urban legends
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Urban LegendsBig-city projects provide a template for real estate opportunities.
By Thomas C. Bothen, CCIM | Jan.Feb.16
Real estate is about people.
Urban planner Daniel H. Burnham knew that when he said “Make no little plans; they
have no magic to stir men's blood.” In 1909, he crafted the Plan of Chicago, which, 106
years later, has resulted in Chicago's public lakefront of pristine parks, beaches, wildlife
preserves, museums, a world-class aquarium, and a planetarium - all connected by a
26-mile biking and walking path. And as an urban planning project, it couldn't be more in
tune with today's objective of blending green space, culture, and access to nature into
the urban environment.
As the world revolves and its citizens evolve, our cities are confronted with major
challenges that require big plans for sustainable urban development. In 2012, the U.S.
Census reported that 80 percent of U.S. citizens lived in an urban environment. In
2014, the United Nations concluded that 54 percent of the world's population lived in
cities, a figure that will climb to 66 percent by 2050.
Successful commercial real estate professionals should be aware of the urban planning
initiatives that are reshaping cities and real estate markets. This article details
developments and trends that are impacting markets nationally. While initiated in large
cities, many of these developments and ideas have been replicated in secondary cities -
and it is only a matter of time before these trends trickle down to even smaller markets.
The 24-Hour City“The real estate industry has posited that 24-hour cities provide superior risk-adjusted
returns,” reports a study by Hugh Kelly, a leading real estate economist and professor of
real estate at New York University. Twenty-four hour cities are places where people
work, live, and play. Atlanta, Chicago, Dallas, Los Angeles, New York City, San Diego,
San Francisco, and Seattle have been described as 24-hour cities, but this is an
evolving list. Coincidently, these markets are often top real estate locations favored by
institutional investors - many of whom invest only in 24-hour cities.
But 24-hour cities don't happen organically. Often the execution of coordinated urban
planning and public-private partnership strategies are the root of vibrant and sustainable
cities.
Chicago. Transit-oriented commercial and multifamily development creates increased
density and reduces traffic. In Chicago, eight apartment projects have taken advantage
of the city's TOD ordinance that allows the reduction of parking spaces for projects
located within 1,200 feet of a rapid transit train station. In addition, developers must
provide bike spaces or participate in bike and/or car-sharing programs, according to the
Chicago Tribune.
By reducing the amount of parking, developers can include more units and more retail
and commercial space, increasing a property's value. Recent research has documented
that the investment return on TOD properties is above market compared to similar non-
transit location properties.
However, to attract TOD, a city has to have a safe, reliable transit system. In cities with
aging transit systems, such as Chicago, upgrading stations and equipment requires a
consistent source of funding. Chicago relies in part on value capture tools such as tax
increment financing, which “captures” the increased property values that the transit
system creates in the surrounding area. Using TIF dollars, station rehabilitation and
improvements were made at six stations. These improvements enhance rail transit and
the quality of city life, thus increasing property values and tax revenue, providing a cycle
of funding for future transit improvements.
San Francisco. Parkmerced is a 3,221-unit rental property on 152 acres in the
southwestern section of San Francisco. Beginning in 2006 the developer and the city
worked closely to redevelop the property - a process that took 10 years. Construction of
new rental properties will start in February 2016, and over the next 20 years,
Parkmerced will result in 8,900 renovated and new rental units, as well as retail,
commercial, and open public space.
It required 500 community meetings to answer the needs of all parties to the project. In
the public-private partnership agreement signed in 2011, the developer agreed to
contribute up to $70 million to redirect the Muni M street car line into Parkmerced - a
project that will also improve pedestrian safety at the stop that serves the 25,000
students of adjacent San Francisco State University. In an unusual agreement, the
developer will design and build the re-routed transit line and two new stations, along
with upgrading the street infrastructure, according to the San Francisco Business
Times.
The success of Parkmerced is a result of extensive cooperation between numerous city
agencies, as well as a recent capital infusion from a group of New York investors. Given
San Francisco's current sky-high rents and the fact that this particular area of the city
has not seen any redevelopment since the 1950s, the project is now valued at $1.35
billion.
New York City. In September, New York City opened its first new subway stations in 25
years in the still-being-built Hudson Yards neighborhood. Planning began in 1988 to
rezone the east and west rail yards on the west side of midtown Manhattan, next to the
Hudson River. This is a where subway trains are parked during off-peak times, and the
Hudson Yards development is occurring on 45-square block area above the rail yards.
For the project to be commercially successful and financially feasible, it was determined
that the Number 7 subway transit line had to be extended 1.7 miles from Times Square
to 11th and 34th streets, the site of the new Hudson Yards station. The cost of the
extension was $3 billion and it is the largest U.S. public-private partnership funded by
separate bond issues.
It was also necessary to produce a zoning density sufficient to justify development
costs. Developers are paying a density premium to build at a density higher than the
standard floor area ratio. These proceeds are supporting the bond financing for the
project. All rezoning has been completed: Densities are known, so there will be no
permitting uncertainties.
Approximately 17 million square feet of office, hotel, and retail space is planned along
with parks, a school, and other public usage areas. Developed by the Related Cos. and
Oxford Properties, the 28-acre project requires constructing two platforms for the
buildings to sit on over the train tracks at a cost of $1.5 billion - a bargain considering
what it would cost to assemble a site this size anywhere else in New York, according to
Fortune magazine. New York officials boast that Hudson Yards will change the world
perception of New York City to that of a new higher global urban standard.
Washington, D.C. The Washington Metropolitan Area Transit Authority is a regional
agency that exists separate from Washington, D.C., city government and other local
government agencies. The district identified an area of D.C. that required a new station
between Union Station and Rhode Island Avenue along the Red line. Also challenged
by funding requirements of $104 million, it was necessary to secure agreements with
local landowners to establish a special assessment district.
The completion of the station generated more than $3 billion of private investment,
including 8 million sf of office, retail, residential, and hotel projects. Research by
WMATA revealed that property values in the vicinity of the new station increased an
average of 8.4 percent above comparable properties outside of a transit node.
Green Space DevelopmentForward-thinking citizens and city governments are discovering new uses for
abandoned freight lines in urban areas. Atlanta, Chicago, and New York City offer
excellent examples of how this real estate is being repurposed as open public space,
bringing a park setting to cityscapes, linking neighborhoods, and offering new real
estate opportunities.
In 1999, an urban planning student noticed an unused 22-mile rail corridor around
Atlanta. City government and community organizations came to support this major
public space redevelopment named the Atlanta BeltLine, which is projected for full
completion in 2030. Currently, approximately 11.5 miles are paved and lighted. The
BeltLine has provided connection to many local parks and 45 neighborhoods. It has
sparked brownfield remediation, along with adjacent commercial and residential
development, and rising property values.
In Chicago, the 606, also known as the Bloomingdale Trail, is an elevated freight rail
line dating to 1893, which was abandoned in 1995. Reuse plans were initiated in 2003
and finalized in 2013. Opened in June 2014, the 2.7-mile trail connects four
economically diverse neighborhoods and is expected to spur significant new
development. More than 80,000 people live in within a 10-minute walk of the trail, which
cost $95 million to restore and build. The majority of the funding came from federal
Congestion Mitigation and Air Quality grants, which are used for commuting projects.
Perhaps the best-known reclaimed park is New York's High Line, another abandoned
freight line, which connects to Hudson Yards and began opening in phases in 2009.
Local government sought for many years to demolish the structure, but local community
groups prevailed in their plan to reuse the line. The Highline links several
neighborhoods and has spurred new development - more than a dozen upscale condo
developments have sprouted up along the path.
For ventures such as the BeltLine, the 606, and the High Line, foresight and patience
are required for implementation. Such initiatives can be spurred either at local
government levels or with citizen-led neighborhood groups. However, as urban
locations grow denser, the need for green space becomes even greater, adding more
value to adjacent properties.
Back to the City In Chicago and elsewhere around the country, companies are moving headquarters
operations back to the city from the suburbs. ConAgra and Kraft Heinz recently
announced that corporate offices will soon be in downtown Chicago. A study by Smart
Growth America and Cushman & Wakefield has validated this national trend of back to
the city. The study reported that 245 out of almost 500 companies across a broad range
of industries have relocated or expanded to downtown settings.
The reasons include access to talented workers who eschew living and working in the
suburbs, improved opportunity for creative collaboration, being closer to customers, and
to centralize operations and thereby improve financial performance. Commercial real
estate values in “highly walkable” CBDs have risen 125 percent in the last decade,
according to Real Capital Analytics, compared to 43 percent for highly walkable
suburban locations. Car-dependent locations have only risen 22 percent, according to
RCA.
The trends of TOD, green space development, and urban business locations crystalize
in 24-hour cities. It is a recipe that smaller cities are using to attract businesses and the
talent workforce they seek.
Cities, developers, and transportation managers working together can realize
synergistic results that create real estate opportunities. The innovative CCIM will
connect the dots, recognize innovative trends, and initiate thoughtful dialogue to
improve the future of city life.
Urban Planning Webinar SeriesIn early 2016, the Ward Center for Real Estate Studies will introduce a series of four webinars on
working in the urban environment. Curated by CCIM Senior Instructor Tom Bothen, CCIM, key
speakers include an urban planning consultant, a City of Chicago housing official, an urban planning
author, and an urban real estate developer. These experts will share details about how the trend of
contemporary urbanism affects property investment value and shapes living in cities that are
successfully responding to the challenges of density. To register, go
to www.ccim.com/education/ward-center.
Thomas C. Bothen, CCIM
Thomas C. Bothen, CCIM, is a senior instructor for CCIM Institute and also teaches graduate real estate courses at the University of Illinois Chicago and Roosevelt University. Bothen also represents off-shore firms seeking real estate investments in the US. Contact him at tcbothen@gmail.com.
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