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.
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.
- 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).
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?
- 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.
- Two and Three story rental walk-up mixed use and apartment buildings in locations with reasonable rents, but no catalytic upside or flywheel effect.
- 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).
- Small houses, rowhouses, and live-works for sale.
- Houses for sale in locations where appraisers will look to conventional subdivisions for comparable sales.
- 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.
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.
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
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?
- 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)
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.
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.
If you know Architect and urbanist Stephen A. Mouzon, you probably know what I mean. He’s a guy who has a lot of great ideas and observations to share and it seems like his mind is always running three paragraphs ahead of his mouth. It can be real work to talk shop with Steve. But I find that more often than not, it is completely worth the effort required.
In 2007 Steve published A Living Tradition – Architecture of the Bahamas. I think this book was a real breakthrough for it’s introduction of a framework for thinking about the pieces of a building. On all the common building elements from the wall base, to door and windows, to porch columns and eaves, Steve starts out by stating WE DO THIS BECAUSE and then give the reason why those piece of the building need to be arranged and ordered in a certain way. Then he illustrates a spectrum from the basic to the fancy, his vernacular to classical spectrum with line drawings showing three levels of treatment; Organic, Median, and Refined for each element. Below each example he lists what matters and what doesn’t matter in the delivery of each example. Then you get 12 very nice color photos showing how that element shows up in real life in buildings in the Bahamas.
This approach to picking a consistent level of grammar for your building, deciding how plain or how fancy you want to build and staying within that zone is excellent. I hope that Steve will post a comment letting folks know where they can get ahold of this book in hardcopy or in an e-book version. (Powell’s and Amazon show the book as out of stock, etc.)
A Living Tradition is a very ambitious book covering a lot of territory. It covers some topics in much greater detail than others. Steve continues to make me crazy with his habit of inventing proper nouns for pretty much everything he is trying to explain. I mean the guy cannot help but Capitalize Stuff, which I find more than a little distracting. It would bother me more if what he had to say was not so thought provoking.
Andrew Frey frequently reminds rookie developers to make their decision to proceed with a project or not, in light of the Capitalization Rate (Cap Rate) that existing projects are currently selling for in their local market. Let’s unpack that a bit.
Andrew recommends that the Return on Project Costs for your new construction project needs to be at least 2 points above the Cap Rate for the purchase of existing buildings that have no construction risk, no leasing risk and no refinance risk.
Here is some other advice for Small Developer/Builders from my favorite recovering attorney and practicing small developer:
Andrew Frey: Start with a market study. Your equity and debt will do their own underwriting, and you want to be one step ahead of them. For example, if new construction only makes economic sense when local rents hit $2 per SF per month, you have to have a really solid case that rents are already at that level or will be soon.
If the market for existing small rental buildings is around a “6 cap” (existing annual NOI / purchase price = 6% capitalization rate) and your proposed building will only generate a 6% annual return (future annual NOI / total development budget), then you are taking on risk without return AND it will be hard to make the balloon payment on your construction loan (can’t re-fi or sell).
Try to do your first project in a prototypical way, i.e. on a typical small lot with plans that can be re-used. Small development already suffers from lack of economies of scale (for an individual project), but you can achieve economies over the course of several projects (soft costs go to zero, hard costs get more accurate). Re-inventing the wheel for every small site is really expensive.”
A subsequent exchange between Dallas planner/urban designer Patrick Kennedy and developers Frank Starkey and Monte Anderson went like this:
Frank Starkey: Monte, don’t you implicitly “have a really solid case that rents are there or will be soon” (because of your value-added place making approach)?
Patrick Kennedy: I don’t think there are comps in the areas Monte Anderson typically operates. He is the pioneer.
Frank Starkey: True. So that’s the limit of applying Andrew’s advice on the frontier, where there is no demonstrable “market”. Two important but very different contexts and approaches: a) established (but hopefully rebounding) markets as Andrew describes and b) moribund locations like where Monte works. (Of course, his efforts transform the latter into the former, at which point the calculus changes.). Thoughts?
Monte Anderson: In the early days of the areas I work, I am always looking for the butcher, the baker or the candle stick maker who will do a project that is more suited for their use and not the investment initially. And yes John, I would like to do more deals that fit this model that Andrew Frey initially talked about. Also, I look for a neighborhood with good bones and one that is somewhat close to something else that is having success. If the streets are not good there is usually little hope unless the city is willing to make those expensive changes. It is a painful way to develop and the return is over a longer period, 10 years or more.
A heads up for folks attending CNU23 in Dallas next month, Andrew Frey and Monte Anderson will be joining me for a CNU202 Session on Wednesday morning at 9:00AM titled Understanding the Numbers and Asking for Money. Monte and Andrew are really sharp guys. I am looking forward to the Session.
I think it is important to recognize the pattern in which something is delivered really does shape the value created by the overall design effort. Good building design and good urban design rely upon the competent application of massing, scale, proportion and detail. The result should be recognizably height and weight proportionate.
Let’s think about that height and weight proportionate thing. A 12 year old puts on 30 pounds over 3 years. That weight or growth could be distributed proportionately or it could be all in on big nasty 30 pound goiter on the side of their neck. The two hypothetical 15 year olds, (one with a goiter and one without) would have the same density and the same floor area ratio. Density and Floor Area Ratio (FAR) are such ridiculously crude metrics for measuring places we hope will have beauty and utility. Cindy Crawford and Phyllis Diller might weigh the same, but from there the similarities start to break down pretty quickly.