A number of issues should be resolved as the City of Lawrence, Kansas considers the purchase and operation of the builiding at 4950 Research Parkway.
Background
The Lawrence Douglas County Biosciences Authority (LDCBA) proposes that the city purchase the property at 4050 Research Parkway for $2,900,000.
This purchase would be financed through issuing general obligation bonds.
LDCBA would operate as the property manager and leasing agent. The property would be leased, in part, to the firm CritiTech. Other firms would be sought to lease the remainder of the building.
The financial projections for the property anticipate that it would not generate sufficient income to cover the costs of operation and that the taxpayers of Lawrence and Douglas County would subsidize the property to cover the losses.
Issues
1. Purchase price
The proposed purchase price is $2,900,000. The financial projections for the property show the property generating a net operating income of about $12 per square foot. It also assumes a capitalization rate (net operating income / property value) of about 6 percent which is too low. Capitalization rates should reflect the cost of borrowing, the return on equity invested in such properties, and the risk associated with this type of space. This suggests a capitalization rate of 8 percent or higher. With a capitalization rate of 8 percent, the purchase price of the property should be $2,300,000, and this assumes that the building can maintain 89 percent occupancy. If the occupancy falls to a lower level, the value of the property will be lower, possibly much lower.
2. Identity of interest between the seller and the tenant
The purchase price becomes immediately suspect because one of the current owners of the property is a principal in the CritiTech firm which is to be a subsidized occupant of the property. The sellers have an interest in obtaining as high a price as possible for the property, even a price higher than it can command in the private market. CritiTech as an occupant has an interest in leasing the space at a low lease rate, even a rate that is below the market rate because it is subsidized. With no arm’s length separation between the seller and the tenant, the taxpayer cannot trust either the purchase price or the lease rate.
This suggests that the city should closely investigate the calculations of the purchase price and lease rates to ensure that the taxpayers are not being asked to provide more subsidies than are necessary.
3. Form of financing
The proposal is for the city to issue general obligation bonds to finance the purchase of the property. This obligates the city to cover all principal and interest payments on the debt if the property does not generate sufficient income.
It is more common for projects of this type to be financed with revenue bonds. With revenue bonds, the city promises only the revenues from the project for payment of the debt. Revenue bonds insulate the taxpayers from a heavy financial burden if the project fails.
This is a highly risky project. This risk will raise the interest rate on revenue bond debt, if the debt can be issued at all. If the project is too risky to be financed with revenue bonds, it suggests that the project is too risky for to be undertaken.
If the city wants to purchase this property, the city needs to explore financing mechanisms that minimize the risk absorbed by the taxpayers.
4. Projected occupancy
The financial projection for the property assumes that the project will achieve 89 percent occupancy after 4 years and will maintain that level of occupancy for the remaining 21 years of the bond financing.
This is an eleven year old property with a checkered history. The property’s occupancy levels over its life need to be detailed. It seems highly unlikely that this property will suddenly transform from a poor performing property to a fully occupied property and remain fully occupied for over two decades.
The city should closely examine the occupancy history of the property and should examine the market for such laboratory space. The market is saturated with facilities being offered to bioscience firms. It is unlikely that this property will attract firms from outside of Lawrence; all of the firms are likely to come from spin-offs of KU.
A compelling case needs to be made that KU will produce sufficient firms to maintain 89 percent occupancy in this property for over two decades, despite the fact that KU has not produced these firms in the past.
5. Property taxes
The LDCBA proposal states that the property will remain a taxable property. This is not correct. If the city is to own the property, it is not a taxable property. Under some circumstances, a tenant could be charged a lease rate that is high enough to cover the debt on the property and an amount that would be paid in property taxes had the property been taxable. This is usually referred to as a payment in lieu of taxes or PILOT.
The financial projection for the property shows a PILOT, but it also shows that the project will not generate sufficient revenue to cover its own costs. The losses are covered by the taxpayers.
It is disingenuous to claim that the property is on the tax rolls when it is publicly owned and will generate losses that must be covered by the taxpayers.
The proposal should not mislead the taxpayers into thinking that this property will be anything other than a subsidized property.
Recommendation
There is nothing wrong with the city exploring mechanisms to foster economic development in the biosciences. However, the city should exercise caution so as to not expose the taxpayers to unnecessary risk or unjustifiable costs.
This proposal merits further exploration, but there are many flaws and misrepresentations in the proposal. It can be seen as a starting point rather than an ending point. The city should negotiate for a better agreement. It is possible that a better agreement can be found that is mutually acceptable to all parties. The current proposal appears to be prohibitively flawed.
The City Commission should direct staff to study this property more closely and determine whether a feasible financial package can be constructed with minimal risk to the taxpayers.
Tuesday, November 10, 2009
Tuesday, October 27, 2009
What are reasonable expectations for local economic development?
What is economic development?
It is important to understand the definition of economic development. Economic development is expanding the total income of a community. Expanding the total income means attracting dollars into the community from outside the community. This can be through attracting tourists or new retirees, attracting new customers who live outside of the community to businesses already in the community, attracting new businesses to the community that sell their products or services outside of the community, or any action that raises the wages of the labor force by bringing dollars into the community.
The most essential ingredient for successful economic development is the maintenance and development of a high quality of living in the community. This means making the community a place where people what to live, where workers are well educated, and where firms want to do business.
Necessary ingredients for successful economic development
Labor
A community must have a appropriately trained labor force. Warehousing requires little or no training. Manufacturing usually requires a well-trained labor force. Professional services can require a highly educated labor force. Lawrence generally enjoys a highly educated labor force. In the U.S. 16% of adults did not complete high school; in Lawrence only 4% did not complete high school. In the U.S. 25% of adults have a college degree; in Lawrence it is 35%. We need to seek employment opportunities that match the composition of the labor force.
A community has to have the right quantity and quality of labor available. If the labor force is too small or not available, then the community will not be attractive. This is usually not a big problem as most new firms are looking for only a small number of employees. Douglas County contains 47,000 workers; most new firms will add fewer than 100 employees.
The labor in a community has to be competitively priced. Unfortunately, Lawrence excels in this dimension. Wages in Lawrence are low in virtually all occupations. Thus, wages are not held down by student labor; wages are low across the board. This makes Lawrence attractive to firms, but sadly it is making Lawrence unattractive to workers.
Land
A community needs to have an adequate supply of appropriately serviced land available. Adequate means the right amount, not too much and not too little. Too often communities are led into preparing large quantities of land that only sits idle. It is unwise to develop more land than can be reasonable absorbed within a decade.
No self-contained community like Lawrence is going to attract an extremely large employer needing a very large site. Virtually all of the firms moving into Lawrence over the last two decades developed on parcels of 25 acres, more or less. While new land for future employment centers may be needed, it is doubtful that the number of acres needed cannot be accommodated by existing sites and by the Farmland Industries site. Remember that the University of Kansas remains the largest employer, and it has provided for its own growth. The community only needs to provide for the non-University growth.
Loans
A community is often called upon to provide financing for business expansion and development. As long as this is done in a way that minimizes or eliminates the risk to the taxpayers, this can be a successful tool to facilitate economic development.
Public sector loans can subsidize a development, but they cannot create demand for the product or service to be produced. It is important to remember that subsidized financing can help a good investment succeed, but it will not turn a risky investment into a safe one. Cautious underwriting is required.
Many things do not work:
Tax abatements
Property taxes comprise such a small portion of the operating expenses of manufacturing or research and development facilities that abatements cannot influence a successful firm’s location decision. Property tax abatements are a waste of scarce resources. They have failed in Lawrence, and they have failed elsewhere.
Speculative development
Building structures on a speculative basis is highly risky. Too often they sit empty and only lose money. This has been the case in Lawrence.
Equally, a community must avoid speculative provision of expensive infrastructure in the hope of attracting new development. Lawrence has often failed in this area as well.
Free land
The price of land in the Midwest is sufficiently inexpensive that it does not influence the location decision of firms. Note that Abilene provides free land but has a low job growth rate while Johnson County charges high land prices and has a much higher job growth rate.
Hasty planning
The amount of time it takes to plan and development a project in Lawrence is comparable to the time it takes in other communities. It is not true that Lawrence takes longer; this is a myth pushed by those who oppose careful planning. Good planning takes a reasonable amount of time in Lawrence, just like it does everywhere else.
Practical realities of economic development
Thousands of communities across the nation are engaged in economic development, yet only a few hundred firms will build significant new facilities in any single year. This means that the job growth rate in Lawrence will be driven the natural expansion and contraction of existing firms and only rarely will a new firm be added to the mix.
Manufacturing is declining in Lawrence as it is for the nation as a whole. While manufacturing jobs pay well, Lawrence is going to lose its share of these jobs, and the return of these jobs is not likely in the foreseeable future.
Lawrence should avoid repeating the mistakes that it and other communities have made in the past in the false belief that these efforts improve the competitive position of the city in attracting tourists, new residents, and new businesses. Lawrence should continue to improve the quality of its work force, seek to raise the wage levels of the work force, and seek to make Lawrence a community where everyone wants to live.
It is important to understand the definition of economic development. Economic development is expanding the total income of a community. Expanding the total income means attracting dollars into the community from outside the community. This can be through attracting tourists or new retirees, attracting new customers who live outside of the community to businesses already in the community, attracting new businesses to the community that sell their products or services outside of the community, or any action that raises the wages of the labor force by bringing dollars into the community.
The most essential ingredient for successful economic development is the maintenance and development of a high quality of living in the community. This means making the community a place where people what to live, where workers are well educated, and where firms want to do business.
Necessary ingredients for successful economic development
Labor
A community must have a appropriately trained labor force. Warehousing requires little or no training. Manufacturing usually requires a well-trained labor force. Professional services can require a highly educated labor force. Lawrence generally enjoys a highly educated labor force. In the U.S. 16% of adults did not complete high school; in Lawrence only 4% did not complete high school. In the U.S. 25% of adults have a college degree; in Lawrence it is 35%. We need to seek employment opportunities that match the composition of the labor force.
A community has to have the right quantity and quality of labor available. If the labor force is too small or not available, then the community will not be attractive. This is usually not a big problem as most new firms are looking for only a small number of employees. Douglas County contains 47,000 workers; most new firms will add fewer than 100 employees.
The labor in a community has to be competitively priced. Unfortunately, Lawrence excels in this dimension. Wages in Lawrence are low in virtually all occupations. Thus, wages are not held down by student labor; wages are low across the board. This makes Lawrence attractive to firms, but sadly it is making Lawrence unattractive to workers.
Land
A community needs to have an adequate supply of appropriately serviced land available. Adequate means the right amount, not too much and not too little. Too often communities are led into preparing large quantities of land that only sits idle. It is unwise to develop more land than can be reasonable absorbed within a decade.
No self-contained community like Lawrence is going to attract an extremely large employer needing a very large site. Virtually all of the firms moving into Lawrence over the last two decades developed on parcels of 25 acres, more or less. While new land for future employment centers may be needed, it is doubtful that the number of acres needed cannot be accommodated by existing sites and by the Farmland Industries site. Remember that the University of Kansas remains the largest employer, and it has provided for its own growth. The community only needs to provide for the non-University growth.
Loans
A community is often called upon to provide financing for business expansion and development. As long as this is done in a way that minimizes or eliminates the risk to the taxpayers, this can be a successful tool to facilitate economic development.
Public sector loans can subsidize a development, but they cannot create demand for the product or service to be produced. It is important to remember that subsidized financing can help a good investment succeed, but it will not turn a risky investment into a safe one. Cautious underwriting is required.
Many things do not work:
Tax abatements
Property taxes comprise such a small portion of the operating expenses of manufacturing or research and development facilities that abatements cannot influence a successful firm’s location decision. Property tax abatements are a waste of scarce resources. They have failed in Lawrence, and they have failed elsewhere.
Speculative development
Building structures on a speculative basis is highly risky. Too often they sit empty and only lose money. This has been the case in Lawrence.
Equally, a community must avoid speculative provision of expensive infrastructure in the hope of attracting new development. Lawrence has often failed in this area as well.
Free land
The price of land in the Midwest is sufficiently inexpensive that it does not influence the location decision of firms. Note that Abilene provides free land but has a low job growth rate while Johnson County charges high land prices and has a much higher job growth rate.
Hasty planning
The amount of time it takes to plan and development a project in Lawrence is comparable to the time it takes in other communities. It is not true that Lawrence takes longer; this is a myth pushed by those who oppose careful planning. Good planning takes a reasonable amount of time in Lawrence, just like it does everywhere else.
Practical realities of economic development
Thousands of communities across the nation are engaged in economic development, yet only a few hundred firms will build significant new facilities in any single year. This means that the job growth rate in Lawrence will be driven the natural expansion and contraction of existing firms and only rarely will a new firm be added to the mix.
Manufacturing is declining in Lawrence as it is for the nation as a whole. While manufacturing jobs pay well, Lawrence is going to lose its share of these jobs, and the return of these jobs is not likely in the foreseeable future.
Lawrence should avoid repeating the mistakes that it and other communities have made in the past in the false belief that these efforts improve the competitive position of the city in attracting tourists, new residents, and new businesses. Lawrence should continue to improve the quality of its work force, seek to raise the wage levels of the work force, and seek to make Lawrence a community where everyone wants to live.
Saturday, February 28, 2009
Is it time to impose a long cooling off period on development?
Watching the market work and fail to correct itself.
Too often our elected officials subscribe to the false notion that all construction is good. They adhere to the "build it and they will come" theory of real estate development. This theory falsely holds the new supply creates demand. One need only look around Lawrence to see the error in this type of thinking. We have empty homes, apartments, retail stores, and offices throughout the community. In fact, demand ebbs and flows; the supply that can be supported is not a function of what we build but of the amount of demand that exists in the community.
The success of our real estate markets depends upon us keeping the supply in balance with the demand.
Why is this? The development industry is not good at pacing itself; it is prone to overbuilding. When it overbuilds, the taxpayers suffer.
We pay for the roads, utilities, plus police and fire protection for these excess developments. Example: Since 2000, the developers built over 3,200 home more homes than the population growth would support. The only good thing that you can say for the current credit market freeze is that it called a halt to the overbuilding spree.
We also suffer from the blight created by the reduced value to the neighborhoods surrounding the empty space. Example: North Lawrence is hurt by the blighting effect of the dead Tanger Mall.
We all lose directly through lost investment in redevelopment plans. Example: The empty $8 million parking garage in the 800 block of New Hampshire Street. The City built the garage on the promise that a developer would redevelop the surrounding area in mixed-use buildings. All that was built was the small building that contains PepperJax. The rest of the development was halted by the overbuilding that created too much competing space, mostly in the west side of town.
We lose indirectly through the diminished efforts to redevelop our downtown. Examples: The Hobbs-Taylor Building is unable to attract retail tenants and the redeveloped 600 block of Massachusetts Street has vacancies. These two attractive developments should be the most valuable space in town. Unfortunately, the City has done its best to hurt these investments in our downtown by approving excessive amounts of competing retail space elsewhere, more space than the spending in Lawrence will support.
Two quick facts show the pace of the overbuilding:
1. From 2000 through 2007, the builders built 800 homes per year when the population added only 400 households per year. Over and eight-year period, this was about 3,200 surplus homes.
2. From 2000 through 2007, the builders built over 160,000 square feet of retail space per year when the growth in retail spending would support only 50,000 square feet per year.
This shows that the construction industry was vastly oversized, and we are now paying for it.
We need a City Commission that will keep the construction industry in check. It is not that hard to keep the pace of growth of housing in line with the growth of population. The City simply needs to plan for the pace of growth, approving only as many subdivisions as are really needed. It is not that hard to keep the pace of growth of retail space in line with the growth in retail spending. The City simply needs to pace the growth, approving only as many new shopping centers as the growth in retail spending will support.
This has been made harder by the current City Commission’s excessive allegiance to developers. The City Commission has approved virtually every development approval brought before it when the market analysis told it that the city could not absorb all of the new space without harming existing developments. Because of this excessive amount of space both recently built and under construction, the city needs a long cooling off period.
The economic recession is having some positive effect in that is it slowed down the building spree. However, recession is too crude a tool for this job. The City Commission should have managed the pace of growth in real estate, keeping it in line with the growth in demand for that real estate. Having failed to do that, we must now recognize that it will be a long time before we will need any significant additions to the supply. We have too many single-family homes. We have too many apartments. We have too many retail stores. We must wait for the demand to absorb this space before adding to this damaging oversupply. If we fail to impose a cooling off period, the development industry will only repeat its mistakes as soon as the recession bottoms out and credit markets thaw.
We should learn from out mistakes and prevent future cycles of overbuilding. It is what good planning and good growth management is all about.
Too often our elected officials subscribe to the false notion that all construction is good. They adhere to the "build it and they will come" theory of real estate development. This theory falsely holds the new supply creates demand. One need only look around Lawrence to see the error in this type of thinking. We have empty homes, apartments, retail stores, and offices throughout the community. In fact, demand ebbs and flows; the supply that can be supported is not a function of what we build but of the amount of demand that exists in the community.
The success of our real estate markets depends upon us keeping the supply in balance with the demand.
Why is this? The development industry is not good at pacing itself; it is prone to overbuilding. When it overbuilds, the taxpayers suffer.
We pay for the roads, utilities, plus police and fire protection for these excess developments. Example: Since 2000, the developers built over 3,200 home more homes than the population growth would support. The only good thing that you can say for the current credit market freeze is that it called a halt to the overbuilding spree.
We also suffer from the blight created by the reduced value to the neighborhoods surrounding the empty space. Example: North Lawrence is hurt by the blighting effect of the dead Tanger Mall.
We all lose directly through lost investment in redevelopment plans. Example: The empty $8 million parking garage in the 800 block of New Hampshire Street. The City built the garage on the promise that a developer would redevelop the surrounding area in mixed-use buildings. All that was built was the small building that contains PepperJax. The rest of the development was halted by the overbuilding that created too much competing space, mostly in the west side of town.
We lose indirectly through the diminished efforts to redevelop our downtown. Examples: The Hobbs-Taylor Building is unable to attract retail tenants and the redeveloped 600 block of Massachusetts Street has vacancies. These two attractive developments should be the most valuable space in town. Unfortunately, the City has done its best to hurt these investments in our downtown by approving excessive amounts of competing retail space elsewhere, more space than the spending in Lawrence will support.
Two quick facts show the pace of the overbuilding:
1. From 2000 through 2007, the builders built 800 homes per year when the population added only 400 households per year. Over and eight-year period, this was about 3,200 surplus homes.
2. From 2000 through 2007, the builders built over 160,000 square feet of retail space per year when the growth in retail spending would support only 50,000 square feet per year.
This shows that the construction industry was vastly oversized, and we are now paying for it.
We need a City Commission that will keep the construction industry in check. It is not that hard to keep the pace of growth of housing in line with the growth of population. The City simply needs to plan for the pace of growth, approving only as many subdivisions as are really needed. It is not that hard to keep the pace of growth of retail space in line with the growth in retail spending. The City simply needs to pace the growth, approving only as many new shopping centers as the growth in retail spending will support.
This has been made harder by the current City Commission’s excessive allegiance to developers. The City Commission has approved virtually every development approval brought before it when the market analysis told it that the city could not absorb all of the new space without harming existing developments. Because of this excessive amount of space both recently built and under construction, the city needs a long cooling off period.
The economic recession is having some positive effect in that is it slowed down the building spree. However, recession is too crude a tool for this job. The City Commission should have managed the pace of growth in real estate, keeping it in line with the growth in demand for that real estate. Having failed to do that, we must now recognize that it will be a long time before we will need any significant additions to the supply. We have too many single-family homes. We have too many apartments. We have too many retail stores. We must wait for the demand to absorb this space before adding to this damaging oversupply. If we fail to impose a cooling off period, the development industry will only repeat its mistakes as soon as the recession bottoms out and credit markets thaw.
We should learn from out mistakes and prevent future cycles of overbuilding. It is what good planning and good growth management is all about.
Thursday, December 11, 2008
What should citizens of Lawrence expect from its City Commission for the development of its housing stock?
What should citizens of Lawrence expect from its City Commission for the development of its housing stock?
The City Commission failed to reign in the excessive growth of the housing stock brought on by the developers. The taxpayers now pay the price for this excessive growth.
In any community, it is the goal of a city to maintain balance between the demand for housing and the supply of housing. If the supply runs ahead of demand, values fall. If the supply runs ahead of demand for a long period of time, whole neighborhoods lose value and blight occurs. Older neighborhoods suffer especially hard. This is what has happened in Lawrence.
Growth in the population is a good measure of growth in demand for housing
In Lawrence:
From1990 to 2000, the population grew:
· About 700 households per year,
· About 2.0 percent per year.
From 2000 to 2007, the population grew more slowly at:
· About 400 households per year,
· About 1.7 percent per year.
Growth in the number of housing units is a good measure of growth in the supply of housing
In Lawrence:
From 1990 to 2000, the housing stock grew:
· About 900 units per year,
· About 3.0 percent per year.
Since 2000, the housing stock grew:
· About 800 units per year,
· About 2.1 percent per year.
Matching the growth of demand and the growth of supply
In a well-planned market there should be a close correspondence between the growth in population and the growth in supply of housing. Developers have added units at a much greater rate than the growth in population:
· During the 1990s, the growth of supply outpaced the growth of demand by 200 units per year.
· Since 2000, the growth of supply outpaced the growth of demand by 400 units per year.
· The surplus stock totals to about 5,000 units. This means that developers have built surplus units that are more than the size of Eudora, all within the city limits of Lawrence.
Implications:
· The surplus has brought about an out-migration from older neighborhoods, mostly in the eastern parts of the city, resulting in a loss of units.
· The loss of units resulted in a loss of value and deterioration in
the city’s older neighborhoods.
What should citizens of Lawrence expect from its City Commission?
· In a growing community, there is no need for any neighborhood to suffer a loss of population, housing units, or property values.
· In a growing community, the City Commission and its planners should manage growth to keep the pace of growth of supply in balance with the growth in demand for that housing.
· The City Commission and its planners should direct sufficient investment into older neighborhoods so that they maintain value and attract new families.
The City Commission failed to reign in the excessive growth of the housing stock brought on by the developers. The taxpayers now pay the price for this excessive growth.
In any community, it is the goal of a city to maintain balance between the demand for housing and the supply of housing. If the supply runs ahead of demand, values fall. If the supply runs ahead of demand for a long period of time, whole neighborhoods lose value and blight occurs. Older neighborhoods suffer especially hard. This is what has happened in Lawrence.
Growth in the population is a good measure of growth in demand for housing
In Lawrence:
From1990 to 2000, the population grew:
· About 700 households per year,
· About 2.0 percent per year.
From 2000 to 2007, the population grew more slowly at:
· About 400 households per year,
· About 1.7 percent per year.
Growth in the number of housing units is a good measure of growth in the supply of housing
In Lawrence:
From 1990 to 2000, the housing stock grew:
· About 900 units per year,
· About 3.0 percent per year.
Since 2000, the housing stock grew:
· About 800 units per year,
· About 2.1 percent per year.
Matching the growth of demand and the growth of supply
In a well-planned market there should be a close correspondence between the growth in population and the growth in supply of housing. Developers have added units at a much greater rate than the growth in population:
· During the 1990s, the growth of supply outpaced the growth of demand by 200 units per year.
· Since 2000, the growth of supply outpaced the growth of demand by 400 units per year.
· The surplus stock totals to about 5,000 units. This means that developers have built surplus units that are more than the size of Eudora, all within the city limits of Lawrence.
Implications:
· The surplus has brought about an out-migration from older neighborhoods, mostly in the eastern parts of the city, resulting in a loss of units.
· The loss of units resulted in a loss of value and deterioration in
the city’s older neighborhoods.
What should citizens of Lawrence expect from its City Commission?
· In a growing community, there is no need for any neighborhood to suffer a loss of population, housing units, or property values.
· In a growing community, the City Commission and its planners should manage growth to keep the pace of growth of supply in balance with the growth in demand for that housing.
· The City Commission and its planners should direct sufficient investment into older neighborhoods so that they maintain value and attract new families.
Monday, November 17, 2008
The Pace of Growth
The national election is over; it is time to think ahead to the election of our next City Commission.
The current City Commission has favored developers and builders to the point of harming the community. The City Commission confuses growth in the supply of real estate with economic development. It is easy to be confused because a coalition of developers, builders, and others engaged in the real estate development industry incorrectly equate growth in supply with growth in demand. This coalition also gives lots of money to the election campaigns of pro-developer candidates who will listen to this false claim and act upon it by approving virtually every development proposal.
The truth is that economic development is the growth of the aggregate income within the community. This can be the result of increasing income among the existing population, usually from wages growing faster than inflation. This can also be the result of increasing the population itself with the new residents bringing new spending to the community.
With growth in aggregate income in the community comes growth in demand for real estate. More households seek more housing. More income increases demand for retail goods and services.
Without growth in aggregate income in the community, there is no growth in demand for real estate. More housing without more households simply causes neighborhoods to compete for a finite, and insufficient, number of households. More retail space without increased income simply spreads the finite amount of retail spending very thinly, with weaker shopping centers failing and becoming blighted.
The community is in need of a City Commission that understands the most basic tenet of real estate economics, that real estate development must be supported by growth in demand for that real estate. If real estate is allowed to grow faster than growth in demand, the older space and the older neighborhoods lose value. Developers make money when they overbuild, but the community suffers. The City takes on the costs of new infrastructure that is not needed. Older neighborhoods lose value and deteriorate. Older shopping centers lose value and become blighted, reducing the value of surrounding neighborhoods.
The next City Commission needs to call for, and act upon, good planning from its planning staff. This means monitoring the pace of growth and ensuring that the developers are not allowed to add subdivisions, shopping centers and other developments that are not needed.
Over the next few weeks, I will itemize some of the specifics of the overbuilding that has taken place in Lawrence along with the harm that this overbuilding has created.
For more on this pace of growth in Lawrence see my recent study at:
http://www.saup.ku.edu/People/UBPLFaculty/KirkMcClure/Pace%20of%20Growth%20Study.pdf
The current City Commission has favored developers and builders to the point of harming the community. The City Commission confuses growth in the supply of real estate with economic development. It is easy to be confused because a coalition of developers, builders, and others engaged in the real estate development industry incorrectly equate growth in supply with growth in demand. This coalition also gives lots of money to the election campaigns of pro-developer candidates who will listen to this false claim and act upon it by approving virtually every development proposal.
The truth is that economic development is the growth of the aggregate income within the community. This can be the result of increasing income among the existing population, usually from wages growing faster than inflation. This can also be the result of increasing the population itself with the new residents bringing new spending to the community.
With growth in aggregate income in the community comes growth in demand for real estate. More households seek more housing. More income increases demand for retail goods and services.
Without growth in aggregate income in the community, there is no growth in demand for real estate. More housing without more households simply causes neighborhoods to compete for a finite, and insufficient, number of households. More retail space without increased income simply spreads the finite amount of retail spending very thinly, with weaker shopping centers failing and becoming blighted.
The community is in need of a City Commission that understands the most basic tenet of real estate economics, that real estate development must be supported by growth in demand for that real estate. If real estate is allowed to grow faster than growth in demand, the older space and the older neighborhoods lose value. Developers make money when they overbuild, but the community suffers. The City takes on the costs of new infrastructure that is not needed. Older neighborhoods lose value and deteriorate. Older shopping centers lose value and become blighted, reducing the value of surrounding neighborhoods.
The next City Commission needs to call for, and act upon, good planning from its planning staff. This means monitoring the pace of growth and ensuring that the developers are not allowed to add subdivisions, shopping centers and other developments that are not needed.
Over the next few weeks, I will itemize some of the specifics of the overbuilding that has taken place in Lawrence along with the harm that this overbuilding has created.
For more on this pace of growth in Lawrence see my recent study at:
http://www.saup.ku.edu/People/UBPLFaculty/KirkMcClure/Pace%20of%20Growth%20Study.pdf
Tuesday, September 23, 2008
Planning in Lawrence has failed
How the City has let the Growth of Supply Outpace the Growth of Demand
Lawrence has grown in population and income, and that is good. But the growth in real estate development has outpaced the demand for that real estate, and that is bad. It causes disinvestment and blight, and all too often the taxpayers suffer.
Housing
Since 2000, developers added about 800 units per year while the population growth would support only about 400 units per year.
The surplus has brought about an out-migration from older neighborhoods resulting in a loss of units. The loss of population and units resulted in a loss of value and deterioration in the city’s older neighborhoods.
Retail Development
Inflation adjusted growth in retail spending since 2000 is growing at 0.2 percent per year, enough to support about only 25,000 to 30,000 additional square feet per year.
From 2000 through 2007, the stock of retail square feet is growing at 3.1 percent or about 150,000 square feet per year.
The developers added about 1.3 million square feet beyond what the growth in retail spending could support. This is approximately the size of the retail space in the entire downtown or about one-fourth of the total stock of space.
The situation is rapidly becoming worse as an additional 750,000 square feet of space have been approved for West 6th Street from Folks Road to the South Lawrence Trafficway. If all of this space is built, it will swell the stock of surplus space to over two million square feet.
The surplus development has stalled redevelopment plans downtown and has pushed the vacancy rates so high that disinvestment and blight now threaten several older shopping centers.
Industrial, Warehousing, and Office Development
Employment growth, like population growth, has slowed since 2000. It has declined for manufacturing and warehousing jobs but continues to grow slowly for office jobs.
Manufacturing space grows in incremental steps as facilities are added. However, there have been no significant additions to the stock of manufacturing space since 2003. Manufacturing space has stabilized with no additions because demand for the space is contracting rather than growing. This means that empty space is available on the market.
The supply of warehousing space is growing at about 2 percent per year, adding about 85,000 square feet each year. Warehouse space is growing despite declining employment. This means a surplus condition exists.
Office space is growing at about 2.3 percent per year, adding about 67,000 square feet each year, a rate close to the rate of growth in employment. The office sector is reasonably balanced with growth in supply closely matching growth in employment, but the market is negatively impacted by the surplus of retail space that is being offered as office space.
Conclusions
Allowing the supply of real estate to grow faster than growth in demand adds to costs. Unneeded roads, sewer lines, water lines are built to service this space. Police and fire protection must be provided even if the space is empty.
Growing supply faster than growth in demand does not stimulate more demand. Lawrence has been overbuilt for years. Yet, surplus housing has not attracted more population. Surplus retail stores have not attracted more vendors. Surplus industrial and warehouse space has not attracted more employers.
Growing supply faster than growth in demand causes older areas to deteriorate. Older neighborhoods are not receiving sufficient investment in the form of replacement homes and improvements to existing homes to maintain their value. Older neighborhoods are losing value, schools and people. Downtown, which is one of Lawrence’s strongest attractions, is stagnating and failing to attract vendors into its newly renovated shops.
Employment centers sit empty while the City rushes to build more.
Lessons to learn
Growth in supply is not growth in demand.
City and county leaders, and their planners, should view it as part of their job to fix a failure in the marketplace, which is the propensity to overbuild. These leaders should keep the growth of supply in balance with the growth in demand. This means limiting growth to just that amount that can be absorbed without harm to the community at large.
The community is overbuilt, and a long cooling off period is needed. The city should stop adding to the problem and work toward redirecting growth into existing space.
The community needs to stop the overbuilding and permit only very selective development that can clearly demonstrate that it responds to an unmet need, despite the surplus stock that exists.
In the housing sector, the city needs to take steps to redirect growth away from new sprawling subdivisions on the perimeter of the city and toward the older neighborhoods that are suffering from disinvestment and decay.
In the retail sector, the city needs to protect and enhance its downtown, the retail district that attracts the coveted tourist dollars. The city needs to stop the unneeded expansion of retail space at the perimeter of the city and help to redirect retail spending to the downtown and the other shopping centers distributed around the city.
In the industrial and office sector, the city needs to carefully gauge the pace of growth of employment and limit the expansion of employment centers, whether office parks, industrial parks, or other form of employment center, to just that level that can be absorbed.
None of these steps means a complete moratorium on development. Moratoria have been tried and failed in other communities. Except in a few short-term situations, they do not work. However, city leaders need to realize that the stock of real estate is in trouble largely because the city has pursued a pace of growth that cannot be sustained.
In the housing sector, the city should stop the development of any new subdivisions until it is clear that more are needed. Evidence of this would be found in low vacancies among existing homes and small inventories of homes for sale.
In the retail sector, the city should avoid adding to the problem by approving any more retail proposals. However, from time to time, a neighborhood center may be needed because it will serve a newer subdivision that does not have a neighborhood center. Despite the retail market being overbuilt, some small quantity of new space may be needed to service the homes in this new subdivision. However, the city has approved several new retail developments that, if built, will be harmful to the city as a whole. Some of these developments cannot go further because they are unable to obtain the needed leases to leverage loans from banks. The development permission given to these projects runs for 18 months. As this permission expires, it is customary for the city to grant extensions without scrutiny of the impact of these unneeded projects upon the remainder of the city. This should be stopped. Until such time as the city can easily absorb new space without hurting existing shopping districts, the city should stop renewing the development approvals. When these retail developments come up for renewal, they should be shelved.
In the industrial and office sector, the city should avoid adding to the problem of surplus employment centers. While land needs to be available for the small number of new firms that may locate in Lawrence, there is already an ample stock of unused and underutilized buildings. The city should make every effort to make use of these structures before sprawling into new sites. In addition, the city should make every effort to use the existing employment center land before bringing more onto the market. Sprawling development, whether housing or manufacturing or office space, adds unnecessary and costly public improvements, and it stretches city services that are already stretched.
Lawrence has grown in population and income, and that is good. But the growth in real estate development has outpaced the demand for that real estate, and that is bad. It causes disinvestment and blight, and all too often the taxpayers suffer.
Housing
Since 2000, developers added about 800 units per year while the population growth would support only about 400 units per year.
The surplus has brought about an out-migration from older neighborhoods resulting in a loss of units. The loss of population and units resulted in a loss of value and deterioration in the city’s older neighborhoods.
Retail Development
Inflation adjusted growth in retail spending since 2000 is growing at 0.2 percent per year, enough to support about only 25,000 to 30,000 additional square feet per year.
From 2000 through 2007, the stock of retail square feet is growing at 3.1 percent or about 150,000 square feet per year.
The developers added about 1.3 million square feet beyond what the growth in retail spending could support. This is approximately the size of the retail space in the entire downtown or about one-fourth of the total stock of space.
The situation is rapidly becoming worse as an additional 750,000 square feet of space have been approved for West 6th Street from Folks Road to the South Lawrence Trafficway. If all of this space is built, it will swell the stock of surplus space to over two million square feet.
The surplus development has stalled redevelopment plans downtown and has pushed the vacancy rates so high that disinvestment and blight now threaten several older shopping centers.
Industrial, Warehousing, and Office Development
Employment growth, like population growth, has slowed since 2000. It has declined for manufacturing and warehousing jobs but continues to grow slowly for office jobs.
Manufacturing space grows in incremental steps as facilities are added. However, there have been no significant additions to the stock of manufacturing space since 2003. Manufacturing space has stabilized with no additions because demand for the space is contracting rather than growing. This means that empty space is available on the market.
The supply of warehousing space is growing at about 2 percent per year, adding about 85,000 square feet each year. Warehouse space is growing despite declining employment. This means a surplus condition exists.
Office space is growing at about 2.3 percent per year, adding about 67,000 square feet each year, a rate close to the rate of growth in employment. The office sector is reasonably balanced with growth in supply closely matching growth in employment, but the market is negatively impacted by the surplus of retail space that is being offered as office space.
Conclusions
Allowing the supply of real estate to grow faster than growth in demand adds to costs. Unneeded roads, sewer lines, water lines are built to service this space. Police and fire protection must be provided even if the space is empty.
Growing supply faster than growth in demand does not stimulate more demand. Lawrence has been overbuilt for years. Yet, surplus housing has not attracted more population. Surplus retail stores have not attracted more vendors. Surplus industrial and warehouse space has not attracted more employers.
Growing supply faster than growth in demand causes older areas to deteriorate. Older neighborhoods are not receiving sufficient investment in the form of replacement homes and improvements to existing homes to maintain their value. Older neighborhoods are losing value, schools and people. Downtown, which is one of Lawrence’s strongest attractions, is stagnating and failing to attract vendors into its newly renovated shops.
Employment centers sit empty while the City rushes to build more.
Lessons to learn
Growth in supply is not growth in demand.
City and county leaders, and their planners, should view it as part of their job to fix a failure in the marketplace, which is the propensity to overbuild. These leaders should keep the growth of supply in balance with the growth in demand. This means limiting growth to just that amount that can be absorbed without harm to the community at large.
The community is overbuilt, and a long cooling off period is needed. The city should stop adding to the problem and work toward redirecting growth into existing space.
The community needs to stop the overbuilding and permit only very selective development that can clearly demonstrate that it responds to an unmet need, despite the surplus stock that exists.
In the housing sector, the city needs to take steps to redirect growth away from new sprawling subdivisions on the perimeter of the city and toward the older neighborhoods that are suffering from disinvestment and decay.
In the retail sector, the city needs to protect and enhance its downtown, the retail district that attracts the coveted tourist dollars. The city needs to stop the unneeded expansion of retail space at the perimeter of the city and help to redirect retail spending to the downtown and the other shopping centers distributed around the city.
In the industrial and office sector, the city needs to carefully gauge the pace of growth of employment and limit the expansion of employment centers, whether office parks, industrial parks, or other form of employment center, to just that level that can be absorbed.
None of these steps means a complete moratorium on development. Moratoria have been tried and failed in other communities. Except in a few short-term situations, they do not work. However, city leaders need to realize that the stock of real estate is in trouble largely because the city has pursued a pace of growth that cannot be sustained.
In the housing sector, the city should stop the development of any new subdivisions until it is clear that more are needed. Evidence of this would be found in low vacancies among existing homes and small inventories of homes for sale.
In the retail sector, the city should avoid adding to the problem by approving any more retail proposals. However, from time to time, a neighborhood center may be needed because it will serve a newer subdivision that does not have a neighborhood center. Despite the retail market being overbuilt, some small quantity of new space may be needed to service the homes in this new subdivision. However, the city has approved several new retail developments that, if built, will be harmful to the city as a whole. Some of these developments cannot go further because they are unable to obtain the needed leases to leverage loans from banks. The development permission given to these projects runs for 18 months. As this permission expires, it is customary for the city to grant extensions without scrutiny of the impact of these unneeded projects upon the remainder of the city. This should be stopped. Until such time as the city can easily absorb new space without hurting existing shopping districts, the city should stop renewing the development approvals. When these retail developments come up for renewal, they should be shelved.
In the industrial and office sector, the city should avoid adding to the problem of surplus employment centers. While land needs to be available for the small number of new firms that may locate in Lawrence, there is already an ample stock of unused and underutilized buildings. The city should make every effort to make use of these structures before sprawling into new sites. In addition, the city should make every effort to use the existing employment center land before bringing more onto the market. Sprawling development, whether housing or manufacturing or office space, adds unnecessary and costly public improvements, and it stretches city services that are already stretched.
Monday, April 21, 2008
Which city, Overland Park or Lawrence, is practicing smart growth?
Lawrence has been on a spree of approving retail shopping centers that are not needed. The City Commission approved a second Wal-Mart. It approved another shopping center at 6th and Wakarusa, far beyond the square footage called for at that intersection. It approved two large shopping centers at 6th and the South Lawrence Trafficway.
This excessive approval of retail development proposals has been going on for some time, and it is harmful to the community. It hurts the downtown generally by siphoning spending away. It makes it impossible to complete various downtown redevelopment projects, such as Downtown 2000, which has left the taxpayers paying for an empty parking garage building. It hurts the capacity of other downtown projects to attract tenants, such as the Hobbs-Taylor building. It adds to the stock of vacant and deteriorating space found all over town.
Lawrence has developed retail space at a growth rate of 3.0 percent per year from 1995 through 2007. Yet, inflation adjusted retail spending--a good measure of demand for this space--has grown by only 0.9 percent per year during the same time period. Thus, Lawrence has allowed its supply of retail space to grow at over three times the pace of growth of demand for that space. This means that new space, if absorbed at all, simply takes demand away from existing space. The result is widespread vacancy, deterioration, and blight.
Overland Park is a nearby city confronting similar growth problems. It is interesting to note that Overland Park has kept the pace of growth of retail supply in line with the growth in demand for that supply. From 1990 through 2007, inflation adjusted retail spending in Overland Park grew by 2.1 percent per year. During the same years, Overland Park allowed its stock of retail space to grow by 1.7 percent per year.
Overland Park is practicing smart growth. It is keeping the growth in supply in balance with the growth in demand. As a result Overland Park’s retail market is in much better shape than is Lawrence’s retail market. Lawrence is not practicing smart growth, and it is paying the price.
What happens when developers control the pace of growth?
The Planning Commission tends to worsen these mistakes by granting the developers unlimited extensions of time in which to develop. When these developments initially go before the Planning Commission and the City Commission, they promise to initiate development within 18 months. Several have failed to move forward because they cannot find sufficient tenants. Rather than admit a mistake, they ask for--and receive--extensions of time to look for tenants. The Planning Commission should admit the mistakes of approving these unneeded developments and refuse the extensions.
Lawrence city government is controlled by the coalition of developers who contributed heavily to get pro-developer individuals elected to the City Commission. These elected pro-developer city commissioners have appointed pro-developer friends to the Planning Commission. This means that developers are getting all that they ask for, even when it runs contrary to the community’s plan which calls for balanced growth.
There is value in smart growth. It prevents loss of value to existing centers. It protects the existing downtown. It helps maintain a healthy level of investment in existing shopping centers. It promotes redevelopment plans.
Lawrence is losing value rapidly. Smart growth can help resolve that problem, but we need leadership that understands the harm that results from letting developers set the pace of growth. We need leadership that understands that smart growth will not happen by itself; we need to consciously plan for our future and work hard to achieve it.
What does the tax abatement report really say?
On Friday, the Lawrence Journal World stated, “The [Public Incentives Review] committee on Thursday unanimously approved its annual report, finding that all eight companies receiving tax breaks are in compliance with the city’s economic development policies.”
This is not what the Public Incentives Review Committee (PIRC) did. The PIRC made no finding of compliance or lack of it. Rather, the PIRC swept the high level of non-compliance under the rug as it has for many years in the past.
The newspaper also said, “In total the companies had exceeded their job creation projections by 87 full-time jobs and 123 part-time jobs.” This is a case of looking at the glass as one-quarter full rather than three-quarters empty.
Here are the facts:
· In terms of making the promised investments, of the 11 currrent abatements, only 8 delivered, 2 fell well short, and 1 chose to lease the property.
· In terms of paying wages at or above the average found in the community, 4 of the 8 firms have substantial numbers of workers being paid from $3 to $6 per hour below the community average within each occupation group.
· In terms of producing the promised jobs, 4 firms fulfilled their promises, 1 firm fell 2 workers below the promised amont, and 3 fell well below the promised job production.
It is true that the total number of jobs at all firms given tax abatements is in excess of the total number of jobs promised. The firms that met the promised number of jobs produced more extra jobs than the shortfall experienced by the firms that failed to meet their promises. However, this statistic would have merit only if the jobs would not have been generated in the absence of the tax abatement. This is simply not the case.
The tax abatement is a needless giveaway. The firms would have produced the jobs without the tax abatement. Some of the firms have made public statements to this effect. All of the published research on tax abatements finds this to be true. Property taxes are too small a percentage of a firm’s total operating expenses to be crucial to the decision to build or expand. However, lower taxes are always helpful to enhance profits; thus, firms ask for the tax abatements even when they are not important to the decision to build or expand. The firms will even lie to the City saying that without the tax abatement the firm cannot build or expand.
What the report shows is that Lawrence has an ongoing problem with its tax abatement program. In a normal economic development program, non-compliance should be minimal. The PIRC should be discussing what to do with no more that one firm that is out of compliance. Instead, the PIRC is trying to cover up the fact that non-compliance is normal in Lawrence. Six of the eight firms are substantially out of compliance in at least one of the important areas or investment, wages, or jobs. This is not a new or temporary condition; it has been going on for years.
The City has been misled. It has been told by business advocacy organizations, such as the Chamber of Commerce, that tax abatements are needed to attract firms even though the experience both locally and nationally says the opposite. The City has been led into a position of offering abatements, almost automatically, to firms just for the asking. Yet, these firms fail to make the promised investments, fail to pay wages comparable to other firms in the community, and fail to produce the promised jobs. In many cases, the firms go out of business before the City can hope to realize any benefits. (Note that the PIRC report is deficient in that it only reports on existing abatements; it does not report of the firms that have been given abatements that went out of business such as Davol or E&E.)
An ongoing problem of non-compliance hurts the City. Not only does the City not get the jobs and wages and taxes promised, but it cannot negotiate effectively with future firms. Word is out; Lawrence is a pushover town. A firm can promise much, produce little, and still keep its tax break.
The City of Lawrence is confronting a severe budget problem. Revenues are not flowing into the City as expected. Planned expansion of the library has been scrapped. Social service agencies saw their budgets cut (although the Chamber of Commerce was given even more taxpayer money to further its failed economic development activities). Discussion has already been started on possible elimination of the bus system, the public transit needed by many people of low-income. We would all have been better served if we had not offered needless giveaways to firms in the form of tax abatements. Those lost tax revenues are sorely needed.
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