Development

Growing Up, not Out

Cities Use Infill Development to Alleviate Urban Sprawl.

The downtown revitalization phenomenon sweeping the country is a boon to infill development, especially in secondary and tertiary markets. However, locating and preparing infill sites for new development is no easy task. Despite cities initiating new urbanism strategies, commercial real estate professionals require a certain amount of vision and finesse to find these sites and bring deals to fruition.

“Infill is a very good product if you can make it work because the demand is there,” says W. Barry Lammersen, CCIM, owner of Lammersen & Associates in Fairfax, Va. The multifamily and retail sectors drive that demand, as residents return to urban centers and retailers seek out densely populated trade areas. Office infill projects are harder to find due to slumping market conditions, but pockets of activity still exist.

“Opportunities are not plentiful, but they are there,” Lammersen says. “And all of these properties are hot properties if you can find them.” Thanks to the demand — and rising prices — developers are eager to tackle these challenging projects.

Overcoming the Obstacles

The foremost obstacle to infill development is slow-moving city approval and rezoning processes. Even minor issues related to parking requirement changes or property setbacks can delay progress for years. “Infill projects are so much more difficult than going out to suburbia and starting on a clean space,” says Gregory C. Hobbs, CCIM, director of commercial real estate at Olympic Properties in Raleigh, N.C.

Infill development is a very slow, political process, agrees Robert L. King, CCIM, a vice president at Grubb & Ellis in Sacramento, Calif. For example, a new Safeway grocery store recently was approved in downtown Sacramento, but, as a caveat to the approval, the city required a residential component to the project. “[City] planners are trying to figure out how to do mixed-use projects, so there is a lot of talk but not a lot happening,” he says.

Nevertheless, infill opportunities are increasing as cities devise new infrastructure and zoning changes and reclaim brownfields. The biggest redevelopment project in Sacramento is the Union Pacific rail yards located north of downtown. The city is moving forward, albeit slowly, in its negotiations to buy 240 acres from the railroad company. The deal, which has been talked about since the early 1990s, would play a significant role in the city's downtown revitalization effort. Although the land requires significant environmental cleanup, a variety of uses already have been discussed with proposals ranging from sports arenas to shopping malls.

Environmental cleanup poses a challenge to infill redevelopment. For example, remediation was necessary before the St. Louis Commerce Center's construction, says Hassan S. Jadali, CCIM, a vice president of Colliers Turley Martin Tucker. Developer Balke Brown Associates worked closely with the city to create the 487,000-square-foot industrial park. Over the years, the site had housed businesses including junkyards, dry cleaners, and filling stations, which subsequently left a variety of contaminants ranging from lead to petroleum. Brownfield Redevelopment Program state tax credits and a 25-year real estate tax abatement helped get this project off the ground.

As a result of a recent Environmental Protection Agency ruling, more brownfields soon may be cleaned up and used for new infill projects. The EPA's decision to loosen restrictions reverses a 25-year-old policy that prohibited the sale of land contaminated with polychlorinated biphenyls, or PCBs. The new ruling is expected to increase the number of PCB-contaminated site cleanups nationwide, which could create new opportunities for infill developers.

Another major obstacle to infill development is neighborhood opposition. Neighbors delayed the sale of the Peace Moravian Church in Charlotte, N.C.'s SouthPark neighborhood, says Harry A. Taylor III, CCIM, owner of Taylor Real Estate Group. The church had outgrown its location and decided to capitalize on the increased land value to finance the construction of a larger building. Neighbors opposed the proposed housing-unit density and forced the initial buyer to back out. A similar fate befell the second buyer. The third buyer succeeded after making substantial reductions in the number of housing units. The transaction closed in late 2002 — more than five years after the church first started pursuing a possible sale.

Office Opportunities

Office infill development fluctuates as occupancies rise and rents fall in the midst of job losses and corporate downsizing; pockets of activity persist in stronger markets, while developers in other areas jockey for position in preparation for a market recovery.

For example, Sacramento's vibrant office market fuels infill development. “Sacramento is different in that we get so much activity from the Bay Area,” King says. Both residents and employers relocate to the city in large part because the cost of living is much lower compared with San Francisco. The state government's presence helps sustain the office market; vacancies in the central business district hover around 10 percent.

Sacramento's office investors vie for opportunities. “There are a lot of multiple offers when properties finally come on the market,” King says. If a developer can redevelop an infill site, it is almost guaranteed to be a home run, he adds. One new project is the $60 million Meridian Plaza, a 230,000-sf office building in the CBD; future development phases include a second office tower and a hotel. Meridian Plaza was built on the last undeveloped land parcel facing Capitol Park.

Corporate expansion also stimulates infill redevelopment. For example, Progress Energy initiated a major mixed-use development in downtown Raleigh. Construction started this spring on the 1.2 million-sf project, which includes a 400,000-sf office tower, 27,000 sf of street-level retail, 72 condominiums, and a 1,055-space parking lot. “[Raleigh has] some wonderful leftover sites that need to be redeployed as new uses, but competition for sites is extremely fierce,” Hobbs says. “Most landowners have had the sites for some time, and they have no compelling reason to sell.”

Retailers Pursue Downtown Sites

Growing urban centers such as Dallas are whetting retailers' appetites. “People with large disposable incomes are moving in, and they need the retail to support it,” says Dudley H. Watson, CCIM, president of Watson & Watson Realtors. Dallas has one of the highest levels of disposable income in the nation — 16.7 percent above the national average.

Dallas also is home to a crowded field of experienced real estate developers constantly on the lookout for new opportunities. “The competition for land is fierce. But people always are posturing for the next deal, as long as money is available somewhere,” Watson says. Retail land prices reach $25 per square foot in high-demand areas.

The most common retail infill projects are stand-alone businesses such as Walgreens or Taco Bell built on one-half acre or 1-acre sites along prime corridors and intersections. “The major retailers and franchisees feel like they have to be on every corner,” Watson says.

Opportunities for large infill projects also exist in mid-size markets. Two Raleigh shopping centers are in the midst of redevelopment. At the former North Hills Mall site, 101,821 sf of office space, 585,971 sf of retail space, and a 150-room hotel are being constructed. In development across the street at the former Lassiter shopping center are 370 condominiums, 52,000 sf of new retail space, and 81,933 sf of renovated retail space.

Rising prices for prime retail sites reflect the growing demand and limited supply in many areas. For example, it is very expensive to buy infill sites in Fairfax County, Va., which is home to roughly 1 million people and has one of the highest median household incomes in the country at $84,683. Due to scarcity, retailers are lucky to find even 1-acre or 2-acre sites, but “the existing demographics and traffic counts warrant buying these sites and doing a tear down,” says Lammersen, who recently sold a former Steak & Ale restaurant in Vienna to Eckerd, which plans to raze the building and construct a new store on the prime location. The nearly 1-acre site sold for $2.5 million. A major jewelry store recently inked a deal for a prime site across from Tysons Corner Center in McLean, Va. The $55 psf triple net rent was elevated due to the high cost of acquiring the land, demolishing the existing Pizza Hut, and constructing the new store.

Residential Revitalization

Driving retail expansion is the urban housing demand, which comes from several fronts: young people drawn to city entertainment and nightlife and empty nesters and baby boomers pursuing low-maintenance condominiums and town homes near jobs and cultural attractions. Traffic congestion and long commutes also spur relocation to urban settings. “People are getting tired of sitting in their cars for 45 minutes to get home from work when they only live 15 miles away,” Taylor says.

“The Dallas-Fort Worth metropolitan area has a tremendous amount of sprawl, and not everyone wants to live on the frontier,” Watson says. Dallas infill opportunities are relatively plentiful, as historically people invested in vacant land, held it several years, and then decided to sell it, he says. Land on both sides of the Dallas Tollway previously was skipped over because it was overpriced, but developers now are buying these properties because the market has caught up with the prices. New residential development in the past year includes an estimated 1,200 loft apartments; an additional 5,000 new units are planned for the next three to four years, Watson says. Developers also are building expensive town homes in affluent areas such as Highland Park on the northern edge of Dallas.

Residential development is driving much of Raleigh's infill activity. “There is not a reverse migration of people wanting to live downtown, but there is a lot of interest and discussion at the council and political level in terms of infill,” Hobbs says. “What is happening is that people moving here from other markets want to live in an infill location because of congestion, traffic, amenities, and other reasons.” One recent infill project is the Gardens on Glenwood. Local developer Grubb Properties bought a prime 7-acre site and tore down the existing office complex to create the 91-unit condominium community.

Often a key infill development can serve as the catalyst to neighborhood revitalization. For example, River Place, a 30-unit town home project, sparked a residential renaissance in Fort Myers, Fla. Stephen Luta, CCIM, CRS, GRI, a broker in the commercial division of Re/Max Realty Group, represented a Chicago-based developer in securing a 7-acre tract of land along the river for $250,000. “That project anchored a renaissance in the neighborhood. People started buying and fixing up homes,” Luta says.

River Place II includes 25 town homes situated on 5 acres. Thanks to the success of the initial project, values are already on the rise. The developer paid $500,000 for the land, and town homes are selling for $220,000 to $350,000. Other infill projects underway in the area range from a 123-unit condominium development to the redevelopment of the vacant Edison Ford shopping center.

Many cities recognize the importance of infill development to overall revitalization efforts, and as a result they are striving to make such projects easer. “If cities don't make those kinds of projects feasible, the sprawl will just keep on going and going and going,” Taylor warns.

Beth Mattson-Teig

Beth Mattson-Teig is a business writer based in Minneapolis.

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