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.