DEVELOPER
The Business of Creating Successful Sustainable Communities
July/August 2008
JULY/AUGUST 2008
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6 Unlikely Hot Spots How to Manage Fuel Expenses
HOT SPOTS ■ LIBERTY PROPERTY TRUST ■ ABANDONED SITES
The New Breed of Land Buyers
TALL ORDER
LIBERTY PROPERTY TRUST WANTS TO GIVE 9-TO-5ERS THE ULTIMATE IN GREEN OFFICE SPACE.
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VOLUME 4, ISSUE 4
Bill Hankowsky CEO Liberty Property Trust
Volume 4, Issue 4
[ features ]
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Dark Horse Markets: Six cities, operating largely under the radar, are emerging as hot spots for development. None of these markets are major metros, yet their projected job growth and low unemployment rates offer developers the promise of strong days ahead.
July/August 2008
Green Push: With the 58-story LEED Silver-certified Comcast Center in Philadelphia lighting the way, Liberty Property Trust’s William P. Hankowsky is guiding the firm into a future where every one of its new projects is sustainable.
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Preying on Land: Amid the shift in risk tolerance, Developer unearths the expectations of the new investors, defining three archetypal land buyers hunting for smart deals.
Opportunity Knocks: A look at five cities working with the real estate community to turn around abandoned sites. These locales are offering incentives to entice developers to enter their troubled and neglected neighborhoods.
TOP PHOTO: COLIN LENTON/WPN; BOTTOM ILLUSTRATION: DALE STEPHANOS
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Volume 4, Issue 4
July/August 2008
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Uncommon Ground: Cleveland is one of the top American cities fighting to survive a combination of tough economic times and a devastating housing market. But will the efforts— albeit valiant—be enough to salvage the city’s future?
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Land Plans: A recent survey finds that home builders are more lip service than action when it comes to green practices ... Living Cities launches a new initiative in Cleveland ... Green condos are in demand ... and more.
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Social Studies: Recent figures for key trade and productivity metrics have developers of warehouses and industrial space cautious about the future.
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Point of View: Lifelong environmentalist and veteran real estate attorney David Nahai is leading the country’s largest municipal utility, the Los Angeles Department of Water and Power, in an aggressive mission to protect the planet.
LEFT PHOTO: STEPHANIE DIANI/WPN; TOP RIGHT PHOTO: BEAZER HOMES; BOTTOM RIGHT RENDERING: THE ST. JOE CO.
Before the Board: A newly enacted inclusionary zoning law in Philly sparks debate.
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Placemaking: Mockingbird Station in Dallas is quickly becoming one of the nation’s finest examples of successful mixed-use, transitoriented development.
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Grids: Panama City, Fla., is banking on a new airport to fuel its economic development engine.
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Spade Work: Developers are feeling the pain and bracing for more bad news as mounting fuel costs command $15 billion plus from 2008 construction projects alone.
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Social Studies | demographics for developers
Empty Space Declining imports and plummeting demand for distribution facilities have warehouse developers strategizing.
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Other U.S. markets are experiencing a similar oversupply of warehouse space, thanks to a surge of development activity from 2004 to 2006. Spending on warehouse construction nationwide increased 19 percent from mid-2006 to mid-2007, according to Norcross, Ga.-based Reed Construction Data; increases of, respectively, only 4 percent to 5 percent are anticipated in 2008 and 2009. The overbuilding comes at a time when supply and demand for warehouse space are out of balance. Last year, supply in the United States reached 143 million square feet, a figure essentially unchanged since 2006, Nordby says. This year, supply is expected to decline 6.3 percent to about 134 million square feet and to 64 million square feet in 2009. But the demand for distribution facilities this year also will plummet a disproportionate 57.6 percent to about 50 million square feet, compared to last year’s 118 million.
TOUGH TIMES So far, this year has been “fairly grim,” says Jim Haughey, Reed’s chief economist. “I would interpret this as some nervousness about the economy. I think people in the warehouse development business are a little nervous about renting space they complete four months from now.” That may indeed be the case, as the WWW.DEVELOPERONLINE.COM
HEITMAN ARCHITECTS
By Lori Johnston ans Nordby was in disbelief. A report last fall from a colleague said that 18 million square feet of warehouse distribution space would be under development in Dallas this year. “I bet with him that it couldn’t possibly happen—and I lost money,” said Nordby, an economist with Boston-based Property and Portfolio Research (PPR), a real estate research firm that tracks the 54 largest metropolitan areas in the United States. Now, that figure has risen to 22 million square feet, Nordby says. It’s the most warehouse space under development the company has ever tracked in that market. Unfortunately, that surplus of supply has impacted warehouse vacancy rates there, which are projected to grow from 9.2 percent last year to 12.5 percent this year. “Dallas did what Dallas does. It overbuilt,” Nordby says.
This means that vacancy rates are on the upswing. In the markets surveyed by PPR, average warehouse vacancy rates are expected to reach 10 percent by the end of this year; rates hovered at 8.8 percent last year. If the recession persists, that number could increase to 11.5 percent. For developers of industrial and warehouse space, this means a push to reduce starts in struggling markets and to deliver new product to existing customers. Craig Guers, senior vice president and general manager for Opus East in Philadelphia, says the development firm slowed land acquisitions 18 months ago and is not starting jobs without at least one committed tenant. “They become turtles,” he says of companies in the current economic climate. “They just pull back into their shells.”
Before the Board | win over the opposition Sweeping the Nation: A recent rash of legislation has developers and cities across the country debating the merits of inclusionary zoning in projects such as this one.
In the Zone The development community debates the impact of inclusionary zoning. By Jennifer Popovec ll eyes seem to be on Philadelphia. There, a newlyenacted inclusionary zoning (IZ) law has some developers worried about their future in the City of Brotherly Love. Philadelphia’s IZ legislation, which went into effect December 2007, requires developers of any project with more than 20 housing units to designate 10 percent of their units per development site as affordable housing. If they don’t, they must contribute a cash payment to the city in lieu of construction. But the law, unlike legislation in other parts of the country, does not offer builders any incentives, such as expedited permitting. Plus, the ordinance requires that all affordable units be built to the same level as nonaffordable units in the same project (e.g., granite countertops for all), which is not something that most IZ ordinances require, says Sam Sherman, a partner in the local development firm New Urban Ventures and president of the Building Industry Association of Philadelphia. “This law will squelch needed redevel-
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opment in Philadelphia,” predicts Sherman. “Our fear is that inclusionary zoning will scare away development.” In an effort to prove the IZ ordinance would hurt rather than help the city of Philadelphia, the Building Industry Association commissioned a study to analyze the law’s impact. The study, conducted by Philadelphia-based research firm Econsult Corp., found that the obligations imposed on developers under the new law effectively eliminate any incentive for developers to build in the city. In fact, the presence of the IZ law would reduce the ROI for new housing construction in the city to 0.28 percent—a drop of 95 percent. Philadelphia’s debate over inclusionary zoning is happening in cities across the country. While some locales, such as Stamford, Conn., and San Francisco, have had IZ ordinances on the books for years, a number of municipalities have recently passed such legislation or are re-evaluating their local zoning system. ONGOING BATTLE Philadelphia and other cities continue to discuss the pros and cons of mandatory
IZ legislation. Advocates contend that such ordinances encourage the development of affordable housing. They say IZ laws significantly add to the supply of affordable housing without impacting the supply of market-rate housing. Opponents, on the other hand, say that such ordinances force developers to subsidize inclusionary zoning by charging more for market-rate homes—thus increasing the cost of housing. Experts point out that it’s difficult to get low-income housing tax credits or tax-exempt bonds for affordable housing because of the competition for the limited number available. What’s more, the laws also discourage development, which decreases the overall supply of housing and ultimately drives up the prices of existing housing. But it’s been impossible for either advocates or opponents to prove their case. It’s difficult to measure the impact of inclusionary zoning on a national basis because these ordinances are local initiatives created and managed by cities or counties rather than states. In the past few months, however, several new studies have attempted to shed light on the topic. In addition to Econsult’s study, the National Association of Home Builders (NAHB) commissioned three reports on inclusionary zoning, while The Independent Institute, a Washington, D.C.-based nonprofit political economy organization, sponsored a policy report. In addition, the Center for Housing Policy and New York University’s Furman Center for Real Estate and Urban Policy recently released a joint research report. Collectively, NAHB’s studies found that inclusionary zoning can act as a tax on housing, as market-rate buyers ultimately have to pay higher costs for their units, and this in turn worsens the affordable housing crisis the IZ system is meant to solve. The association suggests that cities carefully consider the consequences of JULY/AUGUST 2008 DEVELOPER
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Towering Figure: William P. Hankowsky, chairman, president, and CEO of Liberty Property Trust, is determined to make Liberty’s portfolio the most efficient in the industry. 24
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PHOTO COURTESY COLIN LENTON/WPN
PUSH
GREEN
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Liberty finds sustainability is good business. By Les Shaver
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n May 2001, Liberty Property Trust announced that it was building a 58-story property on a site it had acquired a year earlier in downtown Philadel-
phia. The Malvern, Pa.-based REIT expected the more than $500 million project to be its first venture into sustainability. Right away, the project got a lot of attention. It’s easy to see why. In June 2008, the Comcast Center opened as one of the 15 largest buildings in the country and a Leadership in Energy and Environmental Design (LEED) Silver project. The building, now owned by Liberty and CommerzLeasing und Immobilien AG, a wholly owned subsidiary of German-based Commerzbank AG, is 90 percent leased by Comcast. It’s also the tallest green building in the country. Since the 1.25-million-square-foot office tower was announced seven years ago, Liberty has built 43 buildings that meet LEED standards and has become one of the leaders of sustainable building in office and industrial space. “Liberty has taken this [green building] on as an important feature in all of their developments,” says Dewitt Peart, president of the Pittsburgh Regional Alliance, a group that markets the benefits of doing business in Southwestern Pennsylvania. JULY/AUGUST 2008 DEVELOPER
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Dark Horse Markets We’re betting these six under-the-radar cities will be the next hot spots for development. By Jennifer Popovec ou never know when a dark horse is going to score big. This past June, at the Belmont Stakes in upstate New York, underdog Da’ Tara outran favorite Big Brown, stealing the horse’s chance to be the first in 30 years to claim the coveted triple crown. Now, the real estate market is proving to have a few dark horses of its own. Developer identified six markets that are hot spots for development based on Moody’s Economy.com forecasts for cities with the highest projected job growth over the next 12 months and low unemployment rates—both of which point to high demand for employees and a competitive situation for employers. Interestingly,
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none of these markets are major metros. Instead, the markets that are primed for the biggest job gains are small, off-the-beatenpath markets that rarely show up on any developer’s hit list. “Most larger cities will not experience the same rapid job growth as a smaller area that is growing in population and attracting new businesses to the area,” says Nathan Topper, an economist with Economy.com of West Chester, Pa. That’s why we’re calling these cities dark horse markets. They might not be well known, but these cities could turn out to be winners for the developers who are smart enough—and gutsy enough—to bet on them. Jennifer Popovec is a freelance writer in Fort Worth, Texas.
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»Billings, Mont. Growth industries
»Mining, manufacturing
Sectors primed for development
»Billings’ population is
growing by about 3,000 people per year, according to Economy.com. This surge has created the need for single-family and multifamily housing, particularly affordable housing, says Linda Beck, director of business outreach and recruitment for Billings, Mont.-based Big Sky Economic Development Corp. Additionally, more rooftops are creating
[ fast facts ] ■ Closest big city:
Calgary, Alberta, Canada ■ Population: 100,000 ■ 2008-2009 job
growth: 3.66% ■ Unemployment rate:
2.9% Sources: Big Sky Economic Development Corp.; Economy.com; U.S. Bureau of Labor Statistics
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Notable projects
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A 48,289-square-foot building for GE Commercial Finance is under construction at the Trans Tech Center, a high-tech industrial park; Carlsbad, Calif.-based Foursquare Properties is develop-
ing South Billings Center, a 440,000-square-foot retail center anchored by Cabela’s; and the 80-acre Shiloh Crossing retail project is also under construction.
Government incentives
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State incentive grant funds; state workforce training grant; and low-interest, fixed-rate capital and infrastructure loans.
Bet you didn’t know
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Eastern Montana has the largest coal reserves in the nation and boasts a palladium mine, the only place in the United States where the mineral used in catalytic converters is found. Recently, Best Life magazine voted Billings as the third best city in America to raise children after Honolulu and Virginia Beach, Va.
»Bowling Green, Ky. Growth industries
»Automotive manufactur-
ing has become a bastion of Bowling Green’s economy. A number of first- and secondtier suppliers have established operations in the city to be accessible to assembly plants in Tennessee and South Carolina, says Jim Hizer, president of the Bowling Green Chamber of Commerce. Ford Motor Co. and General Motors both have operations in the city, along with Bowling Green Metal Forming, one of the largest auto supply companies in the world. The city also is home to Western Kentucky University.
Sectors primed for development
» The city recently completed a plan to revitalize 17 downtown blocks near Western Kentucky University. Over the next 15 years, the city plans to obtain public and private investment of more than $200 million. The redevelopment plan calls for ho-
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tel, retail, residential, and office space, and the city is looking for developers who are interested in partnering with the city to transform downtown Bowling Green. There are also opportunities in the Kentucky Transpark, a 600-acre industrial park.
park, as well as the $28 million Southern Kentucky Performing Arts Center; and the local economic development authority will soon break ground on a 72,000-square-foot speculative industrial building in the Kentucky Transpark.
Notable projects
Government incentives
a new minor league baseball
On a case-by-case basis, developers can receive incentives such as discounted land and TIF zones, where public improvements and infrastructure are borne by the city.
»Construction is underway on [ fast facts ] ■ Closest big city:
Nashville, Tenn. ■ Population: 55,000
(city); 254,800 (metro) ■ 2008-2009 job
growth: 2.15% ■ Unemployment rate:
4.5% Sources: Bowling Green Chamber of Commerce; Economy.com; U.S. Bureau of Labor Statistics
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Bet you didn’t know
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As a college town, Bowling Green has the second-highest secondary educational attainment in Kentucky. The city also has one of the few Certified Refugee Processing Centers in the nation, leading to a diverse population with significant Vietnamese, Bosnian, and El Salvadorian communities.
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BIG SKY ECONOMIC DEVELOPMENT AUTHORITY
and construction, as well as consumer services and business/professional services. For example, GE Commercial Finance recently decided to locate an operations center in the city and plans to hire more than 250 new employees. The city provides a number of medical facilities to serve the regional population of 400,000. Tourism is also a significant contributor to Billings’ economy—2 million visitors pass through the city annually as it’s one of the big cities closest to Yellowstone National Park.
the need for more service retail. On the commercial side, Billings’ office building occupancy is strong—right at 5 percent, according to local real estate firm NAI Business Properties— which indicates an opportunity for office developers.
FOR SALE BLIGHTED
VACANT
Big Picture: Cleveland is among the U.S. cities dealing with blight, foreclosures, and abandoned properties. The city is hoping to lure developers with tax credits and other incentives.
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SIGN OF THE TIMES
ABANDONED
In today’s dismal market, cities are struggling to bring new life to abandoned, often foreclosed, structures that have cast dark shadows on neighborhoods. By Margot Carmichael Lester
PICTUREQUEST
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hen you fly over Cleveland at night, the number of bright spots are few. In neighborhoods across the city many homes—and sometimes entire blocks—are dark. In the light of day, the scene is equally gritty. Street after street is lined with boarded up homes and untended lawns; shuttered businesses hide behind unkempt storefronts. “The Cleve” has become the poster child of the foreclosure crisis and the financial troubles that follow in its wake. The depression is as much emotional as economic. And it’s spreading. You’ll find a similar scenario in neighborhoods across the country. Cities are struggling under the burden of lost revenue, blight, and crime, especially as foreclosures add an unprecedented number of vacant properties to the community. Estimates vary, but foreclosure listing company RealtyTrac approximated 261,255 homes in foreclosure in May of this year, almost double the number in May 2007. The Brookings Institution estimates that vacant and abandoned properties of all kinds— whether from foreclosure or not—occupy about 15 percent of a typical large city, an average of 12,000 acres. “The first wave [of abandoned properties due to foreclosure] has probably landed, but if we use the tsunami metaphor, it’s the second and third waves that are larger and more dangerous,” says Joe Schilling, professor of urban affairs and planning at Virginia Tech’s Alexandria Center. “They may not hit for six months or a year from now, but the cumulative effect is going to put communities in crisis mode.” The best way to fight the tide, he says, is for each community and neighborhood to develop its own strategy based on the local economy and housing market. Schilling recommends that the redevelopment of large numbers of abandoned buildings happen in three phases. First, cities must stabilize neighborhoods by either demolishing vacant properties or acquiring them for redevelopment. Next, officials must establish a plan that focuses on how to reclaim vacant properties at the neighborhood level. Finally, cities must offer incentives—perks such as tax credits or expedited permitting—in order to lure back private developers and investors who would otherwise be disinterested. “It takes serious intervention and strong government action to handle this kind of crisis,” he explains. “Everyone’s anxious to start building new stuff on [the site of] these vacant properties. When local government is controlling the property, it has a say in making sure the city stays stable.” Developer identified five cities that are putting such forward-thinking plans into action. These governments are working with the real estate community to turn around abandoned sites—and offering incentives to entice developers to enter these troubled and neglected neighborhoods. Margot Carmichael Lester is a freelance writer based in Carrboro, N.C.
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FLAGSTAFF, ARIZ.
Deserted Desert Nostalgic developers find incentives to redevelop brownfields along Route 66.
BEFORE PHOTO: SOUTHWEST AERIAL PHOTO; AFTER PHOTO: THE ASPEN GROUP DEVELOPERS AND DAVIS ARCHITECTS
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lagstaff is struggling to get it kicks on Route 66. Though not yet overburdened by foreclosures, the city does have about a dozen abandoned industrial and commercial buildings. Several old manufacturing or distribution hubs, closed during various economic downturns or consolidated to other locations, line the railroad d tracks and historic highway that form the city’s commercial core. One of the most prominent is the Copeeland Lumber facility. cility. The circa-1890 property, vacant since the mid-1990s, is the last remaining building from Flagstaff ’s lumber era and is listed on the National Register of Historic Places. “The city will be issuing an RFP for private developers to bid on the building,” says Jacki Mieler, the city’s business attraction manager. “It will be offered at a reduced cost because of the Rio de Flag [drain] and the historic preservation.” The Rio de Flag flood plain pipe— a culvert designed to divert the river toward its original course farther south of the downtown area—will eat up most of the property’s large parking area. Despite that, there’s been a tremendous amount of interest from local companies and developers, Mieler says. Other abandoned properties, many on brownfield sites, are dotted throughout the city. The EPA awarded $200,000 to the City of Flagstaff Brownfield Land Recycling Program to assess lands impacted by the release of petroleum products along the Route 66 Central WWW.DEVELOPERONLINE.COM
Corridor. The fund will develop an inventory of properties ripe for development, perform environmental assessments, and develop a geographic information system database. The $100 million Aspen Place at the Sawmill project is one brownfield site that’s back on track. “It’s an amazing
project because of the fact 42 acres sat vacant in the heart of the city for so long, and now it will be a community anchor,” explains Michael Kerski, director of the city’s Community Investment Division. The former saw mill will become a retail-residential center developed by Phoenix-based Aspen Group.
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[ after ] Thinking Big: The $100 million, 42-acre Aspen Place at the Sawmill is on the site of a former saw mill and brownfield.
[ at a glance ] ■ Challenge: Abandoned commercial property in the historic downtown and
along industrial corridors ■ Solution: Strategic municipal purchase of valuable commercial properties; remediation assistance through the Brownfield Land Recycling Program ■ Development Opportunities: A 20-percent historic investment federal tax
credit and substantially reduced property taxes for the redevelopment of the Copeland Lumber site; federal and city incentives for brownfield redevelopment along the rail corridor
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Placemaking | create a community with character
Full Steam Ahead A cutting-edge transit-oriented development transforms a suburban downtown neighborhood in Dallas. By Barbara Ballinger allas developer Ken Hughes has always been fascinated by trains. Hughes’ passion, instilled in part from living in Paris, helped spark his interest in a 10-acre site 5 miles north of downtown Dallas. The property, which fronted Mockingbird Lane, was adjacent to a 1997-built station for the Dallas Area Rapid Transit (DART), a hybrid system of light rail and underground subway. “I was captivated by the potential of a building by the train station and making this the first [contemporary] mixed-use, transit-oriented development in Texas,” says Hughes, president and owner of
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Dallas-based Hughes Development, which developed the project with Denverbased Simpson Housing Group. The site featured a World War II, Art Deco-style assembly plant for the Western Electric telephone company and a 1960s office building. Hughes says the location was a big draw. For one, the site is bordered by the Central Expressway, one of Dallas’ few freeways, which is undergoing a costly rebuild. What’s more, the development is across the street from Southern Methodist University and borders two unincorporated cities, Highland Park and University Park. “Since 1968, the area has become one of the densest garden apartment districts in the region,” Hughes says.
Driving Force: Mockingbird Station’s proximity to a light-rail station in Dallas has made it one of the country’s most successful mixed-use, transit-oriented developments.
It was also ripe for transit-oriented development (TOD), a.k.a. transitoriented design, a variation of traditional neighborhood design. TODs are attracting attention because of increased interest in public transportation due to global warming and a concern over rapidly rising gasoline prices. They favor pedestrians in a compact, denser urban or downtown suburban setting. They rely on a local mass-transit system that pares the use of cars and are often located near stations that are both functional and eye-catching. Mockingbird Station, named for the street and DART stop, has been recognized by the industry as a prime example of TOD. But getting to that point wasn’t JULY/AUGUST 2008 DEVELOPER
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Point of View | perspectives on the american landscape
Power Player David Nahai demands environmental accountability at the nation’s largest municipal utility. Interview by Rachel Z. Azoff avid Nahai heads up the Los Angeles Department of Water and Power (LADWP), but he knows a thing or two about development. Before assuming his post in December 2007, he spent 30 years as an L.A. real estate attorney. But Nahai, a lifelong environmentalist, divested all interest in his successful law firm for a chance to promote energy and water conservation as CEO and general manager of the country’s largest municipal utility company, which serves more than 3.9 million L.A. residents. Nahai is no stranger to the public sector either. For more than 10 years, during his tenure as a lawyer, he served on California’s Regional Water Quality Control Board, and in September 2005 he was appointed to LADWP’s board. Now at the helm, Nahai continues to lead the department on an aggressive mission aimed at protecting the planet. Nahai believes developers should consider utility companies as valuable green resources. That’s why LADWP offers numerous financial incentives to encourage builders to take the lead in environmentally conscious development.
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What are the top green incentives you offer customers? DN: We offer the highest rebates in the state for developers and others who wish to install solar panels on their roofs, and we are going to be substantially expanding our solar program. For small businesses, we offer up to $2,500 in free energy-efficient lighting. On the water conservation side, there are rebates for developers who retrofit their toilets with low-flow or waterless urinals. How is the department changing its energy mix? DN: LADWP has traditionally been mostly a coal and gas utility. But we are determined to cut our greenhouse gas emission substantially. Our goal is to move to 20 percent renewables by 2010 and, beyond that, to 35 percent by 2020. Diversifying energy resources is a wave that certainly has taken grip in California and one I believe will spread steadily across the country. How has LADWP helped green the entertainment awards scene? DN: We are very gratified at being able to participate with the GRAMMY awards, Emmy Awards, Academy Awards, and the American Idol finale. We make arrangements for the entire shows to be powered with green power—electricity produced through renewable sources of energy. It’s tremendously important because it enables us to tell [the general public] our message, which is one of environmental responsibility and conservation. WWW.DEVELOPERONLINE.COM
STEPHANIE DIANI/WPN
Why is it important for utility companies to embrace the development community? DN: We pride ourselves on being progressive—not just limiting our role to providing water and electricity. We have a responsibility to provide those services in a way that is prudent and far-sighted in terms of the future needs of the city. That’s why we’ve engaged with the development community to make sure that we provide adequate education about what’s happening with respect to building standards. In April, the L.A. City Council adopted a green building ordinance as part of the
mayor’s [Antonio Villaraigosa] master plan to green the city. Before the adoption, we did a great deal of outreach, and we plan to do even more to make sure developers don’t feel that the ground rules are being changed.