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 Development
Forward-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.
Planning Webinar Series
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.