Monday, January 6, 2014

When the Levee Breaks



City of Dallas is proposing to offer $50 million in downtown TIF funds to jumpstart a derelict office tower.  This is exactly what we're trying to avoid with proposing the the 345 tear-out.  It wasn't the only impetus for the study, but the endless heavy subsidization of any and all downtown investment was one of the primary reasons for the tear-out proposal.

Why?
1) It's too big of a chunk of money for too little return.  I'm saying that generally, but in this particular instance the public investment is in hopes of returning 511 residential units (a lot to absorb in one project), 71K of office, and 71k square feet of retail (a ton in the downtown market to absorb).  Oh, and "much needed parking" (which is nonsense).  Sounds great.  But can it?  And should it really take $50 million in gap funding to return?  If it works, it will add supply of space.  But this gap funding is a glaring symptom of the underlying problem with the downtown market.  That we'll get to in a bit.

2) It guarantees added supply with no guarantee of added demand or absorption.  It is antiquated, late 20th century, Keynesian urban planning.  I'm not saying there isn't a role for public investment to leverage private investment.  I'm saying with limited resources, it has to be much smarter.  In the past 5 years, downtown Dallas has added a number of new residential buildings.  Thus, you see the "population" of downtown climbing.  Looking deeper at the numbers however, what is cited is always "residential units."  Not actual downtown resident population.  That has been stagnating in the 6,000-7,000 range for sometime.  We're adding new space, but at high(er than necessary) cost.

3) It allows for favoritism games to be played.  Picking and choosing investors (which makes sense on some level), but it also minimizes the amount that can and would invest in downtown.  Too many big money players don't believe in downtown simply because they don't want to deal with the city.  We have to alter the rules so it allows more investors to return to downtown, to meet the huge pent-up demand for walkable urban living, and minimize the unpredictability that scares them away.

4) One hand out leads to another hand out.  When does it stop?  Any smart investor that sees somebody get $50 million will expect the same.  If they don't, they'll go back to whatever else that is working for them.  Considering our current long drive favoring infrastructure, that generally means more sprawl towards Oklahoma.

This is what you have to do when the real estate equation is upside down.  the market isn't healthy enough for profitable investment.  land costs are too high, but demand is too low.  Public agencies create public-private partnerships to fill that gap that won't be filled otherwise in order to add new buildings.  New supply.  But there is no guarantee that anything or anybody will fill that new supply.  You haven't changed the demand model.  But we could.  And by doing so, invest in the city much more wisely and at much greater returns.

-----------------
Let's prorate that investment and proposed return out in comparison with the 345 plan.  We originally suggested the highway tear-out would cost about $65 million.  That was based on Milwaukee numbers from early 2000s.  Now, based on more up to date comparison (the Rochester plan that is about to happen), we're looking at more like $80 million.  Or 1.6x the investment.

Cost:
One Building:  $50M public investment
345 Tear-out:  $80M

Return:
One Building:  511 units, 71k retail, 71k office
345 Tear-out:  17097 units, 812k retail, 1.22M office, and another 400k square feet of what we categorized as miscellaneous.  Go ahead and lump that in as "hotels"

ROI:
At 1.6x the investment, the city gets a "supply" return of 33.29x the residential (with a greater likelihood of affordable housing component), 11.43x the retail, and 17.18x the office (plus the additional hotel space).  On a dollar to dollar basis, that's 20.8x the return on investment for residential (what is most needed), 7.14x the retail, and 10.74 times the office.

I'd say that's a better use of public dollars.  Of course, the question that remains is, why is that not a lot for the area to absorb when the singular project would be a lot for the market to absorb?

The answer is in the supply-demand model.  
Adding a new building online in downtown, does very little to shift the needle on the demand market.  Maybe a little, but it is predominantly supply-sided view of development.  If it does increase demand around it, it is only very slightly, and limited to that localized area.  Whereas, by removing the highway, we would be driving demand, via new interconnections, driving value via the multiplying effect of integrating neighborhoods, and shifting the macro-market to favor proximity.  We do so by making it more difficult to drive long distances, thus the rational choice of the real estate market is to once again benefit agglomeration, proximity, and walkability.

If we get that right, the demand equation rises to the point where renovating these tired old buildings makes market-sense and the city won't have to kick in $50 million every time somebody shows up to city hall with an idea.

Supply-side-ism is easy.
We can look like we're doing something by simply throwing money at a problem, getting out the shovels and cameras, and cutting a ribbon for the next brick and mortar success.  The theory of the Keynesian urbanist, is that if you just keep adding new buildings via public-private partnership, eventually a tipping point will be reached and the market will take over.  However, we have no idea where or when that tipping point is.  Hence, the additional hands out expecting help just to get one building built or renovated.

Instead, set the framework for success through a more sophisticated understanding of demand as leveraged through spatial-infrastructural network.  Our current highway-based infrastructure acts as a dam against the tidal demographic shift back towards the core, towards more walkable urbanism, towards greater choice in lifestyle.  The current infill development is but a trickle through cracks in the dike as long as we continue to favor sprawl and car-based living.  Eventually either the dam or the swell will give in.

Which do we mean to destroy?  The highway-infrastructure holding the city back or Dallas' aspirations to be a global city?

It's time to start planning and building an infrastructure for such a city so that designers can design it and developers can build it.