, it's not "Starbucks" making property decisions so much as their local commercial leasing representatives, even though they also have personnel dedicated to "global store development" for their biggest markets (Old job listing for store development, Starbucks.

* Starbucks follows, it doesn't lead.  I make the joke about Starbucks "as the one thing a commercial district needs" because when you work in the field, that's what residents come up to you and say, repeatedly.  It's not that simple.  Similarly, Zillow is wrong that Starbucks knows the next hot neighborhood.  They are followers, not leaders, and their locations are co-incident with what we might call high-value "amenity districts."

For example, Starbucks considers the location at 8th and D Streets SE on Eastern Market Square in Capitol Hill a distressed location, even though the number is full of houses costing $800,000 or more. There aren't many examples of Starbucks stores leading neighborhood and commercial district revitalization efforts.  In DC, they followed Xando...

For example, in Indianapolis and other Midwest markets, Veritas Realty represents Starbucks, and one of their principals has inked over 80 leases for Starbucks stores.

In DC, the reps retained by Starbucks are clued into how DC is organized, and that "historic buildings" are not only perfectly acceptable sites, but highly valuable sites in historic neighborhoods. A majority of DC's Starbucks locations are in historic buildings.

The renovated gas/caffeine station at Highland and Willoughby is now a Starbucks. (Lisa Boone / Los Angeles Times)

But this isn't the case only for DC or Boston or Manhattan or similar markets, as there is an article ("Starbucks restores old Gilmore gas station for your refueling pleasure") in the Los Angeles Times about how Starbucks has resuscitated a circa 1930s gas station as a cafe. 

You can't get much more "historic preservation" than that.

The challenge is in those markets where the local representatives aren't hip to historic buildings. And to figure out who they are and how to appeal to Starbucks' "Global Store Development" division to make a different decision.

In fact, it's not unlike Walmart and their push into center cities.  Now the company is willing to locate "in cities" when before they weren't. But that's just locating.

Where urbanists have made a mistake is in believing that Walmart now has a special commitment to building city-appropriate stores.  That is not the case.

Walmart doesn't care about whether or not the building is "urban". That's up to the developer who comes to them with a proposal.

 As long as the location meets their criteria, they don't care what the building is/looks like, etc.

So we have a one story Walmart on Georgia Avenue NW in DC, while others in the city are part of mixed use projects, with housing and/or office above, because that's the kind of projects those particular developers were creating.  It's just luck of the developer draw.

Anyway, the Gentri-fuck-ation piece in Salon is otherwise over my head.  Not unlike the piece in Gawker ("Irrigating the (Food) Desert: A Tale of Gentrification in D.C.") that blames improving supermarkets for gentrifying DC neighborhoods like Petworth.

I guess it's better to have crappy supermarkets.  But in any case, supermarket companies, like Starbucks, follow the market, they don't lead the change.

More proof of the downtown real estate market being a national/global market

Over the years I have written quite a bit about the commercial property tax system in DC and how the value of much of the commercial property in the city, even in marginal areas such as Georgia Avenue, H Street NE, Brookland, and elsewhere, gets revalued upwards as a result. In the case of small spaces for retail, it makes the asking price for rents higher than the true market value of the property based on square footage and the likely sales/square foot--which of course is dependent on the customer base/retail trade zone for the store.

Generally, a retail business should pay no more than 4% to 10% of their gross revenue on rent. What happens is that retailers are asked to pay about 25% of their gross revenue on rent. Since most businesses net at best about 15% after taxes, there ends up being no profit...

This is why there isn't much of a thriving independent retail sector in DC.

Last week the Wall Street Journal reported on how Brookfield Properties, based in and Toronto with a large presence in DC, is looking to acquire the portfolio of CarrAmerica, which is mired in debt and now owned by Tishman Speyer of NYC. (Tishman Speyer has lost a bunch of properties over the past year, as they paid top dollar at the height of the property boom, only to crash hard.) Brookfield has acquired a significant amount of the outstanding debt, giving them a superior negotiating position. See "Brookfield Swoops In on Washington Buildings."

(Brookfield by the way is attempting to do something similar with regard to General Growth Properties, a major retail shopping center company. GGP is particularly active in the Baltimore metropolitan area, as the company acquired the Rouse Company, which was one of the region's leading developers, including malls, Baltimore's Harbor Place, and Columbia Town Center.)

Walmart in DC?

Mother Goose & Grimm comic strip, 3/22/2006

The new issue of the Washington Business Journal reports, in "Wal-Mart on the prowl for a D.C. site," that Walmart is looking at a Southeast DC location, on land owned by Urban City Interests, abutting Poplar Point, but that they need more land than the developer has, and they want some of the Poplar Point land, cheap, because according to Urban City Interests principal Jeff Epperson, "the chain does not expect to pay top dollar for the land because of the foot traffic and tax revenue that its stores bring to an area."

The reality is more complicated.

1. The proposed store would be 80,000 to 100,000 square feet. A typical Walmart store does about $425/s.f. in annual sales, although urban stores are likely to have higher sales of $550/s.f. Walmart stores that sell groceries typically do 49% of their business in groceries. In DC, such sales are not taxed.

So a 100,000 s.f. Walmart store not selling groceries at revenue of $425/s.f. would gross $42,500,000, and would generate $2,550,000 in sales taxes. But if half the sales come from groceries, that cuts the sales tax revenues in half, to $1,225,000 annually. At $550/s.f. in sales, the tax revenue would be higher at $3,300,000, and half that, $1,650,000 if groceries are sold.

The reality is then that a Walmart store will generate more sales tax revenue, but not astronomically. Plus it has to be determined how much of those tax revenues would be cannibalized from other DC stores, and how much from Maryland and Virginia, for the net contribution.

In any case, the economic impact of a Walmart store in DC is not so significant that it is worthy of significant public benefits.

2. Regardless of what Mr. Epperson says, Walmart stores are not designed to provide customers to nearby businesses, what he refers to as "foot traffic." See this past blog entry, "Jumping in bed with the devil--it's hot, but will you survive the heat?."

The Walmart business model is designed to capture 100% of consumer spending from its customers--it doesn't get it all, but not for want of trying--and therefore can't be considered an anchor store in the way that supermarkets and department stores anchor shopping centers--spending a lot of money on advertising, drawing customers, who also then shop in adjacent stores. (This is why typically supermarkets and department stores ask for incentive payments, because they spend a lot of money on advertising which benefits other businesses, not only their own business.)

3. Walmart stores generally do not increase business for other stores, they put other stores out of business.

4. Plus, typically, chain stores like Walmart spend very little money on services and goods purchased locally. This is why "buy local" campaigns stress the point that spending in locally owned stores has a multiplier effect of about 45 cents (for each dollar spent in the store, an additional 45 cents is generated in additional economic activity), while for each dollar spent in a chain store, only 15 cents in additional economic activity is generated (usually as a result of payroll).

5. I suppose that some people can say that hipsters and pro-urban people prefer Target over Walmart, even though they are both discount stores (see "Columbia Heights Hipsters Stumble Into Target Territory" from the Post) just like hipsters and chic types like Whole Foods Supermarket even though it is a chain.

I do think that attracting chains and big boxes to urban locations is worth doing. The DC/USA center (Target, Bed Bath and Beyond, Best Buy, Staples, Payless Shoes, Marshalls, etc.) does recapture sales that went out of the city. And if properly leveraged, and customers at the center can be convinced to patronize nearby businesses and business districts as part of a more complete shopping experience, then the city, merchants, and residents will get a huge payback.

But Walmart stores aren't conducive to this kind of approach. As the resources listed below point out, when Walmart comes to town, other stores close, and it is rare for new stores to open.

-- Summary of the Local Costs and Benefits of a Wal-Mart Store (from a presentation at the American Planning Association Ohio Chapter state conference)
-- "When Wal-Mart comes to town: study examines impact on local market" from DSN Retailing Today
-- "Analyzing the impact of Wal-Mart Supercenters on local food store sales" by Artz, Georgeanne M., Stone, Kenneth E., American Journal of Agricultural Economics
-- Table, retail sales tax revenues generated by different types of stores, prepared by the HDL Companies.

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As I have mentioned from time to time, most communities have an "economic development" element in their Comprehensive Plans, but it's not too normative--anything goes, anything qualifies as quality economic development.

But the fact is "building a local economy" is fundamentally different from mere "economic development." Upwards of 75% of the monies earned in a particular store of a big box national (or internationally-owned) chain leaves the community, while that is reversed for locally-owned businesses.

Industrial land needs a separate property tax classification too

As long as industrial land is valued as if it can be office buildings, it too will be reused for different purposes. Furthermore, as long as churches and schools are matter of right uses in industrial zones, these uses will crowd out production-distribution-repair uses, because these uses can outbid industrial uses, because economic viability based on economics of industrial firms will be trumped by the noneconomic considerations of non-industrial users who covet the land that they can get more cheaply, because it is zoned industrial.

For more thinking about property tax revenue and classification issues, see the current newsletter, "Assessing New York City's Property Tax—Yet Again" from the Center for Rethinking Development at the Manhattan Institute. The organization focuses on New York City, but the thinking is relevant to all cities.

Warehouses on Reed Street at Channing Street NE. Located within two blocks of the Rhode Island Avenue Metro Station, these buildings are in effect, "mothballed," while the property owner waits for better redevelopment opportunities.

Speaking of DC development deals: $1 per year for 16 acres of urban land

Also from the Washington Business Journal, "Developers of Southwest D.C. waterfront seek 16 acres," which discusses redevelopment (an urban renewal project to fix the previous urban renewal project) of the Southwest DC waterfront. Some of the holdups concerned making sure that connected "small business construction groups" were wired into the project.

From the article:

Ben Soto, campaign treasurer to Fenty and president of Paramount Development LLC, swooped in this summer to join as an investor, helping to push the Hoffman team over the 20 percent required CBE equity mark. “I thought that the deal was a good deal for Paramount,” he said.

Hoffman also plans to contribute $1 million to a nonprofit work force subsidiary to ensure that D.C. residents are trained for and fill the jobs set aside for them, which has not happened in the past. Developers can avoid hiring District residents if they make a good-faith effort with the D.C. Department of Employment Services.

Councilman David Catania, I-at large, the council’s harshest critic of the Nationals stadium, warned that none of the public benefits would come true. He said the Southwest project, whose initial plans were approved by the council five years ago, was “a case study in how not to do economic development.” But Catania said he would vote for the deal anyway. “I’m supportive of where we’re going because it’s too expensive to turn back,” he said.

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The contracting issues and problems are structural... but that being said, PN Hoffmann does good work, and their joint partner Streuver Bros. Eccles & Rouse does phenomenal work in Baltimore (absolutely phenomenal work). So in the long run, a good project will result, and sure some people make some money (I love how E.R. Bacon company is a small business partner. Her father was the planning director of Philadelphia for many years. She has a famous brother too, Kevin...)

Ironically, if a company like Streuver Bros. were the lead developer at "New Towns" (Florida Market), I'd probably feel a lot better about the overall direction. While I don't favor eminent domain, I am not against the use of such authority. But generally, DC Government exercise of such authority results in s***** projects. And wrt the Florida Market project, the government-chosen developer (no RFP, etc.) has no track record and there is no expectation by me, that a quality project will result.

Community Unites in Opposition to Public Land Deal in Tenleytown

From email:

ANC Commissioners in the Tenleytown/Friendship Heights area sent a letter to DC officials last week, strongly urging them to cease negotiations with LCOR over a public-private project that would involve the construction of a mixed-use residential building on school and library land at the corner of Wisconsin and Albemarle Street.

The letter, which has thus far gone unanswered, was addressed to Ward 3 Councilmember Mary Cheh, Mayor Adrian Fenty, and Deputy Mayor Neil Albert, was signed by 4 of the 5 Commissioners in ANC 3E and leaders representing eight local stakeholder groups. The ANC may consider a resolution regarding this issue at the October 16 public meeting.

Citing the letter sent last week to Mayor Fenty by the Janney Elementary School SIT withdrawing its support for further consideration of a deal that would deprive this already-overcrowded campus of land needed for its expansion and outdoor athletic facilities, community leaders argued for an immediate end of negotiations with LCOR and for the already-funded, designed, and approved reconstruction of the Tenley-Friendship branch library to proceed at once as a stand-alone project. The letter also urged that Janney Elementary School be moved forward in DCPS's modernization queue (back-up to #8), to relieve its overcrowding and expand the capacity of this Metrorail-accessible Blue Ribbon school so that it could accommodate more of the 155 students currently on its waitlist for admission.

On July 10th, Mayor Fenty announced his selection of LCOR as a development partner for the site. Subsequent negotiations have failed to yield an agreement which the DMPED had anticipated would be announced on October 1st. At this point, the District is legally entitled to walk away from the deal. Both before and after the Mayor's announcement, Councilmembers Cheh and Brown wrote to the Mayor expressing their dissatisfaction with existing proposals for the site, but neither has yet called for the abandonment of this project.

Councilmember Cheh has stated she would not accept any undue delay in the rebuild of the library. Now, three months after the Mayor's announcement the community has become even more antagonistic towards this project. It is clear that a PPP will inevitably cause a multi-year delay in getting a library and will hinder rather than speed the modernization of Janney School.

Click here for a statement/explanation of the Janney's SIT's position on the project.

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Meanwhile, the Florida Market eminent domain-urban renewal project continues apace. See "Florida Avenue Market project altered again" from the Washington Business Journal.

I keep making the point that an urban renewal-like focus/police powers (eminent domain) perspective to land and DC government properties is deeply rooted. Some people believe that some councilmembers will begin to see the light. (I'm extremely doubtful, based on my observation of various Council hearings.)

That pesky real estate financing market

In the past I have written about the real estate market in the Central Business District being one of national and international actors--financiers and developers both--rather than strictly a local market. This poses a problem for neighborhood business districts, because for the most part, the commercial property tax assessment methodology treats commercial properties in neighborhoods more like downtown buildings. Since assessments are high, local retailers and other businesses get crowded out, such as the Warehouse Theater, which closed down, across from the Convention Center.

Now that the national-international real estate market is having extreme financial distress, it is affecting some of the "local" players in the industry. Today's Washington Post reports, in "D.C. Deals Relied On Lehman Funding: Bank Was Monument's Main Financing Source ," about how Monument Realty, which has relied on the now bankrupt Lehman Brothers organization, for the bulk of its financing, and how Archstone-Smith, another company with some issues, is a key player in the redevelopment of the Old Convention Center site.

The New York Times also reported on Lehman Brothers' aggressive participation in real estate deals across the country, in "Risky Real Estate Deals Helped Doom Lehman."

Likely, the real estate market downtown is going to slow as well, even though DC has been one of the strongest commercial real estate markets in the world. (The height limit reduces overall inventory, making the market pretty stable, with high demand, high prices, and quality returns.)

Still, there is some resistance (unless you're the DC government, see "Heavy Traffic Cited As Concern in Move For Housing Agency" from the Post) to paying downtown rents in areas that aren't in downtown and lacking in amenities. See "Though Developers Built It, The Tenants Did Not Come" (and the announcement of the building here, "Next Up: the Baseball Stadium") and "NoMa Gets Gentrified, Now Waits For Tenants: Lean Times Make Area a Tougher Sell" from the Post.

Troubles in retail land...

1. Retail tenants are having a hard time on 9th Street NW, in DC's convention center. See "Conv. center to retailers: Pay the rent or move out," from the Washington Busienss Journal. This shouldn't be a surprise. Just because the space is new doesn't mean it is worthy of high rents. This isn't a retail destination, and for many reasons, retail within these spaces isn't attractive or utilized by convention-goers.

It's not a matter of if you build it they will come. Linking big project developments to neighborhoods and to internal spaces is full of nuances. Mostly, it isn't done right. And this is but one more example.

2. The article "Retail landlords offer blue-light specials to tenants," from the Houston Business Journal discusses how marginally located shopping centers are forced to offer large build out allowances and other incentives to attract tenants. From the article:

... offering as much as $35 per square foot or more for tenant improvements. And in some cases, landlords are throwing in other deal-sweeteners such as longer build-out periods and even free rent in an effort to shore up the struggling sector. "It's a citywide problem," says English, president of Houston-based CEC Brokerage. "Landlords are getting anxious because there's too much retail on the ground and it's getting tougher to compete with the grocery-anchored centers."

3. From "Here today, gone tomorrow: Popular tourist area not always road to business riches," in the Orlando Business Journal:

What initially may look like a surefire winner for the tourist-rich street might turn into an unmitigated business disaster -- but the sale of such property might prove to be an unexpected goldmine.

I-Drive "has been a graveyard full of people who have come and gone," says Dave Poole, a tourism industry consultant and marketing expert. "Attractions come in and the owners think they'll make a million bucks -- but they're usually wrong. If the attraction is just so-so, people don't come again."

The area is becoming less a focal point for the vacationer and one more apt to be visited by the conventioneer or local -- two groups not interested in kitschy attractions or places that deserve no more than a single visit.