Redevelopment

Destination: Downtown

Cities Large and Small Are Using Various Strategies to Redevelop Their CBDs.

Across the country, downtowns of all sizes are undergoing transformations. From reinvestments in public infrastructures and existing properties to the development of new hotels, retail stores, and sports stadiums, downtowns are becoming more people-friendly.

Fueling the redevelopment is the public’s desire to work, live, and play downtown. "I think people are enamored with urban lifestyle and kind of tired [of] suburbia," says Nick Hernandez, a broker with Boyd, Page, & Associates in Houston. "Downtown has been growing by leaps and bounds."

Other influential factors are as unique as the downtowns themselves. The emergence of immigrant entrepreneurs, a rise in tourism, new building codes, the involvement of downtown development organizations, and an increase in public financing all have contributed to recent downtown turnarounds.

Some downtowns don’t need any motivation for redevelopment, because town officials see it as an ongoing process. GayLynn Beighton, CCIM, an associate broker at Chiles & Co. in Seattle, says that downtown Edmonds, Wash., with a population of 32,000, "doesn’t fit the typical profile of a down-and-out city cleaning itself up." Instead, the city continues evolving as a way to maintain its current level of success. "Edmonds is a fairly affluent community," says Beighton. "We have to work very hard to stay where we are."

The 24-Hour City
As more and more people expressed an interest in urban living, many cities have repositioned their downtowns to accommodate a new set of needs and desires.

Downtown Houston’s successful office market is home to a number of corporate headquarters for national and international banking, oil, and natural gas companies, Hernandez says. The area has a total of 40 million square feet of office space and almost a 97 percent occupancy rate for class A properties. Until recently though, there wasn’t much else downtown.

"Up until about three years ago, there was no night life or retail activity," Hernandez says. "But three years ago, it started to come around and it’s been booming ever since." A pent-up demand for loft space spurred developers to convert old buildings into multifamily properties, he says.

The historic Rice Hotel, built in the early 1900s, was one of the first conversions. The social center of Houston for many years, the hotel sat empty after it closed in 1976. A local developer, the Randall Davis Co., saved the building from the wrecking ball in 1996 by arranging for the city to buy the hotel for $3 million and lease it to the company.

The developer turned the Rice into a 307-unit loft apartment building with 28,000 sf of retail space on the ground- and second-floor levels. Monthly lease rates for the units range from $650 to $4,000 depending on the size.

Responsible for leasing the retail space at the new Rice Lofts, Hernandez and a partner brought in a mix of restaurants and bars. Average lease rates for the space are $24 per sf annually.

The Rice Lofts have inspired other developers to bring downtown multifamily properties on line. "There are probably seven or eight more loft developments under construction now," Hernandez says. Other property types also have benefited. Retailers have followed residents downtown, and three proposed 800,000-sf office buildings are being considered for construction.

Hernandez says he is amazed at how these developments have changed downtown Houston. "It was a place where you didn’t feel safe walking around in the evenings," he says. "Now it’s just full of life."

Pittsburgh also is looking for ways to attract people downtown after 5 p.m. "We’re trying to make Pittsburgh a 24-hour city," says David Auel, CCIM, president of Griffon Realty in Pittsburgh.

The downtown had few retail and multifamily properties, and developers didn’t seem interested in venturing there. After doing some research, city officials found out that it was expensive and time-consuming for developers to get existing properties up to current building code standards. For example, many buildings had old, exterior iron or steel fire-escape stairs. By code, developers had to take down the existing stairs and install a secondary, interior stairwell, Auel says.

To simplify the process, Pittsburgh adopted an adaptive reuse building code this spring, which relaxed some of the rehab standards. "It was hugely important to the actual developers," Auel says.

A 232-unit apartment complex was the first multifamily property redeveloped under the new code. "This was the first time new residential rental units of a large scale had been developed in about 20 years," Auel says. "In addition to that, there have been five different loft conversion projects that have been started since then." Sales of the lofts have been strong, ranging in price from $120 psf to $160 psf depending on the amenities.

Other downtown rental properties are doing just as well. An office building converted into a 25-unit apartment building has monthly rents ranging from $900 for efficiencies to $2,200 for two bedrooms. Auel says the building was fully leased before the conversion was finished. "It’s been a very dynamic market for those pioneers," he says.

With multifamily properties on the rise, the focus has shifted to creating a strong retail district. "The city is looking at an eight-square-block area of downtown that will be anchored by a new Lord & Taylor and an expanded Saks Fifth Avenue," Auel says. Also within that area, a 250,000-sf Lazarus department store opened last October.

The city plans to bring other major retailers and restaurants downtown, as well as the first multiplex theater. The current occupancy rate for retail space is just over 87 percent, Auel says. Annual lease rates for small, mom-and-pop stores range from $15 psf to $20 psf, while new stores range from $30 psf to $50 psf triple net.

Philadelphia also is beefing up its downtown with a new mixed-use development. According to The Wall Street Journal, local developer P&A Associates is going to build an $80 million, 300-unit apartment complex that will include restaurants and stores. Monthly apartment rental rates reportedly will range from $1,500 to $4,000. The 40-story luxury high-rise building would be the first constructed in downtown Philadelphia in 15 years.

Public/Private Financing
While some downtowns are trying to expand their appeal, others must bring themselves back from the brink of ruin. "Our central business district was beyond decline," says Bruce Buchanan, CCIM, owner of Buchanan Resources in Walla Walla, a city of 30,000 in southeastern Washington. "It was close to being classified a ghetto."

Buchanan says Walla Walla’s condition was caused by government neglect. "What had been taking place for over 20 years was a complete lack of capital reinvestment into our CBD," he says. "The city had not put one red cent into infrastructure." The 38-block downtown gradually deteriorated.

"All of the public infrastructure was at the end of its useful life, and because of that deterioration, property owners were not putting capital back into their properties," Buchanan says. "Consequently, lease rates were very low." He estimates that downtown properties averaged $3 psf annually for years because owners would rather keep tenants than have vacant buildings.

An announcement in the late 1980s that a regional mall was going to be built a mile and a half outside of downtown Walla Walla prompted a group of city and grass-roots organizations to improve downtown conditions. As a founding member of the nonprofit Downtown Walla Walla Foundation, Buchanan helped the group spearhead the downtown’s revival plan.

The group took a unique approach to funding the redevelopment plan, Buchanan says. With the support of more than 65 percent of downtown property owners, the City Council authorized a local improvement district in April 1991. Under the LID, property owners were assessed to raise the $2.7 million needed to improve the public infrastructure.

When the construction was completed, the owners had the option to pay their assessments upfront or participate in a 15-year bond retirement plan. Buchanan says most property owners opted for the 15-year plan.

The public financing spurred private investors to finally raise the bar for downtown properties. "We had a number of people who, because of the catalyst created by public investment, in turn went in and did major restoration to their private properties," he says. He estimates that the private sector invested $10 million in downtown properties.

Annual rental rates for downtown office and retail space now range from $10 psf to $12 psf. "In a small town, that’s top-of-the-market prices," Buchanan says. And Walla Walla no longer talks about its vacancy rate, which reached 30 percent in 1989, but instead emphasizes its 3 percent turnover rate since project completion in 1993. "No property downtown stays vacant for very long," Buchanan says. "Without question, our downtown is pretty widely recognized regionally as a downtown success story."

Greenville, S.C., with a population of 102,000, is another example of a city that started its downtown renaissance with public improvements. In the 1970s and early 1980s, downtown Greenville had a high vacancy rate, says Caine Halter, CCIM, president of Coldwell Banker Commercial, Caine Real Estate in Greenville. There virtually was no multifamily downtown and very little retail — and new developments weren’t anywhere in sight.

Halter says he believes that the opening of two malls five miles away caused downtown Greenville’s plight. "There’s no question that it was the development of regional malls that pulled a lot of the retail out of downtown," Halter says.

To attract more traffic, Greenville invested money in making the historic downtown more "pedestrian-friendly," he says. This included narrowing streets from four lanes to two lanes, adding parking in front of stores, and creating landscaped islands in the middle of streets.

A public/private venture that helped anchor Greenville’s Main Street is the $42.5 million, 17,000-seat Peace Center for the Performing Arts. Private donations accounted for $28.5 million of the funding, while public funds culled from tax increment financing and bonds picked up the remaining $14 million.

Halter says the public/private partnership has paid off for Greenville. "It’s literally a 180-degree turn," he says. "Greenville is now a model downtown." Retailers and restaurants have moved back downtown, and a number of residential units are being developed above storefronts. Annual lease rates in the area range from $16.50 psf to $18.75 psf for class A office properties, and from $12 psf to $15 psf for retail space and multifamily properties.

Halter’s company has been involved in renovating existing buildings and assisting landowners with sales. He says there are still plenty of opportunities for real estate professionals in Greenville because the redevelopment continues. "I don’t think it will ever be completed," he says. "It’s a constant, ongoing effort."

West Palm Beach, Fla., also developed a master plan in 1993 that relies on a long-term municipal commitment to improve public infrastructures and decrease crime. Retail vacancy rates dropped as national retailers such as Gap, Banana Republic, and Starbucks opened there in the last 18 months.

Emerging Trends
While downtown redevelopment can be a challenging, long-term process, it can be spurred by one trend.

Immigrant Entrepreneurs. Los Angeles has experienced a shift away from typical investors, says Ted McGonagle, managing principal at Property Solutions in Granada Hills, Calif. "Southern California has become very, very entrepreneurial," McGonagle says. "Not only is it dominated by small businesses, it’s also dominated by immigrants." In the last 18 months, two-thirds of all commercial property sold in downtown Los Angeles was purchased by immigrants or first-generation Americans, he says.

This trend soon may spread nationwide. (See "A World of Opportunity," CIRE, March/April 1999.) About 10 million immigrants joined the U.S. population in the 1990s, according to a report from E&Y Kenneth Leventhal Real Estate Group. That figure is reportedly the highest of any decade in this century.

McGonagle says the majority of immigrant entrepreneurs he works with buy older mixed-use buildings to renovate because it’s often cheaper than building new. Most pay for the property with cash or debt acquired from small immigrant banks.

McGonagle and his co-workers often have to accommodate their clients’ cultural beliefs in the plans. "To a big degree, we’re sort of a bridge between those two very different worlds," he says.

For example, many Chinese immigrants practice feng shui, the "belief that physical places have a relation to elements in the world like wind and fire and sun," McGonagle says. After buying a building, these entrepreneurs have a priest determine if it’s in harmony with the world. If it isn’t, changes will be made to the physical structure.

Hotel Development. Hotel development signifies that a downtown is doing well. "We have three hotels coming on line that will be four- and five-star hotels," says Guy Trusty, CCIM, president of Lodging & Hospitality Realty in Miami. The new hotels — a Marriott, a Mandarin, and a Four Seasons — are "an indication that downtown Miami is maturing into a world-class city."

Trusty says Miami has received a lot of attention lately because South Beach has become a celebrity hot spot. "They are creating an impression out in the world that this is the place to be," he says, which has boosted Miami’s tourism industry.

"There’s some concern that adding 1,000 rooms will hurt the market," Trusty says. "I contend that it will not hurt the market because it will cause the existing hotels to adapt and do better or just drop down and be at the low end."

Downtown boosters elsewhere realize the importance of the hospitality industry. "We have a terrible shortage of hotel rooms," Beighton says. She says she believes that Edmonds, located 15 miles north of Seattle on the shores of Puget Sound, attracts enough tourist traffic to fill more than the one, 64-room hotel it currently has.

The city would like to build a new hotel near its ferry terminal, but needs permission from the state before it can begin building one. So far, the state has not agreed, Beighton says.

Cities that do have hotels being developed downtown include Chicago, Houston, Los Angeles, New York, Phoenix, and Austin, Texas.

As public interest in downtown life keeps growing, cities — both large and small — will continue to find ways to meet and exceed those challenges. "A downtown that is alive and breathing is constantly evolving and being redeveloped," Halter says.

Leah Bocanegra

Leah Bocanegra is associate editor of Commercial Investment Real Estate.Oklahoma City RebuildsOklahoma City is a model of resilience for downtown redevelopment projects, overcoming two events that virtually crippled its core in the past 10 years.First, the area’s oil and gas industries bottomed out in the early to mid-1980s. "We lost thousands of jobs and it was really devastating to Oklahoma City economically," says Tim Strange, CCIM, vice president of Wiggin Properties in Oklahoma City. As a result, the central business district’s office occupancy rate dropped from 97 percent to 65 percent.Then, just as the city was beginning to rejuvenate its downtown, a far graver tragedy struck. On April 19, 1995, a bomb exploded in front of the Alfred P. Murrah Federal Building located in the heart of downtown. When the dust cleared, 168 people were dead, 14 buildings were destroyed, and countless other buildings within a square mile were damaged."It will always be one of the most devastating moments in every citizen’s life," says David A. Huffman, CCIM, president of Property Resource Group in Oklahoma City. "You’ll always remember where you were when the bomb went off." The bombing caused more than $150 million in physical damages and forced the city to amend its redevelopment strategies.Prior to the bombing, Oklahoma City had tried to reverse its fortune by attracting national companies to the area, Strange says. When that failed, the redevelopment focus shifted solely to downtown. "The city fathers thought we needed to have a healthy downtown to have a healthy city," he says.The chamber of commerce developed a revitalization plan called Metropolitan Area Projects that consisted of nine individual public projects. These included building a new $34 million ballpark, remodeling the convention center and music hall for a combined cost of $92 million, installing a $3 million mass transit system, and creating a $34 million riverfront walkway.The projected cost of the plan, known as MAPS, was $350 million, which city officials wanted paid upfront. In December 1993, voters overwhelmingly approved a referendum for a 1-cent sales tax for five years to raise the necessary funds. Huffman says this self-imposed tax was "clearly a commitment on the part of the public" to downtown Oklahoma City.Almost a year and a half later, the city shook from the bombing and suddenly it faced not only redeveloping downtown, but also rebuilding it. "The most severe structural damage was sustained within three blocks of the site," Strange says. Office buildings were hit the hardest, followed by churches, then a small number of residential and retail properties.The federal government has committed $40 million to create a federal campus that will replace the destroyed government buildings. Construction is set to begin early next year, Strange says. The federal government also is building a $29 million national memorial where the Murrah Federal Building was located. The memorial is expected to be completed by April 2000.In addition, Oklahoma City purchased the damaged Journal Record Building, located across the street from the Murrah Federal Building, to create a museum dedicated to the bombing. The renovation project, estimated at $12.6 million, should be finished by the end of next summer.Strange says the bombing has had little negative effect on the redevelopment project. "I don’t think it really changed MAPS," he says. In fact, some funds provided through the government loan program have been reinvested in other downtown projects. A new YMCA was built and loft apartments are planned in an area called Automobile Alley, while the Bricktown neighborhood is a booming entertainment center that will be home to a 26-screen movie theater.Still, downtown Oklahoma City is experiencing high vacancy rates. In January, the office vacancy rate was 39 percent. Strange cites several reasons for the vacancy rate, including the consolidation of businesses and a competitive suburban market.Another reason is that Oklahoma City has not historically been a 24-hour city. "There haven’t been other attractions, other reasons for being downtown," he says. "Unless you had to be downtown for business reasons, you weren’t going to go downtown." He expects this will change as more entertainment properties come on line and more people move downtown.Huffman also still supports MAPS and continues to be positive about its results. "The absorption numbers remain low, but it may be a little too early to tell for sure," he says. "The optimism is euphoric."

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