Philip Johnson was Half Right

University of Virginia  photo by Alex McLean
University of Virginia –photo by Alex McLean
An email inquiry from a 27 year old working in a California Architecture firm:
“I once saw an interview online with Phillip Johnson where he stated that most successful architects are either born rich or marry rich because you have to commission your own projects. I often wonder how accurate this is but I guess I will find out one day. I’m still trying to figure out my own strategy of opening up my own firm one day so it’s always helpful to get little clues from those with greater experience.”
My first clue would be to suggest that Philip Johnson may not be the best role model for a young Architect (for a number of reasons).   But broader advice  requires a big picture view of the Architecture profession.  MIT offered its first classes in Architecture in 1868 taught by William Ware. Prior to that time, formal study of Architecture was difficult and Architecture was not a licensed profession (like the practice of Law or Medicine).  Guys like Thomas Jefferson who designed the Great Lawn in the photo above, learned by reading books and by trial and error.  Specializing and professionalizing the Architect’s work divided the tasks previously performed by  generalist master builders into the design professions (Architects and Professional Engineers) and the building trades.  This division and specialization made some things more efficient, but also created some unfortunate problems and cultural gaps that continue to mess us up when we try to design and build places worth caring about.
Many architects do not understand the fundamentals of how a building makes money or loses money as an enterprise. Most universities limit training in basic business practices or finance to a single class in “practice management”, so understanding where clients come from, or what drives their program or decision process is abstract at best for many Architects.  If you combine this particular blind spot with a lack of direct experience in any of the building trades, an Architect’s grasp of the complex world of building construction and operations can sometimes be too “thin” and theoretical to be useful to the client.  When clients and Architects are not able to understand each other the work gets significantly harder.
While you are young and still logging hours toward completing your IDP and taking your license exams, I would recommend learning how to create a financial pro forma that corresponds with a schematic design and site plan for a potential project.  This skill and the broader thinking that it requires will set you apart from your peers.  You will also be less vulnerable to the frustration that comes when the client tells you that “the numbers don’t work” for the design you have worked on for the last 2 weeks.  Which numbers don’t work?  The construction costs?  The likely rents?  The operating expenses?  If you understand how the numbers work you can ask questions and fix stuff in the design, just like you would if the stair section does not work.
If you have an opportunity to work in a building trade; framing &  finish carpentry, electrical, plumbing, drywall, etc.,  I recommend it.  Seeing a building progress through construction on a daily basis at full scale will give you much more confidence and capacity as a practical professional.  Spending your days on a construction site will also help you to understand the culture of the trades and the rhythm and pace of building.  That’s hard to do if you are just an occasional visitor/tourist.
Understanding the numbers and spending time in the trades will help you tremendously if you decide to build a couple of buildings with a financial partner.  Build something that you can hold onto can provide passive income, those checks that show up in your mailbox regardless of how many hours you bill as an Architect.  The mechanics of having your own practice and managing projects, clients and employees is another thing that your formal studies or daily experience working in an Architecture firm may not prepare you for, but that is a story for another email.
I think that rather than limiting yourself to a specialized corner of the building business, it is better to be fully engaged, even if you have to limit yourself to projects of a modest scale.  You can own a building with partners without having to be rich or marry rich as Phillip Johnson suggests.
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Cap Rate Compression — Dinosaurs, and Squirrels – Part 2

Bruge, Belgium
Bruge, Belgium

The years leading up to the financial crisis saw global capital flooding the US markets with cheap capital for individual mortgages (which was used to over-build the wrong stuff).  At the same time, capital for building apartments was reduced.  Now we find ourselves in a market where shortages of skilled labor will prevent us form coming remotely close to delivering on the backlog of pent-up demand at the same time as we are seeing rapidly increasing new demand for rental housing.

Capital is available for building large scale apartment projects at unbelievably low Cap Rates these days because rents will be stable or continue increasing until the problem of low supply can be addressed in 20 or 30 years.  Capital for apartments will not be a problem for a very long time.  The fundamentals are that far out of whack.
The yield on the 10 year US treasury bond below 2% and Cap Rates on large multifamily deals have dropped to just over 3%.  That little tiny one point spread means that the people  who are managing money for insurance companies, investment banks, pension funds, etc. don’t see any serious risk in investing in apartments.
For those who want to explore the fundamentals in greater detail, I recommend reading Multifamily Executive from time to time. This trade magazine covering the business of  large scale apartments is available online for at no cost.
The steady trend of Cap Rate compression shows how institutional capital is crowding out small investors in the world of conventional sprawl garden/carport apartments and in large (and capital intensive ) apartment mid-rise and tower buildings.  This pressure makes the incremental building of modest apartment portfolios in walkable urbanism a solid opportunity for small investors, because they are being crowded out of the other stuff.

So, the good news is there will be no shortage of capital for building apartments in walkable urbanism.  The delivery of apartments in walkable urbanism will not be constrained by any lack of capital.

The bad news is that apartments in walkable urbanism will be constrained by a lack of capacity to deliver competently and to deliver these buildings at any meaningful scale.  This is why I think Lean Urbanism is so important.
These are the big forces that I see swirling around the US economy:
  • Under production of all apartments over the last 10 years, and along with that a shortfall of apartments in walkable urbanism.
  • A shortage of skilled construction labor for the next 10 years, even with significant immigration reform.
  • A significant increase in demand for apartments in walkable urbanism (Nelson).
In my experience, there is currently significantly more equity capital available than there are good deals to put that capital to work in.  The reason there are not a lot of good deals at the scale I think is critical to walkable urbanism, is that there are not enough small developer/builders producing them.  There are lots of big “dinosaur” developers and not enough small, locally focused developer/builders “squirrels”   https://rjohnthebad.wordpress.com/2015/03/08/dinosaurs-and-squirels/
I do not anticipate a land rush of financiers and developers looking for chances to do small apartment buildings in projects with less than 50 units in walkable urbanism or in distressed neighborhoods.  They are dinosaurs and need way more than 50 units to be able to operate. The most significant barrier to entry is to be able to operate at a small scale in a local context.  Existing outfits with business models that require lots of units cannot get that done.  They don’t have a reason to reinvent themselves as squirrels.

 

Why Build New Buildings in Distressed Neighborhoods?

Modest WalK-up Mixed Use Building in Lowell, MA By Sandy Sorlien/The Transect Collection
Small Walk-up Mixed Use Building in Lowell, MA By Sandy Sorlien/The Transect Collection
(–From an email exchange today about transition strategies that will work for new rental apartments and workspace in distressed neighborhoods).
“Lean development should make marginal neighborhoods more complete and complete neighborhoods more affordable”. —Rob Sharp, Architect & Urbanist
For example, let’s take a scenario where current apartment rents in the distressed neighborhood (in older buildings with deferred maintenance) are at $0.85 to $0.90 per SF per month for 2 and 3 bedroom units, and rents for dumb garden/carport apartments out by the highway are at $0.90 to $1.00 per SF per month. In that setting newly constructed, better designed, smaller units (studios, 1 and 2 bedroom units) in the distressed neighborhood can probably see a 20% to 35% bump in likely rents over the current $0.85 – $0.90 paid for the older units, bring them to the $1.00 to the $1.20 per SF per month level.
That rent level will put single stair walk-up into a reasonable range of return on risk and capital at 7% to 8%. This would be just clear of the 2 point spread you should see when you compare a new construction project with a 5% Cap rate on the purchase of an existing building with limited deferred maintenance in the same distressed neighborhood. The project needs to have a good enough return to justify the construction and leasing risk when compared to just buying an existing building with tenants.
If what you build contributes to the neighborhood getting better, that neighborhood amenity will show up in increased rents and reduced vacancy in your new buildings. If you are building apartments in that distressed area, it is in your interest to invest your time , attention, and learning curve in pressing the city to correct the lousy street design, improve services, transit, and policing. It is also in your interest to support local businesses and local institutions; community center, parks, schools, and churches.
If your residential apartments have decent cash flow, you can take a risk on a local food and drink operator on a % of sales lease to help them get up and running in one of your work spaces (in lieu of a straight dollar amount on the rent). The reason why it is possible for you to take these next steps in helping the distressed neighborhood is because you are making the same money on your in-town urban walk up apartments as you would if you had built units in a dumb garden/carport apartment complex out by the highway. One of the reasons why you are motivated to take on that additional effort is that it will translate directly into stable or rising rents.
An OK building at $1.25 a SF per month rents becomes a wonderful building at $1.50 per SF per month rents. When the $1.50 likely rent number is established as a comparable in a single stair walk up building this allows for more expensive building types such as Walk-up Buildings with two stairs + corridors or Elevator Buildings with two stairs + corridors. What is important in this strategy is that the leaner Lean Building Type of the Single Stair Walk-up opens the way for a succession of more expensive Lean Building Types, while keeping the scale of the individual project small enough for a small developer/builder to make a living without having to get any subsidy for their projects.
That is the baseline business model I am focus on working through with small operators. The building types and site configurations can still be aggregated into larger scale projects and can still be used by CDC’s and private builders who choose to pursue projects with subsidies. The intent is to encourage folks to use better tools for making small possible. The tools can be deployed by enterprises in a range of sizes, although this approach is likely to be beyond the grasp of larger conventional operators.

Return On Brain Damage – Selecting a Site

horrible overly-wide arterial Street (Stroad) with decorative light poles.  Photo by Chuck Marohn
Horrible overly-wide arterial street (Stroad) with decorative light poles. Photo by Chuck Marohn

It is important to understand the relative advantages a potential sites over other sites in the area, so here are some screening criteria for considering where to invest time and attention in a given city.

Where can you have the most impact while building a stable portfolio of income properties that will become more valuable with time, reinforcing their neighborhood? What projects present the best return on the inevitable brain damage and learning curve that doing this kind of work brings with it? What is the Return On Brain Damage (ROBD)? When it comes to picking sites and building types, Opportunity Cost is about trying to understand what else you could have done with your time, attention and other resources compared with committing to a particular piece of property. http://www.investopedia.com/terms/o/opportunitycost.asp

To be extra clear, I personally don’t want to spend a minute pursuing numbers 4 – 6 when there are opportunities for 1 – 3 .

Which kind of building in what kind of location?

  1.  Single story commercial, 2 and 3 story rental walk up mixed use and apartment buildings in locations with reasonable rents, and potential for catalytic upside and/or flywheel effect for the neighborhood.
  2.  Two and Three story rental walk-up mixed use and apartment buildings in locations with reasonable rents, but no catalytic upside or flywheel effect.
  3. Small houses and atypical building types for rent on infill parcels close to food and drink and transit (bungalow courts of small rental units and live/works are appealing to me).
  4. Small houses, rowhouses, and live-works for sale.
  5. Houses for sale in locations where appraisers will look to conventional subdivisions for comparable sales.
  6. Multifamily in sprawling locations typical for conventional Garden Apartments

Here is a list for sorting sites that meet the first criteria for catalytic upside and potential flywheel. 

  • Look for sites with the following:
  • Proximity to Food and Drink.
  • Your proposed buildings and site plan can be built as of right, with no discretionary approvals.
  • Discretionary approvals needed, but room to build a brand and reputation as the preferred developer/builder.
  • Chances for actually fixing the street on the horizon; public investment in correcting the streets looks sure to likely.

Watch out for Potential Deal Killers:

  • Site constraints; topo, utilities.
  • Proximity to a horrible big wide fast arterial street (Stroad).
  • Level of Administrative Contamination; Excessive Minimum Parking, Fire Code Appendix D adopted.

Maybe we should construct a matrix for ranking sites, building types and tenure by their potential return on brain damage.

 

 

Getting started in Development; a Podcast & a Video

Studio on working out a basic floor plan,  section, and elevations. in the Mule Barn at the Destrehan Plantation.
Studio on working out a basic floor plan, section, and elevations. in the Mule Barn at the Destrehan Plantation.

Several people have told me that I really do need to get a new video up to cover a lot of the basics.  After a couple of awkward GoToMeeting sessions and some adventures with Google HangOut walking folks  through the basic back of the envelope pro forma ,I have to admit they are right.  Until such time as I can wade through the QuickTime tutorial and put a new video together, here are links to the content that we have been able to collect (largely because someone else was in charge of the production effort).

This podcast with Chuck Marohn of Strongtowns.org opens with the ritual greeting of two Minnesotans, 5 minutes of us talking about the weather.  From there is gets into how folks typically get started in real estate development.

http://www.strongtowns.org/journal/2014/7/3/podcast-show-180-john-anderson.html

Will Pierce told me that this video The Dark Art of Developing Small Projects from the U of Miami’s Masters in Real Estate Development + Urbanism was worth watching more than once since it covers the basic business model math of production homebuilding and the basics of land development and deal structures.  Will Pierce subsequently went to the Miami MRED+U program and landed a gig with Grass River Properties in Miami http://grassriverproperty.com/who-we-are/  If you are a rookie developer in in the Miami region, you should make a point ot meet Will Pierce and  Andrew Frey of  the Townhouse Center. http://townhousecenter.org/

U of Miami Video: https://vimeo.com/31441603

Reforming the Culture of Building Regular Stuff

Retrofit of a ranch house into a 4-plex by Dan Camp in Starkville, MS
Retrofit of an awful ranch house into a very nice 4-plex by Dan Camp in Starkville, MS

A friend recently asked me what policies I would put in place to address housing affordability?  This came up after an exchange of emails on the screwy way that folks calculate housing affordability as a percentage of gross income.  I think that is a good way to measure how much housing in sprawl costs, but it does not take into account things like the cost of transportation. For a more thorough exploration of this problem of lousy metrics I recommend the work of Scott Bernstein and the capable folks at the Center for Neighborhood Technology.  Their Housing+Transportation Index is particularly good.  http://www.cnt.org/tcd/projects/ht/

So what policies would I put in place to solve a problem that is poorly defined and badly measured?

Zero. If the game is rigged, why would the score matter?

What policies would I put in place to reform the culture of building?  That’s actually a question I would rather answer, (even though nobody asked it.) Here’s a list of those reforms with the likely level of authority needed to implement each measure in parentheses:
  • Eliminate off-street parking minimums. (Local)
  • Up-zone any parcel that is limited to one dwelling unit to four units plus 35% of conditioned space as workspace as of right.  I think spending time and calories fighting to get ADU’s as-or-right is a waste of resources.  The goal is too timid, a half measure that will bring out all the same NIMBY’s anyway with a fraction of the benefit. (Local)
  • Revise the FHA, FAnnie Mae and Freddie Mac mortgage underwriting requirements for 30 year loans to reflect the 4 unit/35% workspace frame.
  • Eliminate the mortgage interest deduction. It is a moral hazard. (Federal)
  • Get municipal building departments out of the business of issuing building permits for buildings for which they bear no liability. (State)
  • Open the licensing of Architects to anyone with a contractor’s license or with four years experience in a skilled trade, who can pass the exam. (State)
  • Eliminate the upfront fees charged for new construction or renovation work by utility companies, public or private.  They can roll the cost of their administrative, engineering, and inspection staff into the operating budgets approved by each state’s utility commission and recovered through the rates they are allowed to charge. (State)
  • Get the SEC to complete the Rules for crowd sourced investments in real estate for non-accredited investors (Federal)
  • Pitch John Oliver on a piece pointing out how ridiculous it is to believe that anyone is entitled to stable or  ever-increasing  real estate value. (some guy who knows John Oliver’s producer)

Excellent Free Stuff from Smart People

Twin Duplexes in my hometown - Duluth, MN (T-4) photo by Sandy Sorlien
Twin Duplexes in my hometown – Duluth, MN (T-4) photo by Sandy Sorlien

Sometimes to build something decent you have to go through a really painful exercise of re-writing the local zoning code.

You could limit your brain damage to negotiating a re-write of the zoning code for just your site.  Lots of municipalities have rules for this on their books which allow for greater flexibility in site planning in return for higher quality design.  You can rewrite the rules for your site to you if you apply for something called a Planned Development Permit (PD) or Planned Unit Development (PUD).  This extra step can be frustrating if what you are proposing to build is completely in line with the town’s big picture policy documents like the General Plan or the Comprehensive Plan,  it’s just out of sync with the more specific Zoning Code of Development Standards.  Being inline with the big picture but out of line with the small-bore rules is tough.  The staff gets nervous and you get a heightened level of attention and scrutiny while the folks building schlocky snout houses, McMansions and regrettable strip retail get a pass because they are doing what the small bore rules in the zoning code require.

If you get your rewrite of the rules adopted as a PD or PUD you may be surprised when the local fire marshal shows up and tells you that they are removing the parking from the curb in front of your project.  And that’s what’s wrong with the PD/PUD.  It is a half measure that puts the developer/builder through a protracted negotiation with the staff and planning commission that still leaves room for a stunning and arbitrary decision by the fire marshall or the public works director after the project is built.

If you want greater certainty, build in places that already have the code in place that allows what you want to build as-of-right.  If the local zoning is messed up and out of whack with the big picture policies of your town, push to get the zoning code and the development standard brought in line, particularly if you intend to build more than one project in a place that you care about.  The best place to find the open source tools needed to rewrite a zoning code so that you can build walkable urbanism is The Center for Applied Transect Studies (CATS).  While that is certainly an extremely geeky name, they are providing Excellent Free Stuff from Smart People.  You can download the latest version of the SmartCode (Version 9.2).  The SmartCode is a framework that is already in place in many communities along with a host of interesting SmartCode modules you can use in addition to the base SmartCode.  All this great free stuff is available for download as  PDF documents and in editable files for Excel, Adobe InDesign, and Word.

http://transect.org/

There are also a ton of great photographs , drawings and diagrams.  It is a great resource that deserves your attention.

 

A 17 minute video on Urban Transect Theory https://vimeo.com/40099153.  There are lots of other Transect videos up on YouTube.  Please post comments with your favorites.