Redevelopment

The Upside of Downtown

Three Cities Attract Residents and Tourists With Innovative Revitalization Plans.

Central business districts of all sizes nationwide are working to bring businesses and people back downtown.

Already hard hit by the post-World War II suburbanization that shifted growth outside of city limits, CBDs recently were hammered by corporate downsizing and the loss of large employers due to mergers, relocations, and bankruptcies. But cities are fighting back with strategic plans to revitalize their downtowns, hoping to reintroduce businesses and residents to the pleasures of urban living.

Three very different cities — Racine, Wis., Tampa, Fla., and Los Angeles — are tackling redevelopment issues to energize CBD economic development. While such programs often span several years, or even decades, they can dramatically affect the sales and leasing value of all commercial property types.

Recreation in Racine

Nearly three decades of revitalization efforts are beginning to pay off for Racine, located on Lake Michigan between Chicago and Milwaukee. Recently completed and current development projects total more than $100 million in combined public and private investment. “There is a lot of momentum right now, and lots of people are seeing the value of owning property downtown,” says Kathy Hansen, executive director of the Downtown Racine Corp.

Home to the Frank Lloyd Wright-designed S.C. Johnson headquarters and heavy-equipment manufacturer Case, this city of 80,000 residents is changing its image from an industrial workhorse to a pleasure boating and cultural mecca. Redevelopment began in 1974 when the city council approved the purchase of an abandoned industrial property along Lake Michigan and replaced coal piles with a recreational harbor and park to maximize the city's lakefront location.

Once the waterfront redevelopment was complete, the focus shifted to the adjacent downtown. Key points of the downtown plan, unveiled in 1999, call for the city to build on its proximity to Lake Michigan and the Root River, preserve historic architecture, develop a pedestrian-friendly environment, increase residential development, and promote business development.

Office Anchors Retail

The most significant redevelopment is the Johnson Building, a newly constructed, $22.5 million, 244,000-square-foot office building housing more than 400 workers from Johnson Financial Group and Johnson Outdoors, two divisions of S.C. Johnson.

Another important office development is the 45,000-sf One Main building. “Part of the plan was to develop these anchors in the middle of downtown and then have retail as infill, which is exactly what is happening,” says John P. Crimmings, GRI, president of N. Christensen & Son Real Estate in Racine.

More than 20 new retail businesses have opened downtown since 1999. The retail vacancy rate has dropped steadily from 28 percent in 2000 to 23 percent in 2001 to 17 percent in 2002, according to the Downtown Racine Corp.

“Downtown redevelopment efforts have helped us to market the Racine area to investors outside of Racine, because they see redevelopment and perceive that it will generate a healthy market,” says Patrick D. Gallagher, CCIM, president of Siegel-Gallagher Oncor International in Milwaukee. In March Siegel-Gallagher sold the 240-unit Wind Point Apartments north of Racine to a private buyer. “This was an investor that looked at the opportunity and said, ‘Racine is going in the right direction. Therefore, I can add some value to this property and make it go in the right direction as well,'” Gallagher says.

The revitalization activity has prompted other value-added buyers to snap up underutilized buildings, pump money into renovation or rehab, and then retenant with shops, restaurants, service businesses, and residents. Within the past year, N. Christensen & Son Real Estate has brokered more than a half-dozen building sales downtown. “Investors are looking at downtown Racine and saying, ‘This is an opportunity that is waiting to happen,'” Crimmings says.

The Cultural Component

Two major cultural venues are joining the mix: the 40,000-sf Racine Art Museum that opened in May and the Racine Heritage Museum, which plans to break ground later this year on a larger downtown facility. “The new art museum is going to be huge,” Hansen says. Housed in a renovated historic bank building, the museum's collection of contemporary crafts ranks third in the nation, which Hansen sees as a strong tourist draw.

The cultural projects help to further the city's goal of creating a significant critical mass that draws people downtown. “We're talking about things that put Racine on people's radar screens and make them think about living and working here,” says Brian F. O'Connell, Racine's director of city development.

Redevelopment also is an important part of the strategy to diversify and expand the city's business base. By increasing its service and tourism base, Racine hopes to reverse high unemployment brought about by a loss of manufacturing and industrial jobs. “We need a strong downtown as an amenity to attract people,” O'Connell says.

Tourism in Tampa

People also are a critical aspect of revitalizing downtown Tampa. “Our strategy is to develop a tourist attraction that is different from anything else,” says Fernando Noriega Jr., Tampa's administrator of development.

After attracting tourists, Tampa aims to keep them. “The benefit that we have as Tampa is that we are a continued recipient of in-migration,” which spurs additional growth and community building, says Raymond F. Sandelli, senior managing director for CB Richard Ellis in Tampa. More than 88,700 people live within a 3-mile radius of downtown, a population that is expected to grow 7.6 percent by 2007.

Tampa is building on existing assets: a convention center and aquarium in downtown, historic Ybor City, and the Port of Tampa Bay — where cruise ships dock, bringing 1 million passengers a year. “The strategy has been to connect these three separate districts into one major attraction for the convention population and also cruise ship business,” Noriega says. Last October the city introduced eight replicas of 19th-century streetcars that physically connect the three areas, helping to improve traffic flow in and around downtown.

Hotel Boosts Convention Traffic

Tampa's 717-room Marriott Waterside, which opened in 2000, “was the catalyst for everything else that we have done,” Noriega says, noting that for 12 years the downtown convention center had no hotel. The Marriott “brings in much larger convention traffic,” he says. Since the hotel opened, the number of conventions has more than doubled from 40 to 100 annually, and the size of the conventions has grown to three- and four-day events.

Following the hotel's lead, the $49 million Channelside at Garrison Seaport mixed-use development added 230,000 sf of retail and entertainment space between the hotel and the aquarium. It features an Imax theater, restaurants, and shops. The city also created downtown parks to make the area more aesthetically pleasing, additional parking, and a new river walk that runs from the hotel to the aquarium. A new cruise ship terminal opened in March, and two more terminals are under contract to be built.

Additions such as Channelside, the Marriott, and the new streetcars have helped strengthen the CBD. “Downtown was really not on the map for most people. Now it is a much better place — more vibrant and diversified — with those facilities in place,” says Steven E. Tombrink, CCIM, director of corporate real estate services for USAA Real Estate Co. in Tampa.

Gaining Momentum

Like other U.S. markets, Tampa's downtown struggles with growing office vacancies and sublease space. For example, USAA owns the Wachovia Center, a 22-story, 388,000-sf class A office building that is 84 percent occupied, slightly better than Tampa's overall first-quarter CBD office vacancy rate of 16.6 percent. The city hopes such redevelopment initiatives will fortify the downtown office market.

However, the redevelopment activity already has sparked a number of smaller infill projects. For example, the Franklin Exchange Building was renovated in 2001 to create 250,000 sf of updated office space. “In Tampa, we have a great downtown, but we don't have the cost basis to initiate new construction,” Sandelli says. New buildings cannot garner $28 per square foot to $29 psf rents, so financing new construction is difficult. “Redevelopment can be very cost-effective,” he adds.

Such revitalization efforts are crucial to the CBD. “That economic platform is vital, which is why the health and well-being of the whole market is important — especially for how investors view the city and recoup profits,” Sandelli says.

The city plans to continue expanding its convention business, tourism, and the residential population. “The impact of a project like the Marriott, in concert with other projects, is revitalizing the area and making it attractive for the urbanite dweller to feel comfortable to come into the inner city,” Noriega says. “Urbanites are not going to come to the downtown if it looks like a ghost town, and they won't live there unless the amenities are in place. So we are putting the amenities in place to attract that type of clientele.”

Living in Los Angeles

With nearly $5 billion invested since 1995, downtown Los Angeles is experiencing a redevelopment phenomenon that is translating into strong residential development. “What began occurring in the 1990s was a complete restructuring of the cultural, entertainment, and housing base,” says Carol E. Schatz, president and chief executive officer of the Central City Association of Los Angeles and the Downtown Center Business Improvement District.

Three key cultural and entertainment projects have put downtown L.A. on the map as a destination center — the Staples Center, the Walt Disney Concert Hall, and Cathedral of Our Lady of the Angels. “We're giving people a reason to come downtown,” Schatz says. The three venues are expected to draw several million people to downtown L.A. each year.

The Staples Center, a $400 million sports and entertainment complex, opened in 1999. “Staples was a very, very positive move here. It changed how people perceive downtown Los Angeles,” says Jodeen Meade, CCIM, a retail investment specialist for CB Richard Ellis in Los Angeles. Increased traffic has generated several fine dining restaurants in the area, and Staples Center owner AEG is planning more than $1 billion in retail, hospitality, and residential development.

This greater downtown visibility will increase with the opening of the Walt Disney Concert Hall this fall, Meade adds. Designed by world-renowned architect Frank Gehry, the $274 million project features a 2,273-seat concert hall that will be home to the Los Angeles Philharmonic, a 266-seat theater, a 300-seat outdoor amphitheater, an urban park, and a six-level underground parking garage.

Another significant destination is the Catholic Archdiocese's $190 million Cathedral of Our Lady of the Angels, which opened in September 2002. The first U.S. cathedral built in 30 years, the 5.6-acre hillside site includes an 11-story cathedral, conference center, 2.5-acre plaza with reflecting pools and bell tower, and a parking garage. Like St. Patrick's Cathedral in New York, the L.A. cathedral draws secular tourists as well as the city's four million Catholics.

Housing Drives Rehab Boom

While the three new cultural and entertainment venues have energized the city, the primary redevelopment driver has shifted to housing. “Housing continues to be critical, because you cannot revitalize the downtown without a strong base of residents that creates a critical mass and then provides the reason to have more retail,” Schatz says. “These people will hopefully work close to where they live and populate the cultural facilities as well.”

But downtown L.A. faces a unique problem. “Land is in very short supply here,” says Barry Baker, CCIM, a vice president in the West Los Angeles office of Grubb & Ellis. “We no longer have the open spaces. But what we do have is a vast population demanding more and more housing.” Existing high-rise apartments are 98 percent occupied.

As a result, housing developers are pushing into traditionally commercial and industrial areas. “There is plenty of investor interest. Investor/developers have been combing through the stock of old buildings, trying to find [properties] and parking lots that they can convert,” Baker says.

In total, downtown Los Angeles will gain more than 5,000 new multifamily units by 2005, according to Marcus & Millichap's first-quarter 2003 market reports.

Retail Returns

The growing downtown population should fuel retail expansion. For example, Hollywood-based CIM Group is developing a four-phase downtown mixed-use project that includes a 50,000-sf Ralphs supermarket.

“The CIM deal is the first instrumental, landmark deal because it is bringing with it a grocery retailer,” Meade says.

Strengthening the downtown residential and worker base also is an important step in maintaining a healthy office leasing market. First-quarter downtown office vacancies reached 19.4 percent, up from 17.3 percent a year ago, according to Grubb & Ellis. However, the redevelopment efforts, coupled with lower asking rents, are helping to lure tenants back to the CBD.

Part of the problem with rising office vacancies is vacant space in older properties has become obsolete and is difficult to retenant. “What's happened is that a lot of that obsolete space is being taken off the rolls because the use is changing,” Baker says. Older office buildings are being converted to lofts, condominiums, and apartments.

Although now focused largely on residential, the downtown renaissance has broad implications for all property sectors. “What we have here is not only a shift physically of people living in the downtown area, but it's a shift in mindset, and it's a recognition that we're in a city,” Baker says. “From a long-term point of view, it is a new step in the maturation of this city.”

Beth Mattson-Teig

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

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