Tuesday, December 12, 2006

What do Impact Fees Do?

As the LJW editor (12/12/2006) indicates, impact fees are, indeed, an issue for all residents of Lawrence.

Who pays for the costs of new infrastructure?

Developers pass impact fees along into higher house prices because buyers of homes in new subdivisions cannot hop across the city limit into a competing town, as is true in a larger metropolitan context. However, homebuyers do have alternatives; they can buy homes in existing neighborhoods. In the absence of impact fees, the costs of development are passed along to all residents of the city, including those far from the new infrastructure.

Contrary to the claim in the editorial, impact fees do not inflate the real estate market. Only in the most extreme cases—where the most severe shortages exist—would the substitute existing homes experience a price increase. For Lawrence, prices in the existing market will be unaffected by the impact fees.

Should we continue to favor sprawl or wise reuse?

As the editorial stated, “Providing and maintaining the city’s infrastructure is a communitywide responsibility” but that does not say who should pay for it. At issue is the share paid by the new homebuyer and the share paid by the residents who live elsewhere in the City.

The developers have built new subdivisions faster than the city’s population needs them. This sprawl adds to the tax burden of all taxpayers as we have been paying for the new infrastructure. This sprawl also accelerates the decline of older neighborhoods as homebuyers are siphoned away from older neighborhoods. We must pay for their redevelopment. It is not unreasonable, at a time of overbuilt housing and declining older neighborhoods, to ask the buyers of the homes in the new, sprawling subdivisions to pay a greater share of the costs of that sprawl. This may cause some homebuyers to opt for an existing home in an older neighborhood, bringing much needed investment to these areas. This will also free scarce City resources to address the pressing needs for the City’s older infrastructure. This is what impact fees do.

Saturday, December 02, 2006

What is a sure formula for a "Lesser Lawrence"?

The Lawrence Journal World criticizes those who are concerned with excessive growth by stating, "Unfortunately, there are some in Lawrence who belong to the "Lesser Lawrence" fraternity when, in fact, the city needs dreamers, entrepreneurs and residents with the vision and enthusiasm to build Lawrence into an even finer and stronger city."

What is a "finer and stronger city"?

Many visions of the future of Lawrence exist, but it is doubtful that any of these visions included deteriorating older neighborhoods, blighted shopping strips, and a decaying downtown. It is equally likely that all of the visions seek strong older neighborhoods, vibrant shopping strips, and a downtown that attracts shoppers not only from Lawrence but from beyond. A "finer and stronger city" means development that serves to maintain and enhance our older neighborhoods, ensures the economic feasibility of our existing shopping centers, and preserves and improves our downtown.

Unfortunately, not all development leads Lawrence to a finer and stronger city. Some development leads to a weaker city that is more vulnerable to blight and decay. The city's leadership needs to know the difference.

How do we know good development from bad development?

The city needs to seek balance between the growth in demand for real estate, new as well as old, and the growth in the supply of new real estate.

The growth in demand for real estate is a function of the growth in the city's population and the growth in that population's income. If Lawrence remains an attractive city with good homes in viable neighborhoods, with good schools, and with good jobs with competitive wages, it will attract new residents. If Lawrence allows its older neighborhoods to deteriorate, its shopping centers to fall empty, its downtown to decay, and its base of jobs to pay sub-par wages, it will not attract new residents. This growth in demand can only be influenced by the city's actions; it cannot be controlled.

The growth in supply is under the city's control. Too many people, including the editors of the Journal World, equate all growth in supply with progress. History shows that this approach to development leads to overbuilt cities. When cities build more supply than their growth in demand can absorb, bad things result. We need only to look at nearby Topeka to confirm this. The new neighborhoods prosper, but older ones decline because there is insufficient demand to attract investment. The new retail centers succeed, but the older ones decay because there is insufficient demand to fill their stores. Older downtowns deteriorate because the shopping moves to the centers at the perimeter of the cities.

Overbuilding our supply of housing and retail space is the path that Lawrence has taken for too long. This is a sure formula that will lead to a "lesser Lawrence."

It is the job of the city's leadership to gauge the growth in demand and to find a way to match the growth in supply with the growth in demand. This will help preserve older neighborhoods by directing sufficient investment into these older areas to keep them viable. This will help to maintain older shopping strips by keeping them occupied with retail vendors who will attract sufficient business to remain economically feasible. This will help to protect the downtown as the unique place that identifies and defines Lawrence and that attracts visitors from outside the city. This will lead to a much greater Lawrence.

Saturday, October 28, 2006

What is the Myth of Development?

Many hold a false belief that all development is good.

The Lawrence Journal World buys into the myth that all development is good. In the editorial of October 28, 2006, it stated, "The company [Wal-Mart] would have hired many employees, would have provided extra income for many families and would have spun off added taxes for the benefit of the entire community."

Examination of the facts shows this to be incorrect.

1. No net gain in employment

While it is true that the company would have hired many employees, there would be no net gain in employment in the community. The total number of jobs in the retail sector is a function of the total spending in the retail sector. Adding new stores does not mean new spending. New stores do not add new people or new income. The new stores only displace workers from one store to another. We saw this when the Wal-Mart on south Iowa expanded; it caused the closure of the Food-4-Less. The gain in jobs at Wal-Mart was canceled by the loss of jobs at Food-4-Less.

2. No net gain in income and possibly a loss

If retail workers will not see any increase in their numbers, will they at least see a gain in their wages? With Wal-Mart, the answer is "No". Kroger will probably close the Dillon's store at 6th and Wakarusa if a Wal-Mart opens at the intersection. The Dillon's workers will lose their wages and benefits. Wal-Mart is notorious for paying low wages and offering few or no benefits to its workers. Thus, there is certainly no gain in wages, and probably, there will be a loss. More workers will be without a health plan, leaving the community vulnerable to greater unpaid usage of the City's hospital facilities.

3. No new sales taxes

Sales taxes from retail sales are paid by the consumer, not the vendor. Adding more stores does not increase the population or its income. It only changes the location where the sales tax is paid. Thus, adding a new Wal-Mart will not provide any increase in sales tax revenues for the community. It will only take it away from other stores and send it through Wal-Mart, with no net gain to the community.

4. Short-term gain in property taxes with a long-term loss

There will be a short-term gain in property taxes. A new Wal-Mart store will pay property taxes. This is an immediate gain to the City. However, because the retail maket in Lawrence is saturated with a surplus of stores, opening a new Wal-Mart will only cause other stores to close. As these stores close, they are still subject to property taxes, even if they are empty. But chronically empty stores create blight that is expensive to fix through redevelopment. This redevelopment generally comes with high public expenditure. A short-term gain with a new store will be lost through the high, long-term cost of blight elsewhere in our community.

It is a myth to believe that all development is good. There is little doubt that growth is good, but excessive growth is cancer. Lawerence, like any growing community, needs to be smart. It needs to distinguish between well planned beneficial growth and growth that does not serve the long-term interests of the community.

Thursday, October 26, 2006

Can good design cure bad development?

Design is important, but it cannot fix all of the problems resulting from bad planning.

The City has gone through a long and detailed process, attempting to determine whether or not a Wal-Mart should be built on the northwest corner of 6th and Wakarusa. Law suits have been filed. Landowners have made claims that it is their “right” to build whatever they want. Planning staff have been battered from all sides. Angry citizens have felt betrayed by their elected officials. Developers have effectively become a political party, attempting to purchase the votes they want on the City Commission.

Now it looks like Commissioner Highberger will switch sides, leaving the progressives, and joining the pro-developer camp. He indicates that if the design of Wal-Mart is improved, he will vote for the development.

An improved design, a few more trees in the parking lot or placing the buildings closer to the street, will do nothing to resolve the market impact. The town is already overbuilt in retail space. Adding a new Wal-Mart to an oversaturated market will only cause other stores to close and become vacant. Finding tenants will be difficult to impossible. It is probable that we will simply add to the already large stock of empty, deteriorating, and blighting vacant retail buildings that already deface our community. The jobs in those stores will be lost. The workers will have the unhappy choice between unemployment or going to work for Wal-Mart.

Good design is not the same as good planning.

No issue galvanized voters in the 2003 election as did the Wal-Mart issue. The voters called for good planning. They did not want sprawl, hurting the older districts of the City. They did not want overbuilding of commercial space, hurting the existing commercial districts, especially the downtown. Unfortunately, the leadership of the City failed to deliver. Sprawl and overbuilding continues unabated. No amount of architectural details can cover this failure.

Thursday, October 19, 2006

Do we need to worry about keeping developers happy?

"Yes" is not always the correct answer.

Developers are interested in building. The only answer that they want to hear when seeking planning approvals and building permits is "yes". Any other answer is, from their perspective, the wrong answer.Very often the community is best served by an answer other than "yes". Often the answer is simply "no". The proposal does not conform to the City's plan. The proposal is simply a bad proposal. Sometimes the answer is "not now". The proposal is premature because the infrastructure is not available to support the proposal or the proposal cannot be absorbed in the market without significant negative impact on the market. The proposed development may be too far from existing sewers or roads. The proposed development may add too much space to an already saturated market. The answer may be "not this design". The proposal may be too big or too poorly configured for the site or generate traffic or other problems. Developers are not happy with any of these answers.What are the consequences of developer's being unhappy?

Not all development is helpful.

This community has, for too long, equated progress with building. The difficulty with this equation is that not all development is a good thing. The community cannot grow and prosper without development, but not all development contributes to the prosperity of the community. Planning is how the community guides its growth and distinguishes between developments that are good for the community and those that are not. Left up to the developers, the community’s growth would not follow the plan. Left up to the developer, the community’s growth would be plagued with sprawl and excessive building as well as with a deteriorating downtown and declining older neighborhoods.

Guiding a growing community is tricky. Growth is a luxury that, if used well, can benefit all parts of the City. If left to the developers it will be squandered in the most profitable locations leaving the older parts of the City to deteriorate. Downtown can thrive and older neighborhoods can be revitalized if we carefully manage the growth. However, this is not the path of least resistance for the developers. Developers are prone to excessive growth, which should be curtailed, and are prone to sprawl, which needs to be redirected back to the older parts of the City.

The community should manage its growth in a way that is beneficial to the community as a whole. The community should not succumb to the pressures to make the developers happy.

Wednesday, October 11, 2006

What does Lawrence need in a Director of Planning?

Successful planning is much more than zoning administration.

Lawrence has confronted many difficulties as it seeks to cope with the rapid growth of its population. This led the prior Director of Planning to be overly focused on current planning at the expense of long-range planning and the ability to investigate the implications of public sector participation. Too often, the Director of Planning accepted that keeping developers happy was the measure of successful planning. Rather, the measure of successful planning is guiding the development process toward the successful implementation of the community’s comprehensive plan. The plan does not call for deteriorated neighborhoods and blighted shopping districts, but this is what we are getting. Given this focus on current planning (zoning administration) the staffing of the planning department failed to acquire individuals skilled at long-range planning and real estate development.

A few quick facts demonstrate the problems resulting from this process.

First, from 1990 to 2000, the housing stock grew by 27 percent while the population grew by only 22 percent. This 5 percent surplus corresponds to units and population lost to the City’s older central neighborhoods. The planning staff should have monitored these conditions and advised the Planning Commission and the City Commission as the pace of subdivision approvals began to outpace the population growth. It would have been very easy for the community to slow the pace of subdivision approval, but discussion of this pacing problem was not even raised by the staff and made part of the deliberations. In a growing community, there is no need to accept decline in any neighborhood. Successful growth management can direct some investment into all areas.

Second, from 1990 through 2005, the supply of retail space grew by 4.1 percent per year while retail spending grew by only 1.6 percent per year. Thus, the pace of growth of retail space was about two and one-half times the pace of demand for that space. The outcome has been the many empty shopping centers and strip malls blighting many areas of the City. A further outcome is the many retail buildings being converted into office space, spreading the problems of glutted retail market into the office market. Again, the staff failed to carry out normal planning analysis alerting the Planning Commission and the City Commission on these matters as the development proposals have moved forward.

Under the prior Director of Planning, staff did not evaluate or attempt to correct market analyses submitted by developers. Developers are required to submit a market impact analysis with their development proposals. The simple submission of even a flawed analysis was accepted as meeting the market analysis requirement. This renders the requirement meaningless and misinforms the decision makers.

These problems suggest that the new Director of Planning needs to have skills far beyond zoning administration. While zoning administration is important, it is only a portion of the work that needs to be conducted by the Planning Department.

Smart growth requires skills in market analysis, real estate investment analysis, and economic development analysis.

Skills are needed in:

Long Range Planning. The Director of Planning needs to understand standard procedures of market analysis. One of the key roles of planning is to help keep the pace of growth of supply in balance with the pace of growth of demand. It has long been known that real estate developers are prone to over building various markets, leading to empty and blighted older spaces. It is much easier and less expensive for a city to prevent blight than it is to attempt the redevelopment of blighted space after the available demand has already been satisfied by a glut of new space. The practice of depending upon market analysis from developers leads to poor decisions. Developers will always find a way to twist the numbers to justify their developments. If the City is to make good decisions on its pace of growth, it must receive valid, professional market analysis from its own staff.

Real Estate Development Negotiations. The Director of Planning needs to understand how to negotiate public-private partnerships in real estate. Too many times, the City has entered into a partnership only to have the deal fall well short of its goals. Examples would be the Riverfront Mall and the Downtown 2000 project. In other cases, the Planning Commission or the City Commission asked for input on the financial feasibility of reducing the scale or changing the design of a proposal. The staff failed to answer the questions because they did not know how to address these issues of financial feasibility given their single-minded focus on zoning issues. Examples would be the Border’s Bookstore and the Hobbs-Taylor development. If the City is to make good decisions on its role and participation in developments of this type, it needs to have guidance of planning staff skilled in understanding real estate feasibility analysis and in negotiating the level of public participation needed to bring projects to feasibility.

Economic Development Planning. The Director of Planning needs to understand how to evaluate and implement successful public sector initiatives directed at business development and retention. The community has too long equated business advocacy with local economic development. This has led the City into the embarrassing position that more recipients of tax abatements are in non-compliance than in compliance. This reduces, even eliminates, the City’s capacity to effectively negotiate economic development packages. If the City is to make good decisions on its level of public subsidy to private firms, it needs planning staff informed on current practices in economic development and skilled in these negotiations.

For a Director of Planning to be successful, this person must, at least, be conversant in all of these areas. For the Planning Department to be successful, the staff must possess skills in all of these areas and have the courage to guide the City well, even when this means denial of a developer's proposal. All growth is not good. The Director of Planning and the staff working for this person need to know the difference between growth that is supportive of the City and growth that is harmful and need to guide the City accordingly.

Tuesday, October 03, 2006

Why do developers overbuild?

In theory, the market for real estate should be self-correcting. If prices fall and vacancies rise, developers should take these signals as indicators that no more space should be built. If prices rise and vacancies fall, developers should take these signals that more space is needed in the market. This is good theory, but it does not work. We know that developers are prone to building more space than the community can absorb. New space is added to markets that cannot fill up the existing space. So why do developers overbuild?

1. Developers will take any tenants.

Developers are concerned that their own space becomes occupied. It does not matter to them whether the tenants are new to town or are already in town and moving from an existing shopping center to the new one. Equally, developers do not care if the new center satisfies growth in demand only captures demand away from an existing center. If the new shopping center empties out an existing shopping center, this causes blight which is bad for the community. When Wal-Mart opened its supercenter, Food-4-Less closed. Wal-Mart is not satisfying new demand, it is simply capturing demand away from existing stores, leaving us with empty shopping centers.

2. Commercial development takes a long time.

Development is a slow process. A developer may read a signal saying that it is time to build in 2003. By the time the development is ready for occupancy, it is 2006. The market may change in the intervening time, shifting from a market needing new space to a market in surplus with no new spaced needed. The empty office structure in the 1800 block of Wakarusa is an example. The developer began in the belief that the office market would be strong. Instead, the structure has been empty for years because the office market turned soft.

3. Correct actions by individual developers do not add up to correct actions for the market.

Developers act alone. Several developers may read market signals to build. Individually, each is properly reacting to market signals. Collectively, the combined actions of all developers create too much space. We saw this in apartments in 1997. We normally add about 400 apartments per year, but that year we added about 1,200. Each developer was properly responding to market signals, but each wished that the other developers had not built. The resulting surplus hurt the older smaller apartment building owners hardest. It took about 3 years to absorb that surplus.

4. Tenants are more mobile than buildings.

If retail vendors see better opportunities in a different location, they will move when the net benefits of moving outweigh the costs. The commercial real estate left behind cannot be moved. Redevelopment of an outdated building can be costly, usually more costly than building a new structure on the periphery of the city. Redevelopment is tricky and generally has difficulty competing with newer, larger shopping space. The failure of the Downtown 2000 redevelopment plan is an example of this problem. There is simply too much supply for the few tenants seeking stores, and it is hard for expensive downtown redevelopment to compete with life-style centers at the edge of the City.

These conditions lead real estate markets to overbuild resulting in chronic vacancies and deterioration. When the vacancies and deterioration last long enough, blight is the result. Blight not only lowers the value of the surplus properties but it can lower the value of surrounding properties, causing a widespread loss in value. This is costly, ugly, and avoidable.

If a city like Lawrence wants to avoid such losses, it can correct the developers' propensity to overbuild through simple regulation of the flow of new space into the market. The rule is simple, do not allow the developers to build more space than the market can absorb. In retail markets, this means allowing the supply of space to grow only as fast as the growth in retail spending. In housing, this means only letting the supply of new units grow as fast as the growth in population.

Lawrence's failure to follow these rules has brought it to a very unfortunate position. The City has allowed so much retail space to be built that the downtown is being hurt along with several other older existing shopping centers. The City cannot proceed with its redevelopment plans downtown. Older shopping centers cannot attract new tenants. The City has allowed so much housing to be built that it is causing older neighborhoods to lose population and to lose investment needed to renovate older homes.

Lawrence needs to recognize that the real estate market is full of imperfections. Just because a developer wants to build does not mean that it is a good idea. Often the City needs to take the position that the developer must wait until the City can absorb the new development without harm to the remainder of the City.

Monday, September 25, 2006

Can downtown retail face down the competition?

The Sunday editorial, “Downtown future” is correct that maintaining the status quo isn’t an option. However, the editorial asserts that downtown can compete with developments built elsewhere in town. Evidence from here and throughout the nation suggests that this is not true.

Growth in retail space has outpaced demand for that space.

For years, Lawrence has approved more retail developments than it can absorb. From 1990 through 2005, retail spending grew by only 1.5 percent per year after inflation. During the same years, retail space grew by 4.1 percent per year. This is clear evidence that developers build more space than is needed. The results are empty space blighting parts of the City.

These new centers may enjoy a brief success when they open, but in the long-run they either cause blight in other shopping centers or fail themselves. The empty hulks are seen all over town.

• The Riverfront Mall was promised as the new anchor for downtown. It failed because of too much competition elsewhere. Now it is an uncomfortable mix of office and hotel and very little retail. The chances of it returning to a retail anchor are diminished with each additional development elsewhere.

• The Tanger Mall was promised as the new retail gateway to the City. It failed as well. It now stands largely empty, greeting entrants to the City with a blighted shopping center.

• Many other small strip malls sit empty or only partially occupied and in disrepair, especially along 23rd Street.

• Many shopping centers, including the Southern Hills Mall, 10 Marketplace plus others, have had to lease prime space to office uses because of a lack of demand for retail space. This spreads the problems with a glut of retail space into the office market, hurting it as well.

This overbuilding hurts redevelopment plans for downtown.

• Lawrence partnered with developers to redevelop part of downtown. The City built an $8 million parking garage on the 900 block of New Hampshire Street. In exchange, the developers were to build retail, office and residential space. The tax proceeds from this space were to pay for part of the cost of the garage. The redevelopment plan failed, in large part, because the City permitted and continues to permit too much space to be developed elsewhere.

• The new Hobbs-Taylor development on the 700 block of New Hampshire is having difficulty finding retail tenants because too much space is available.

The City should take steps to prevent the harm from these market failures.

If Lawrence wants its downtown to succeed, it must help the process. If it wants its downtown redevelopment plans to prosper, it cannot depend upon the retail vendors choosing downtown over the many developments in place an planned for West 6th Street. Experience in Lawrence and other cities suggests that new space at the suburban perimeter will be more appealing to the retailers that are being courted. If the City wants downtown to win the competition, it needs to help downtown. The editorial suggests that in the long-term we should let downtown “face down its competition”. In fact, in the long-term, downtown developments have tried to do this and lost.

The damage goes beyond downtown. Lawrence has already become a City pock-marked with deteriorated and empty retail centers, blighting many neighborhoods. If we want new growth to reinvest in the downtown and other older districts of the city, the process must be guided. It cannot be left to the developers and the retailers. We do not have enough demand to support both excessive growth in new shopping districts and redevelopment of our existing shopping centers.

It is long past time to reign in the growth of retail space in this town. Lawrence needs to bring the growth in retail space in line with the growth in spending and direct that growth where it is desired, into a vibrant downtown. Downtown Lawrence is one of the key identifying features of this community; we need it to prosper.

Wednesday, September 13, 2006

Are we building more housing than the City needs?

The pace of housing construction should match the pace of population growth.

Homebuilders in Lawrence appear to be building more housing than we need. From 1990 to 2000, the population rose by 22%. During the same time period, the housing stock grew by 27%, 5 percentage points than the amount needed to support the population growth. Note that the 27% growth in the stock is net growth, new units minus units demolished. Thus, the surplus growth was beyond the growth needed to cover losses of older units.

Current statistics suggest that the population growth rate is declining. The Census Bureau believes the City's growth rate has slowed from 2.0 percent per year to less than 1 percent per year. Yet, current building permit data suggest that housing is still being built at a rapid pace.

What is the harm?

Widespread vacancies lead to reduced investment, especially in rental properties. Older neighborhoods lose population as households leave older neighborhoods and move to new, unneeded subdivisions. Neighborhood schools close. Property values fall. The new investment in maintaining homes in older neighborhoods declines.

What is the benefit?

There a benefit from overbuilding. Home prices and rents fall or fail to rise as fast as they might otherwise. This is helpful for homebuyers and people who rent. However, everyone has an interest in the overall stability of the community. Once a household buys a home, that household has an interest in price stability rather than price decline. Similarly, renters have an interest in the long-terms health of the rental stock. If rents are held too low for too long, landlords reduce maintenance expenditures, lowering the quality of the rental stock.

Everyone--both owners and renters--have an interest in price stability. This means allowing the housing stock to grow at a pace that is sustainable, a pace that matches the population growth.

Achieving this is not hard. It simply means monitoring the growth in population and pacing the rate at which new subdivisions are approved. It is clear that depending upon the developers to set this pace will lead to long-term oversupply of homes. This is what was done all through the 1990s and into the current decade. Now that population growth appears to be slower than experience in the past, it is important that we reign in the pace of growth of housing development. Out goal is to have it match the pace of growth of population so as to not harm existing neighborhoods and to channel some of the growth back into existing neighborhoods.

Comments on the Market Impact of Wal-Mart at 6th and Wakarusa

Re: Proposed Development of Wal-Mart at 6th Street and Wakarusa Drive
Market Impact Study by Richard Caplan

Sent to the Planning Commissioners:

I have had the opportunity to review the various market impact studies on the Wal-Mart development prepared by Richard Caplan. The studies are flawed, leading to an incorrect conclusion.

Using the data from the Caplan studies and correcting the flaws, it is clear that the retail market of Lawrence cannot absorb the proposed Wal-Mart store and that the development of this store will cause other retail space already located in the market to fail.

1. Growth in the supply of retail space has far outpaced the growth in demand for retail space.

Caplan makes use of sales tax receipts from 1990 through 2005 to proxy demand for retail space. This is a good approach. However, the Caplan report uses the current dollar growth to project growth in demand. This is the same, incorrect, procedure he used in 2003 with his first market analysis.

As I pointed out in 2003, these numbers must be adjusted for inflation in order to estimate growth in retail spending. The applicant admitted to this flaw and withdrew the market analysis. The revised market analysis claims to correct sales tax data for inflation, but this correction is not shown in the data.

When corrected for inflation:

a. From 1990 to 2005, growth in retail spending is only 1.6% per year suggesting that the City should have kept retail space down to that same rate of growth. However, since 1990, the City's retail stock grew by 4.1% per year and by 4.9% per year from 1996 to 2005, far outpacing growth in demand leading to the widespread vacancy that we have today.

b. From 2000 to 2005, retail spending actually fell, indicating that there is no new demand for additional retail space.

2. The rate of population growth has declined.

The Caplan analysis makes extensive use of the Development Strategies Inc. (DSI) study. The DSI study makes use of population growth rates that are higher than Lawrence experienced even when the City was growing at its peak rate of 2.2% per year in the 1980s. DSI offers no justification for this assumption that population growth will be higher in the next decade than it ever has been in the past.

Caplan makes no mention of the Census Bureau's recent report suggesting that the City is now growing at about 0.6 percent per year. This Census figure is corroborated by the declining school enrollment, the high rental vacancy rates, and the declining inflation adjusted retail sales tax receipts.

3. Income growth has slowed corroborating the slow growth in retail spending.

Caplan uses U.S. Department of Commerce data to claim that income grew 14.4% from 2000 to 2004 suggesting that this indicates growing retail demand. What the report fails to state is that this only a 4.4 percent increase after inflation.

The Kansas Department of Labor Employment Survey provides local, thus better, data on income growth. The employment survey finds that wages grew by only 3.4% from 2000 to 2005 after inflation. This wage growth translates into about 0.7% growth in income per year.

Even over a longer period of 1996 to 2005, wages grew by only 1.1% per year. If multiplied by 0.6% growth in population per year, the growth in retail demand is only 1.7% per year. This closely corresponds to the 1.6% per year in real growth in retail spending found in the sales tax data. With either approach retail demand is growing by much less than the growth in retail space. This translates into a need for only about 110,000 square feet per year, if the City was not already overbuilt. This indicates that the City cannot absorb retail space at the rapid pace at which it is now being planned and built.

4. The vacancy rate in the retail market is higher than Caplan and DSI assert.

Caplan makes use of the DSI estimated retail vacancy rate of 3.9%. On a total stock of 6,479,000 square feet, this vacancy rate suggests about 250,000 square feet of vacant space. Simple addition of known, long-term vacant buildings adds to more than 250,000 square feet. For example, the Tanger Mall is 135,000 square feet alone. This indicates that the DSI study did not properly count vacant space and cannot be relied upon for an analysis of the vacancy conditions of the City.

Several conclusions can be made after correcting the flaws found in the Caplan study.

1. The City has permitted developers to build more retail space than the City can absorb. This is hurting existing retail centers. If a second Wal-Mart is built at 6th Street and Wakarusa Drive, this additional retail space will cause a comparable amount of space to go vacant elsewhere in the community, blighting these existing shopping districts.

2. Population growth and income growth has slowed in the community. This necessitates that the community slow the pace of retail expansion in the future so as to not further blight existing shopping districts.

3. The City has already allowed too much space to be built leading to widespread and long-term vacancies. This should cause the City to exercise restraint before permitting any expansion of the already bloated supply of retail space.

Communities throughout the nation have learned to monitor the health of their real estate markets and to plan accordingly. Cities can better achieve their planning goals if they react appropriately to market signals. The Lawrence retail market is dangerously overbuilt and will only become worse if additional space is added to the supply. This leads to the conclusion that a Wal-Mart store should not be developed now at 6th and Wakarusa Drive.

Tuesday, September 12, 2006

Overbuilt Retail in Lawrence

The Saturday Column (LJW 9/2/2006) calls for strengthening downtown. Proponents of downtown and smart growth agree. A strong and vibrant downtown is crucial to keeping Lawrence a good place to live.

Real estate economics instructs that the amount of successful retail space in a community can be predicted from its population size and income. More stores do not create more people or more spending; they only spread the spending more thinly, hurting the older and weaker shopping districts.

This is the basic purpose of the retail market impact procedure, to keep the growth of retail space in line with the growth of demand for that space. Trusting the market to do this has proven to be a mistake in countless communities. Developers will overbuild new space, even if means high vacancy and blight to older shopping districts. Lawrence needs to protect itself from this process.

Retail spending from 1990 to 2005 grew by only 1.6 percent per year after inflation, but retail space grew by 4.1 percent per year, over twice the supportable rate. The City cannot support a strong downtown as well as excessive development elsewhere.

Lawrence need only look at Topeka to understand the consequences of overbuilding by developers. The White Lakes Mall killed Topeka’s downtown; Wannamaker Road killed the White Lakes Mall. Lawrence is following Topeka’s lead. Unless the Planning Commission reigns in the developers who are poised to overbuild this city, the developers will hurt the very downtown that makes Lawrence uniquely attractive.