Sunday, July 20, 2014

Should Lawrence Approve the Southpoint Development on South Iowa Street?


The Proposed Southpoint Development

The applicant, Collett and Associates, seeks to develop a parcel on Iowa Street through an amendment to Horizon 2020, annexation of land and rezoning of the land. The proposal, Southpoint, calls for development of: About 460,000 square feet of retail in a first phase; 80,000 square feet for a 100-room hotel; and probably about 70,000 square of additional square feet of retail in a second phase (14 parcels at 5,000 square feet per parcel).  The development will contain a total of over 600,000 square feet of commercial space.
 
This project is large; when fully built it will be the equivalent of 40 percent of our downtown.  It will expand the supply of space on South Iowa by about 30 percent.  At this scale it has the potential to have a significant negative impact on other retail shopping districts in Lawrence, including the downtown.


Additional Hotel Space:

 

The issue:  Can the community absorb additional hotel space without threatening existing and future taxpayer investment in hotels?

 

The taxpayers of Lawrence are heavily invested in hotels.  The taxpayers invested about $11 million in the Oread Hotel.  The taxpayers are investing about $10 million in the 9th and New Hampshire project with a significant portion of that amount serving the new hotel.

 

Lawrence has zoned multiple parcels for additional hotel space.  Hotel zoning was approved in the North Mass development.  Hotel zoning was approved in the latest revision of the Bauer Farms development.

 

Lawrence is about to begin a process that may lead to a new conference center.  This center will probably include additional hotel space, and this hotel and conference center will probably include a significant taxpayer contribution.

               

The Southpoint proposal includes a hotel.  The staff report is silent on the hotel issue.  It is unknown whether or not the city can absorb an additional hotel without threatening its already large investment in hotels.

 

The City made the hotel investments without careful study of the city’s capacity to absorb new hotel space.  The City is about to embark on such a study to guide it to a better decision on the conference center.

 

Zoning for additional hotel space may hurt an already saturated market.  Zoning for additional hotel space may threaten existing taxpayer investment.

 

Recommendation on the hotel component:  Do not approve additional hotel space until the absorption study is complete and it is clear that additional hotel space will not threaten existing, and possibly future, taxpayer investment.

 

 

Additional Retail Space:

 

The Issue: Can the Lawrence retail market absorb the proposed space without significant negative impact upon existing retail districts?

               

The Economics of Retail Markets:  In a well-balanced market, the supply should grow in proportion with growth in demand.

 

The economics of retail real estate are well established.  Demand for retail space is what determines the value of retail space, the number of jobs it will produce and the sales tax revenues that it will generate.  The supply of retail space does not drive these outcomes. There are many false beliefs that building real estate grows the economy.  It does not.  Growth in the economy is a function of growth in the aggregate income of the households within the community because income sets the amount of spending that a market will experience.  More stores do not create more spending; rather, only more income to the households in the community can drive growth in the economy.  As a result, more stores do not create more spending, more sales taxes, more retail jobs or more value of all retail buildings.  If too many stores are added to a market, the stores vie for the finite amount of spending, driving down the revenue per square foot, hurting all stores.

 

Retail Demand:  The best proxy for demand in a market is the local retail sales tax revenues.  They show the actual spending in the market reflecting changes in income, the community’s pull factor and the use of on-line shopping.

 

The City’s retail market study shows that inflation adjusted retail sales taxes have been flat from 2000 to 2012.  They actually declined very slightly at -.012 percent per year over the last twelve years.  However, there has been negligible growth from 1995 to 2014 at +0.40 percent per year. Thus, for a long period of time, retail spending in real terms has not grown for about 20 years.  See the table below.

 

 

Table:    Lawrence Retail Supply and Demand Conditions 1995 to 2012

Inflation
Adjusted
Commercial
Sales
Square
Year
Taxes
Feet
2012
 $   13,593,996
          9,105,151
2000
 $   13,797,066
          5,299,404
1995
 $   12,695,769
          4,372,183
Demand Annualized Growth Rate
0.40%
1995 to 2012
-0.12%
2000 to 2012
Supply Annualized Growth Rate
4.4%
1995 to 2012
4.6%
2000 to 2012

 

 

Source:  City of Lawrence 2012 Retail Market Report

 

Demand Conclusion:  The city’s capacity to support growth in its supply of retail space is non-existent.  With no growth in retail spending, the city has no capacity to support additional retail space at this time.  The developer is only seeking to capture a share of that spending for the proposed development, taking this demand, and possibly some of the vendors, away from existing shopping districts.

 

Retail Supply: The stock of retail space has grown dramatically since 1995, which is the last time there seemed to be a balance between the supply of and the demand for retail space.  From 1995 to 2012, the stock grew by 4.8 million square feet.  This growth translates into a rate of growth of 4.4 percent per year.   The City has approved an additional 1.2 million square feet at 6th Street and the SLT, Fairfield Farms, North Mass and 31st and Ousdahl Streets.

               

Supply conclusion:  The supply of retail space is growing rapidly with much more approved for development. 

 

Implications:  The supply of retail space is growing rapidly while the retail spending is flat.  This means that the revenues per square foot are falling.  Reduced revenues lowers property values in existing shopping centers, including the downtown.  Reduced revenues threaten the ability of attract investment to older existing properties.  This is especially threatening to historic properties such as in our downtown.

 

If we expect to maintain the condition of our existing shopping centers, and especially if we want out downtown to continue to thrive, the space needs to attract sufficient revenue per square foot to drive sufficient lease rates that attract investment.

 

Staff report:  The staff report on the proposed development concludes that because the vacancy rate has not become terribly bad, that the retail market will not be hurt by this development.

 

Vacancy is one of many measures of market health, but vacancy is one of the weaker indicators of market health.  The notion is that if a market is overbuilt, the vacancy rate will rise proportionately.  This is not true. Property owners will fill their space, even if it means granting rent concessions to attract occupants.  Even with a rent concession that takes rents below costs, the property owner will lose less with a rent concession than with an empty property.

 

The staff should expand its analysis to examine the revenues coming into each market segment (defined both spatially and by type of vendor).  It is clear from the staff report that the market is suffering from declining revenues per square foot over a long period of time, which leads to poor maintenance and reduced investment in existing properties, both of which are harmful to a retail market.

 

The Caplan Report:  The market analysis provided by the developer contains multiple errors.  Probably the most severe is the assumption that sales will rise 4.1 percent per year when they have not even been keeping up with inflation for a long period of time.

 

The Caplan report uses the argument that the proposed development will improve the Pull Factor of the entire retail market.  The report claims that the community will benefit from new spending attracted to the local market.  This can be a valid claim in a tourist market or a market with very special tenants that they become a destination shopping location not found in the region nor having any close substitutes elsewhere in the region.

 

This notion of attracting new spending into the community is simply not plausible with the proposed project. The vendors will not attract shoppers that are not already here.  The vendors listed in the development proposal are not unique to the Kansas City-Lawrence-Topeka region.  Thus, shoppers from Johnson County will not drive here for these vendors; they already have them in Johnson County.  Shoppers from Shawnee County will not drive here for these vendors; they already have them, or have very close substitutes, in Topeka.

 

The best option to improve the pull factor in Lawrence is to enhance the one unique, destination shopping district that we have, Downtown Lawrence.

                                               

Recommendation:          

 

Someday, this site on South Iowa Street may be an appropriate site for additional retail space and even hotel space on the scale proposed. That day is not even in sight.

 

  • Retail spending remains flat while the supply has grown too quickly.
  • We want to enhance, not degrade, the condition of our shopping centers and especially our downtown.
  • We do not want to jeopardize our current and future hotel investments.

 

Lawrence should tell the developer that this proposal is premature and cannot be approved at this time.

Wednesday, July 09, 2014

Which is better, smart growth or giveaways?


City commissioners Dever, Farmer and Riordan gave away a package of tax breaks worth over $5 million to developers of the mixed-use development at 11th and Mississippi Streets.  In this case, mixed-use means a combination of luxury apartments designed for students and a small amount of retail space.

  

Income Drives Growth in the Market, Not Growth in Buildings

 

The three commissioners who voted for this package of subsidies displayed a lack of understanding of basic economics.  Note that commissioners Amyx and Schumm voted against it.  

 

A community's economy grows only insofar as the income of the population grows, whether that growth is due to new households, higher wages or both.  The value of the real estate in the community is a function of the demand for that real estate which rises and falls with the expansion and contraction of the aggregate income in the community.  Adding real estate to a community does not add income to the households, thus it does not add value to the tax base.

 

Does this mixed-used development respond to growth in demand?  No. Lawrence has already allowed retail space to grow much faster than the growth in retail spending. The City’s own retail market study shows that retail spending since 2000 has been flat in inflation adjusted terms; it actually has fallen by 0.1 percent per year.  The supply of space has grown by 4.6% per year.  The fact that supply has grown much faster than demand over a long period is clear evidence that the market is in a surplus condition.  Lawrence has already allowed rental housing to grow faster than the growth of renter households.  From 2000 to 2012, the number of renter household grew 10.3 percent while the number of rental units grew 12.5 percent.  This is clear evidence that the supply of rental housing is in surplus.  Right now, the community has no pressing need for either more retail space or more rental units. 

 

Zero-sum Markets

 

Building this mixed-use development will not bring new households or new retail shoppers to Lawrence.  The development will only change the location where renters, who are already here, locate and where shoppers, who are already here, do their shopping.  Thus, the rental and retail markets are zero-sum markets.  Adding new rental units does not add new renter households; it simply pulls them away from elsewhere in the market.  Adding new retail space does not add retail shoppers; it simply pulls them away from elsewhere in the market.

 

Clearly commissioners Dever, Farmer and Riordan did not understand that these markets are zero-sum systems.  To be fair, the planning staff of the City deserves some of the blame for this mistaken understanding.  The staff prepared a benefit-cost analysis, as the law requires for economic development subsidy packages of this type.  Unfortunately, the staff made the mistaken assumption that the value of the new rental units increases the overall tax base of the city.  This is a mistaken assumption.  Because there are no new renter households with new income, there is no new value to the tax base.  The value of these new buildings will simply shift value away from existing rental units to these new units.  Thus, there are no net benefits from the project as the staff benefit-cost analysis assumed. 

 

Commissioners Amyx and Schumm understand that the new development will not bring new value to the tax base.   They are both downtown merchants who know that adding stores does not add shoppers; it simply spreads the shopping across more stores, lowering the spending per store for all stores.

 

Both commissioners Dever and Farmer made it clear that they believe the $75 million is net new value to the community.  This would be true only if the apartments and retail space would bring new income and new spending into the community, but they will not.

 

Good Growth Management

 

What should the City be doing?  The City should be regulating the growth of real estate in the community, whether that real estate is commercial or residential.  A healthy market keeps the supply of space in close correspondence to the demand for that space.  But developers are prone to overbuilding, leading to unhealthy markets.  We saw that with the housing bubble of 2000 to 2007 and the economic harm from its collapse.  Without good growth management, developers will overbuild and ask for public subsidies to as they do it.  We have seen with the mixed-use development at 11th and Mississippi Streets.

 

If the City practiced good growth management, the developers would be standing in line waiting for the City to grant permission to building only the amount of space that is needed.  Rather than subsidizing this space, the City could be exacting better designs and better community amenities from this space making the developers compete for the designation as the developer who receives permission to go forward with permission to build.

 

Conclusion

 

Rather than practicing good growth management and exacting greater community amenities from developers, commissioners Dever, Farmer and Riordan have contributed to the overbuilding of our markets and have subsidized luxury student housing in excess of $5 million.  We would be a better community with healthier real estate markets if we practiced good growth management.

 

 

Sunday, June 09, 2013

Should the taxpayers of Lawrence subsidize the KU Athletic Association?


Should the taxpayers of Lawrence subsidize the KU Athletic Association?

 
Rock Chalk Park was supposed to be a partnership.  KU was never part of the partnership.  Rather, the partnership was the City, the KU Athletic Association (KUAA), the Endowment Association, and Fritzel Construction. 

 
The project was to cost $25 million.  The no-bid recreation center building contract was estimated to cost $19.9 million.  The land was to cost about $800 thousand and the architectural fees were estimated to cost about $900 thousand.  The City’s share of the infrastructure was to be $3.4 million. The City’s share of the infrastructure was the amount left under the $25 million cap after deducting the costs of the land, architectural fees and the building.  The Athletic Association was to pay the remainder of the $8.3 million in infrastructure, about $4.9 million.  The argument for KUAA paying this share was simple; the KUAA would use this shared infrastructure to service its facilities.

 
Public Bidding was Supposed to Save the Taxpayers Money

After the public complained, the City Commission decided to bid the building, a procedure that should have been part of the original partnership.  The $19.9 million building came in at $10.5 million.  This should have been a savings to the taxpayers of $9.4 million, but it appears to have become a windfall to the Athletic Association.


City Commission Rushes to Approve a Revised Budget 

In great haste, the City Commission pushed through a new budget Tuesday night.  The public only had hours to study the numbers. 

The project now will cost $24.5 million with the building costing $10.5 million.  The City will pay for the entire shared infrastructure now estimated to cost $12.3 million after more careful estimates were made and some upgrades were added to the list.  The Assist foundation will now contribute $2 million.  The net result will lower the taxpayer costs to $22.5 million, but the KU AA Association makes no contribution toward the cost of the infrastructure serving its facilities.

 

Rock Chalk Park Cost Estimates, Original and Revised
Original Estimated Costs
Revised Estimated Costs
Item
City Web Site
Memo 6/4/2013
TOTAL CAP
25,000,000
22,500,000
Net:
Architecture Fees
925,000
925,000
Land
784,050
784,050
Recreation Center Building
19,910,000
10,500,000
Assist Foundation
0
-2,000,000
City share of Infrastructure
3,380,950
*
12,290,950
* Calculated as the residual remaining under the cap $25 million
Estimated Infrastructure
Estimated Infrastructure
Costs Original
Costs Revised
Total shared infrastructure
8,345,333
12,290,950
Fritzel/KUAA share of infrastructure
4,964,383
0

 
 

Tuesday evening, only a few hours after releasing the new budget, the City Commission rushed through approval of this arrangement.  Given the rush, very few members of the public were even aware of what had happened.

It is time for the City Commission to explain its haste.

 
Should the taxpayers of Lawrence subsidize the KU Athletic Association? 
 
No.  The infrastructure includes parking lots, lighting, drainage systems and more that is all shared between the City of Lawrence and the KU Athletic Association.  The taxpayers of Lawrence should not be expected to shoulder the full costs of this infrastructure.

It is time for the KU Athletic Association to step up and contribute.  Rather than reap a windfall from the public bidding that should accrue to the taxpayers, the Athletic Association should pay for its share of the shared infrastructure.

 

 

 

 

 

 

Wednesday, September 12, 2012

Who does the best job of directing local economic development?


Who does the best job of directing local economic development?

Last week Greg Williams, the new Chief Executive Officer of the Lawrence Chamber of Commerce, spoke to the members of the Lawrence Association of Neighborhoods.  In his remarks, Williams stated that the “best” local economic development agencies are run by Chambers of Commerce, not by local government.

This seems like an empirical question which should be informed by looking at the published research on local economic development.  What does that published research have to say on this question?

Wolman and Spitzley find that local economic development decisions are made through a political process masquerading as a rational process.  A political “growth machine” exists that is a coalition of interests who benefit from real estate development, rather than real economic growth.  Led by business interests such as real estate developers and the Chamber of Commerce, this growth machine maneuvers to take control of the economic development process (Harold Wolman and David Spitzley. 1996. The Politics of Local Economic Development, Economic Development Quarterly 10(3):115-150.)

Rubin finds that when economic development is directed by a Chamber of Commerce, the deals are structured to benefit the businesses, often at the expense of the taxpayers.  When economic development is directed by a local government, the deals are structured to benefit the community as a whole.  When local government turns over the administration of local economic development to a special interest group, such as the Chamber, that special interest group generates a systematic bias in favor of the Chamber’s constituents (Herbert J. Rubin, 1988, Shoot Anything That Flies; Claim Anything that Falls: Conversations with Economic Development Practitioners, Economic Development Quarterly 2(3):236-251)

McGuire finds that economic development is a collaborative process, but the form of the collaboration is important.  With the Chamber is in the lead role, it will direct the process to the benefit of its constituents, its member businesses (Michael McGuire. 2000. Collaborative Policy Making and Administration: The Operational Demands of Local Economic Development. Economic Development Quarterly 14(3): 278-291.)

Opening up the process can be beneficial.  KU’s own Elaine Sharp finds that “Public officials in tax-stressed communities who are wary of the potential consequences of popular mobilization may be relieved to find that heightened citizen involvement can actually enhance the climate for economic development policies . . . “(Elaine B. Sharp  and David B. Elkins. 1991. The Politics of Economic Development Policy. Economic Development Quarterly, 5, 126-139.)

 
No one can serve two masters, and the Chamber of Commerce is no exception.  It works for its membership as a special interest group advocating for businesses. 

If the City of Lawrence wants to pursue economic development policies that are beneficial to the community as a whole, it needs to both depoliticize and professionalize the process.

The Chamber of Commerce receives over $400,000 in taxpayer dollars each year from the City and the County.  The record of accomplishments for this large annual taxpayer subsidy is very poor.  The Chamber led the City into 17 tax abatements of which only 35 percent met expectations, the remainder failed outright or did not produce the jobs, wages or investment promised.  The Chamber led the City into violations of the Kansas Open Meetings Act in attempt to broker a deal without the taxpayers’ knowledge.  This caused the members of the City Commission to be censured. The Chamber consistently supported more and more real estate development on the false belief that supply creates demand.  They were wrong, and now the City is stuck with a large inventory of vacant housing, retail stores, and offices.

 
The City and the County should take this money and spend it on professional planners who report to the elected officials.  These planners would bring professional skills to their work and would serve the community as a whole.   The Chamber should be at the table when economic development policy is designed and implemented, but it should not be paid large sums of public money to be at the table.  The Chamber can sit at the table as an equal, interested and unsubsidized partner. 

Who does the best job of directing local economic development?  Professional planners working for the community do the best job, not the Chamber of Commerce working for its business constituency.