Faux-Urban?

So, I was driving down the road the other day and noticed that a building I've been watching go up was finished. Located near our 1.6 million square foot mall is a brand new Hyatt Place.

Now, a new hotel in suburbia is nothing new. In fact, there's been explosive growth in the suburban hotel market over the past decade or so. It's just that most of these hotels have a decidedly suburban look - Mediterranean, Colonial, Craftsman - like an overgrown production home.

This time, though, the folks at Hyatt have been opening some of their "Hyatt Place" branded properties with a look right out of the urban core - modern, sleek, with a ground floor that looks like it could contain store-fronts.

I have mixed feelings about this. One one hand, I think it's great that companies are recognizing consumer preference leaning toward the urban. This is apparent not only in Hyatt Place's facade, but in the Smart car, clothing styles, and the rising popularity of loft-style interiors.

On the other hand, the styling of this hotel does nothing to change the suburban landscape. It still requires a car to access it. There's no public transportation that can effectively get you to or from anywhere useful. It's 1/2 mile to get to the mall I mentioned, because of a massive retaining wall between the two, even though it's only 1/10 of a mile as the crow flies.

Here's hoping that, as the economics of new development return, we see a shift to more urban development - mixed-use, walkable, transit-oriented development.

I'm Back!

Urbanity Today is returning from a not-so-surprising break. Unless you have been living under a rock for the past year or two, you are aware that we've been going through a global economic crisis. Those who know me also know that the economy has taken a toll on me personally. With the economic conditions, there has been less going on in the world of development, and a bit less to talk about.

Now that the economy is officially in a recovery phase, there must be more to talk about, right? Well, not so fast. Yes, by official definitions, we're in recovery. The world of real estate, development, and urban planning, though, is still in intensive care. So, what's happening right now?

• Residential real estate's free-fall has stopped, and prices seem to stabilize. So, for those interested in buying a home, now's a great time - if your credit hasn't been crushed to pieces
• Commercial real estate is now the asset class that's having issues. Lots of properties are not just up for sale, but many are being sold at auction following foreclosure. One interesting sign of the times was a non-foreclosure auction of the Pontiac Silverdome, which sold for only $583,000.
• Urban planning is also in a lull. Many municipalities have tightened their spending, and developers are licking their wounds after many projects have been scrapped.

So, great time to come off a break, huh?

Actually, yes. If you recall, my purpose here is not just to talk about real estate development. I feel strongly that we need to develop more responsibly, and now's a great time to start the discussion again.

For developers who have managed to retain cash or access to funding, this is a unique opportunity. Central, urban properties that were previously too expensive to make sense for development are now, suddenly, much more accessible. Cost of construction is also much lower than in 2006, due to the available labor and materials supply. It's still possible to find redevelopment and infrastructure grants from state and federal sources that reduce the cost of infill development.

My hope is that more developers will see the opportunities with infill development, and will seek to be responsible by implementing mixed-use, walkable designs.

Outside the Big Box

One category of development that's frequently debated is big box retail. You know, the Costco's, Best Buys, and Home Depots of the world.

From a retail perspective, this is a profitable niche. Build a large (ok, huge!) store, pack it in with as much product as you can, limit service, and cut prices as much as possible. The store makes up in sales volume what it lacks in profit margin.

It's profitable for developers, as well. Profitable store, built for the long term, easy and cheap to build (they're usually pretty "bare boned"). For a developer, that's good business.

Here's where the debate comes in, though. Big box is not friendly to smart urban development. The stores themselves can often be an acre or more inside. With that much space, walkability is not really an option. Even in an urban environment, the perimiter is so large, you can walk a city block and still be outside the same store. Enough of these and you end up recreating the need for a car, which clogs the urban downtown, sending more people to suburbia, and so on...

Develop one of these in suburbia, though, and that 1-2 acre store turns into a several-acre site. Parking usually takes up at least double the space of the store. Then, there's loading dock access for multiple trucks, required landscaping, access roads, you get the picture. By definition, it's the complete opposite of smart development.

Lately, one more drawback has cropped up. The economic downturn hammered the retail sector, and there have been some bankruptcies and closures of big box retailers - Circuit City is one big example. With each store closure, one more big box is left vacant. That means acres of retail wasteland. No one else wants the stores right now, and until retail takes off again, the space will remain unused. Smaller stores have a much broader base of potential tenants, making them much easier to lease again. This also makes smaller retail stores a much smarter way to develop and grow an urban area.

Economic Justification for Development

In my last post, I commented about a few "mega developments", and how they all related to some aspect of "play", such as Las Vegas-style gambling or a mega amusement park for the ultra-rich. Apparently, these activities throw off a lot of cash for the owner, justifying the initial investment in the projects.

So, are there less luxurious justifications for significant developments?

Just so we're straight, every development is significant in some way, but I'm referring to landmark, sweeping, game-changing development.

All along, I've advocated some types of development that aren't your typical suburban development - projects that exist to satisfy some societal need, be it community, culture, health, environmental responsibility. (As a reminder, you can read more about that here.) However, to the investment community, these are not adequate justifications for developing real estate. Needless to say, the project will only be successful with the investment.

As I, or any other developer, work through the vision of a development, the financials are often forefront of the planning process. Unless I can answer the question of how an investor in a project can receive their money back with interest, the project will never get off the ground. In a circular way, this should explain why a Vegas-style casino may get funded, while a community-sensitive, well-planned mixed-use project may not.

Rest assured, projects that promote Community, Culture, AND Commerce can be funded and built. It simply means I, and my other fellow developers, just need to be more diligent.

Mega Developments

One trend showing up in real estate development in "developing" countries is the "mega development". Some entity with a lot of money decides to build a massive series of buildings and infrastructure. Keep in mind that describing these developments as "recent" is a bit of a misnomer, since these projects take years to decades to complete...

Dubai - This small section of United Arab Emirates was the first out of the gates near as I can tell. Their solution to having nearly filled up all their coastline and beach land is to create coast. Palm Jumeirah, Palm Deira, The World, and other projects are being built on man-made islands. The process creates a significant amount of both buildable land and coastline. Some of this is being done with walk-ability and mass transit in mind, while other parts are more similar to the suburban-style islands off the coast of Miami. Check out Nakheel Development for more. Funds for this project are directly from the Dubai government.

Abu Dhabi - This larger portion of UAE holds nearly 10% of the world's oil reserve. This means they have access to a lot of funds. About $500 billion (with a "B") is being put into development in their coastal capital city, also called Abu Dhabi. (Start Spreading the News! Abu Dhabi, Abu Dhabi!) Ironically, the area being targeted is also about the size of Manhattan. The architecture looks to be superb, while the overall effect appears to me to have the feel of Orlando mixed with Beverly Hills (read: playground of the ultra-mega-rich). It even includes a Ferrari-themed amusement park. This project is also solely government-funded, and developed by Aldar Properties.

Macao - This is actually two islands off the coast of China, and the project is the development of reclaimed land known as the Cotai Strip. Besides being geographically distant from the other two areas, the "project" is a departure from the Middle East projects above in other ways as well. First, the feel of the project is much more Las Vegas than LA or Manhattan. Second, the project is being funded by private development funds from the Las Vegas Sands corporation and MGM Mirage, among others. Sheldon Adelson, of Las Vegas Sands fame, is leading this development effort which is ultimately supposed to produce as much revenue annually as the entire state of Nevada.

Some commonalities exist between these projects. First, two of the three depend largely on reclaimed land. Second, the complexities that exist are quite different from typical developments, and are related to scale and speed of development, as opposed to gaining public buy-in and raising funds.

From a developer's standpoint, these projects represent a dream come true. Put the pedal to the metal and get the job done. They also represent the ability to put forth a particular philosophy or methodology without a whole lot of opposition. Mind you, in these cases, it mostly has to do with play, but the freedom is there. When you think about it, maybe the idea of play contributes to the ease of funding. When "play" sells, the investor can justify the investment economically.

So, the challenge to the developer comes in finding ways to economically justify their development...

Development in a Down Economy

The economy has been a major topic of discussion on CNBC, on main street, and around the dinner table for quite some time. So, how has it affected commercial real estate and redevelopment?

As my nearly two-month pause from this blog indicates, the economic difficulties have dominated the discussion. I can't say anything about the economy that hasn't already been said. There are a lot of writers monitoring this very topic.

From my perspective, though, here's where everything stands. There are an awful lot of bargains in commercial real estate, just as there are in single-family homes. There is also an extreme lack of available money from banks and other lenders, so taking advantage of those bargains tends to be left to those who already have the money.

Development has not completely stopped, though single-family subdivisions are not cropping up like weeds as we saw a few years ago. Redevelopment has slowed dramatically, since many of the players are the small guys who are infinitely dependent on other peoples' money.

Yet, there are still some bright spots. There are loft projects going on that are selling units. There are new restaurant and entertainment venues either under construction or ready to open.

The economy will come back. Will development be different? More than likely. Will it include more redevelopment and smarter building? I certainly hope so. Will I do my part to make it happen? Of course!

Latest on the Economy

As you no doubt know by now, my work life hinges directly on the economy and the availability of financing for projects. You have probably read my post "Everybody Now... Pull!", and have a basic feel for what I believe it will take for the economy to turn around.

Sunday, President Obama made a comment that is dead wrong, and may prove to be detrimental, or even disastrous, to our country. I know many are very positive about Obama, and I don't begrudge those opinions. However, I hope you will see how this comment, and the sentiment behind it, is very damaging.

The comment in question was not included in the pre-prepared transcript (available here), but I heard it in the replay on NPR yesterday morning. Obama said that the US government is the only entity that can get us out of this crisis. Just like a dutiful CEO, affirming a company's products or services as the best way to go, Obama is selling the federal government's ability to do the job.

Here's where he's wrong. It's not that I feel the government of Switzerland or Morocco should step in. Rather, he is forgetting about the entity that is the United States of America. You and I are not part of the government, except when we step into the ballot box or write a congressperson. We are part of the entity that is our great country. We consumers, businesspeople, investors, and citizens need to step out in faith. We need to be willing to spend sensibly, not clutch our white-knuckled fists around our wallets for fear of what the economy will do to us.

What happens when we rely on the federal government? We give up freedom, control over our lives and money, and we "pass the buck". Once upon a time, people in our country used to act out of personal responsibility and integrity. Now, we cry out to our government, saying, "Save us! Save us from this mess we got ourselves into!"

Let's all step out and do the right thing.