Wednesday, July 25, 2007

What happens when the Planning Commission does not plan?

The Lawrence-Douglas County Planning Commission consciously defined itself as the "land use" commission when it reviewed the development plan for the city's second Wal-Mart, this one to be located at 6th Street and Wakarusa Drive. Anytime a planning commission shirks its duty to plan and attempts to redefine itself as something less, such as a "land use" commission, a city is hurt.

On July 23rd, the Planning Commission reviewed the development plan for the second Wal-Mart. The Chair of the Planning Commission stated, "We are the land use commission". With this statement, the Chair asserted that the role of the Planning Commission is very narrow, that of administering zoning ordinances that specify the height, size, and use of buildings. Zoning administration is part of the job of the Planning Commission, but this is far short of all of its full job.

Horizon 2020 is the comprehensive plan for the community. The zoning ordinance and zoning map derive from this plan, but they are not the whole of the plan. The plan calls for the city to monitor the pace of growth of retail space and to protect and preserve the city's existing retail districts.

Maintaining the proper pace of growth is crucial to the success of a city. If the retail space grows too fast, the new space will be occupied, but the surplus will cause older space to become vacant, to deteriorate, and to cause blight. If a city can pace the growth of retail space so that the pace of growth in supply is balanced with the pace of growth in demand, then the retail market can remain healthy.

In the absence of such planning, a city is letting the developers determine the pace of growth of retail supply. History shows that developers are prone to overbuilding. Lawrence is particularly troubled with overbuilding as the supply of space has been growing at three times the pace of growth in retail spending over a period of 12 years. This is a long-term problem. A twelve-year period is not a short-term fluctuation; it is a chronic problem. The harm of this overbuilding is that is causes widespread vacancy in older commercial districts, causing loss in investment, loss in value to surrounding neighborhoods, and lost public investment in revitalization. In Lawrence, the problem is so widespread that the retail oversupply has spread to the office market as dead malls seek out office tenants to avoid total vacancy. This depletes demand from the office market, hurting its capacity to survive.

The Planning Commission chose to ignore these issues. When it narrowly defined itself as the "land use" commission, it took the position that if the land is zoned for commercial space, that the developer, not the community, decides when that land is developed. It is this type of thinking that has generated many of Lawrence's real estate problems. It perpetuates the overbuilding that has resulted in:

1. A blighting level of vacancy in North Lawrence,

2. New retail space downtown unable to attract tenants,

3. Wasted large-scale investment in downtown revitalization with the new parking garage unable to leverage new commercial development,

4. Office usage of retail space in several malls along 23rd Street, and

5. Widespread vacant and deteriorating retail stores.

There is little doubt that adding a second Wal-Mart (or any other store of this scale) will add no new spending to the community. It will only displace retail spending from other stores. Thus, adding this new space will only vacate space elsewhere. The City currently suffers from:

1. Over 300,000 square feet of surplus vacant space (vacant space beyond a normal 5% vacancy rate),

2. Over 800,000 square feet of retail space in the planning process (including the Wal-Mart proposal), and

3. An ability to absorb only about 50,000 square feet per year given the pace of growth of retail spending.

The arithmetic is sobering. If no more space were to be built, it would take 6 years to absorb just the surplus vacant space that exists now. If all of the proposed space is built (Wal-Mart, Bauer Farms, Northgate, and Mercato), it will take an additional 16 years to fill all of this space.

The space may be built, and most of it may be occupied early in its lifespan, but the result will be continued widespread vacancy, deterioration, and blight elsewhere in the community. This can be avoided if the Planning Commission ceases to be narrowly defined zoning administrator and becomes what it is called upon to be, a commission that plans.

Tuesday, June 12, 2007

Should the City treat demand for real estate as a scarce resource?

The Lawrence Journal World (“Downtown’s future looking up: Leaders may consider guidelines for vertical redevelopment”, June 12, 2007) reports that the City Commission is thinking about ways to help redevelop the downtown. This is a good and useful exercise. The article also reports that the City is considering ways to permit buildings taller than experienced in the past. Again, this is a useful exercise. What is missing in the article is recognition by the City that buildings, at any height, need tenants who want to fill them.

The demand for real estate is a function of the population, its income, and its spending habits, not the number or height of the buildings available. There is only a fixed amount of demand available to the various real estate markets of Lawrence. Creating more buildings will not create any more demand. It is a zero-sum game. There is some opportunity to import dollars from elsewhere through tourists, but the capacity to do this is very limited and often overstated. The various households and firms who operate here allocate the total demand for real estate across the City. If a market is overbuilt, attracting demand to any one area of town means that the demand is taken away from another area of town.

If the City wants all the built space to be occupied and viable, then it should not permit more space to be built than this finite amount of demand can support.

What has been our experience in the various sectors of the real estate market?

Retail Sector

The supply of retail space is growing at an annual rate of over 3 percent per year with demand for that space growing by less than 1 percent. This excessive pace of growth doomed the retail market to what we have today, a market with widespread vacancy and blight. The overall retail vacancy rate is over 8 percent and over 10 percent for general merchandise space, the type of space sought after for downtown. At its extreme, this empty and under-utilized space is blighting some districts such as North Lawrence where nearly one-half of the retail space is empty. But the problem is not peculiar to North Lawrence. Many other retail centers, in all parts of the City, in buildings of all ages and sizes, are experiencing high vacancy.

Yet, the developers want to build more.

A second Wal-Mart will have little direct impact on downtown. Its competitors will be such vendors as Dillon’s grocery and Ace Hardware. However, the proposed Bauer Farms, Northgate, and Mercato developments are direct competitors with downtown. If built, these three developments will add over 600,000 square feet, equivalent to over one-half of all the retail space downtown. The growth in retail demand is sufficient for the City to absorb only about 50,000 square feet of new retail space per year. Clearly, these three developments constitute many years of growth in retail demand. It is doubtful that any downtown redevelopment proposals can be successful if the City has already approved over a decade’s worth of additional retail space elsewhere.

There are too few vendors to fill all of this space as well as redevelop large parts of downtown. Letting the vendors and the developers decide where this space will be filled is not the best way to achieve the city we want. The citizens, working through their planning process, should decide.

Office Sector

The office sector is in even worse shape. The retail sector is so overbuilt that owners of empty malls have leased space to office tenants rather than let their space go empty. This can be seen in the old Tanger Mall, 10 Marketplace, and the Southern Hills Mall. This has not been a temporary problem. Had it been, the mall owners would have taken the more lucrative retail tenants at the first opportunity, but office uses have occupied this surplus retail space for many years.

Spreading the problems of an overbuilt retail market into the office market has repercussions for the City’s downtown redevelopment plans. Evidence is found in the office space in the Hobbs-Taylor development. The space built for lease has been empty for too long.

Can the City hope to succeed in its redevelopment plans if a high quality project like the Hobbs-Taylor building is unable to lease either its office or its retail space? Usually, the first project in a redevelopment plan captures the latent demand that has been unsatisfied for some time, while buildings built in subsequent phases of redevelopment are slow to be leased. Given the overbuilt markets in Lawrence, even this initial building is struggling to find commercial tenants.

Residential Sector

The stock of homes grew much faster than the growth in population throughout the 1990s. The net growth in the stock of housing (new units minus demolitions) was 27 percent from 1990 to 2000. The growth in population was only 22 percent during the same time period. In round numbers, this means that about 120 more housing units were built per year than were needed. This resulted n unneeded new subdivisions that pulled residents out of older neighborhoods. This fostered deterioration and blight in these older neighborhoods, when the City should be ensuring that these neighborhoods maintain their population and the level of investment in the homes. Of the 40 neighborhoods of Lawrence, 14 experienced a decline in population and/or housing during the 1990s. There is no need for this to happen a growing city. The growth is being squandered. The high level of vacancies and the slow pace of home sales suggest that the problems continue today.

Lessons to Learn

The City should treat demand for real estate as a scarce commodity.

The market does not do a good job of pacing the growth of supply with the growth of demand. Developers and builders generate more supply than is needed. This creates vacancies and blight in otherwise good markets. The City needs to bring discipline to the market, helping to keep the pace of growth in supply in check with the pace of growth in demand.

The City also needs to take the initiative to direct that growth where it can do the most good.

For the retail market, the City should not only help to redevelop the downtown, but it should prevent other developments, such as West 6th Street, from damaging the downtown redevelopment plans. There is not enough demand for two downtowns. Lawrence can support one on Massachusetts Street or one on West 6th Street; there is insufficient demand to support both. The City needs to recognize that Massachusetts Street is the core of its unique destination shopping district, a destination that can be imitated but not duplicated on West 6th Street. That core cannot survive if too much additional space is created elsewhere, diluting the demand. We need only look at the Hobbs-Taylor building downtown for evidence. Its retail space remains empty; the market is saturated, leaving very desirable projects such as the Hobbs-Taylor building hurting.

For the office market, the process is very similar. The growth of office space needs to reflect the growth in employment among firms in the finance, insurance, health care, and other sectors that occupy this type of space. It is in the City’s interest to keep this component of the commercial real estate market healthy. To the extent that any downtown redevelopment plans contain office space, the success of these plans depends upon new demand materializing. It is hard to foresee success in future office space when a new office building such the one in the 1800 block of Wakarusa Drive has stood empty for years.

For the residential market, the City needs to pace the growth of residential space so that it matches the pace of growth of the population. If the net growth in homes is any faster, older neighborhoods are harmed and redevelopment plans for these areas will be foiled. It will add to the City’s debt burden, as it must pay for the new roads, sewers, and other services needed to support this surplus space. A growing city does not need to experience decline in any neighborhood; a smart city manages its growth seeing to it that some amount of growth and investment is attracted to all neighborhoods.

Demand for real estate is a finite scarce resource. The amount available dictates the success of any development or redevelopment plan. Good design and location are important, but they are of little consequence if the supply is far in excess of the demand for that space. If the City wants to succeed in its redevelopment plans for downtown, it must do much more than debate the number of stories in the buildings. It must carefully gauge the available demand for new space, permitting no more space to be built throughout the City than can be supported. The City must also allocate that space to downtown and elsewhere with equal care so that the finished space is able to be occupied and remain financially viable.

Thursday, April 26, 2007

Is the retail market of Lawrence overbuilt?

The retail market of Lawrence, Kansas is out of balance, with space growing much faster than demand for that space.

Growth in supply

· From 1995 into 2007, the stock of retail space grew by 3.0 percent per year.

Growth in demand

· The inflation adjusted pace of growth in demand for retail space is growing at a rate of little less than 1 percent per year.
· The number of retail firms has been effectively flat and retail employment has fallen from 2001 to 2007.


· The mismatch between the pace of growth in supply and the pace of growth in demand is large (supply is growing at a pace 3 times the pace of growth in demand), and it is long-term (lasting more than a decade).

Proposed developments

· Proposed developments will add over 800,000 square feet of retail space. This represents an increase in the already overbuilt stock of over 12 percent.

Consequences of the mismatch

· There is over 540,000 square feet of vacant retail space in Lawrence, 395,000 south of it river.
· About 364,000 square feet of this vacant space south of the river is in general merchandise, automotive, and food use, a category that developers are seeking to expand further.
· General merchandise space, which makes up about one-half of the total stock of space, has a very high vacancy rate of 13.5 percent. Even if North Lawrence is removed from the stock general merchandise space has a vacancy of 10.1 percent, which is twice the level of a healthy market.
· The surplus stock is creating blight that was contained in North Lawrence, but now it is spreading.
· The City cannot absorb more space; additional stock will only increase vacancies throughout the City.
· The City needs to protect itself from the harm of this overbuilding by slowing the pace of retail development.

Wednesday, April 11, 2007

Who should set the pace of development?

George Gurley (LJW April 8, 2008) is correct that “the champions of growth and the proponents of preservation could learn to negotiate with one another.” However, his view of the planning and development process in Lawrence is incorrect on many counts.

Horizon 2020 is the community’s expression of what it wants. At 6th and Wakarusa, the plan called for 200,000 square feet of space. The developers built that amount, but they want to build more. They are manipulating the planning process, seeking to build over 400,000 square feet, more than twice the planned amount. When blocked from overbuilding, developers criticize the planning process for its “lengthy delays” and “inconsistent interpretations.” What is really happening is that developers will not take “No” as an answer. If an intersection’s retail space is built to capacity, then no more retail space is needed. Proposals to build more should be met with a firm “No” and calling this response a “lengthy delay” or an “inconsistent interpretation” is incorrect and unfair to the community.

Gurley disparages efforts to control the growth of retail spaces saying that “overbuilding is usually self-correcting.” The facts show this to be untrue. If the process was self-correcting, there would be no long-terms trend of excessive development or high vacancies. Unfortunately, Lawrence has witnessed both. From 1995 through 2005, the retail space in Lawrence grew by 3.0 percent per year. During the same years, real growth in spending increased only 0.8 percent per year. Thus, retail space grew at a pace over three times greater (in fact almost four times greater) than the growth in demand for that space. The result is a high vacancy rate and conversion of retail space to other uses, spreading the harm of overbuilt markets beyond the retail sector.

The vacancy rate for general merchandise space in Lawrence is over 10 percent, double the normally accepted standard, and this figure excludes North Lawrence and space converted out of retail use, such as the Riverfront Mall. Some of the converted retail space is now in office use, making it hard if not impossible for the office market to succeed. Think of the empty office structure in the 1800 block of Wakarusa; it has stood empty for years. Some of the converted retail space is in hotel use, making it hard if not impossible for the lodging market to succeed. Converting the Riverfront Mall into a hotel has reduced the capacity of other downtown redevelopment plans to materialize including the plan for which the taxpayers built the $8 million parking garage in the 900 block of New Hampshire.

Developers build in saturated markets because they are willing to gamble that they can still make money. They believe that new, larger, better located space can capture tenants away from older space. They believe that their project will succeed and others will fail. They believe that they can make their money quickly and get out before suffering the long-term consequences of a glutted market. The evidence is mounting against this thinking. For all but North Lawrence, the vacancy rates show that newer space is no different than older space when it comes to maintaining occupancy. The vacancy rates show that larger space is no different than smaller space. Finally, the vacancy rates show that the far west side of town is no different than the east side.

The community is paying the price for this overbuilding. The taxpayers endorsed a redevelopment plan for downtown, contributing the parking garage, but that plan never materialized. It was delayed by the 2000-2001 recession, but now it is doubtful that it can ever succeed because the City has approved large amounts of retail space in west Lawrence at 6th and Wakarusa and at 6th and the SLT. The shopping centers and downtown are all competing for the same tenants. The retailers are aware of the slow pace of growth in retail spending in Lawrence and will enter into the market only to the extent that they will be supported by this sluggish growth or can capture spending away from existing stores. This means that only part, and definitely not all, of the development can succeed. The blight is spreading. It was confined to North Lawrence, but now “dead malls” and underperforming shopping centers can be found throughout the city. These poorly performing retail centers tend to receive little maintenance. They become liabilities rather than assets to their surrounding neighborhoods. We need only look at Topeka to see what happens if this overdevelopment process is allowed to continue for too long.

Planning for the growth of retail space is hardly “farfetched” as Gurley states. Rather, pacing the growth in supply is a good way for the citizens of Lawrence to protect themselves from the overbuilding and blight that has plagued so many other cities when the developers are left to their own devices. Only the City, not the developers or the builders or brokers, can bring discipline to the development process and ensure that the pace of growth of space does not exceed the pace of growth of demand for that space.

Wednesday, March 14, 2007

Who runs Lawrence, the developers or the citizens?

The urban growth machine

Over 30 years ago Harvey Molotch wrote a now famous article that described political urban growth machines (H. Molotch, The American Journal of Sociology, 1976). In this article, Molotch explains how developers and others interested in the development process organize to capture local government in order to achieve their ends.

Lawrence has, for a long time, been struggling to control the influence of such an urban growth machine.

When the developers can get their friends elected to the City Commission, these friends can facilitate the development process. Developer-friendly mayors can appoint developer friendly people to the Planning Commission. Thus, when the developer needs a favorable vote in order to gain approval of a development proposal that runs counter to the community's comprehensive plan, the developer-friendly Planning Commission will ignore the plan and approve the development.

When the developers can get their friends elected to the City Commission, developer control of the planning process is complete. The City Commission sits as the final level of quality control in planning decisions. Even if a development proposal fails to gain approval from the Planning Commission, a developer-friendly City Commission can be counted on to approve a proposal at odds with the plan.

The growth machine in action in Lawrence

We have seen this process manifest itself in numerous retail proposals calling for more space to be built than is permitted in the plan. The best example is at 6th Street and Wakarusa Drive. The plan calls for no more than 200,000 square feet of space, but the Planning Commission approved over 400,000 square feet of space. This hurts older shopping districts and especially hurts downtown which is specifically identified for protection by the City’s plan.

We have also seen this process play out in the excessive growth of housing subdivisions and apartment complexes on the perimeter of the city. During the 1990s, developers built 20% more housing than the population growth demanded. This drew population and investment out of older neighborhoods causing millions of dollars of property value to be lost.

Planning mistakes of this scale do not happen by accident. It takes the concerted efforts of a well-organized, developer-driven growth machine to do this much harm.

Who will control the future composition of the City Commission?

Builders and others closely tied to the development process have a keen interest in the current election. They are not in control of the current City Commission, but they want to be. They can only count of two votes, Hack and Amyx. The developers are not in control of the current Planning Commission. It is split evenly between pro-developer commissioners and pro-planning commissioners. This will probably change. Several pro-planning members of the Planning Commission will see their terms expire. Soon-to-be Mayor Hack will have the opportunity to appoint replacement members to the Planning Commission. It is very likely that she will appoint people who are pro-developer.

The upcoming election will dictate whether the next City Commission will also shift to a pro-developer majority. The developers know that they only need to win a single seat to have a pro-developer majority on the City Commission. Coupled with a pro-developer Planning Commission, the growth machine will encounter few obstacles, at least for the next couple of years. This is why the developers are investing so heavily in this election with large contributions to their selected candidates, Chestnut, Dever and Bush.

It is important that the community protect itself. Citizens all too often participate in the planning process only when the development issue is in their own back yard. By then it is too late. This level of participation is survivable if the citizens can count on their elected officials to serve the interests of the community as a whole, not the narrow special interests of the developers, builders and other players in the real estate development process. For this reason, voters need to elect David Schauner, Carey Maynard-Moody, and Dennis “Boog” Highberger.

Wednesday, February 07, 2007

Why do real estate developers make such large contributions to local elections?

Real estate developers and their attorneys have contributed heavily to the next City Commission election.

The Kansas Governmental Ethics Commission report for January 10, 2007 finds that only two candidates had raised campaign funds during November and December of 2006. The other candidates had yet to get organized. Combined, these two Candidates, Rob Chestnut and Michael Dever, have received over $9,500. These contributions come from 71 contributors with 34 of them from the real estate development industry. These developers, brokers and attorneys contributed over 60% of the dollars.

Why is it that the developers and builders make such a disproportionate share of contributions to local political campaigns? It cannot be their contribution to the workforce. Educators make up a larger share of employment in Douglas County than do developers and builders. Yet, educators do not make such large contributions. Health care providers make up a larger share of employment than developers and builders. Yet, health care providers do not make such large contributions.

It is doubtful that developers and builders are any more altruistic than either educators or health care providers. Educators and health care providers both have a deep-seated interest in the quality of their community.

The simple answer is that developers expect something for their contributions. They want a City Commission that is biased in favor of approving any development proposal that comes along, whether it is good for the community or not, whether it is in accordance with the community's comprehensive plan or not.

If the developers and builders can capture three votes on the fiver-member City Commission, it matters little what the plan says; the City Commission can amend the plan any time it wants. With pro-developer City Commissioners, the developers and builders can get people from their industry appointed to the Planning Commission so as to smooth the planning process when a development proposal runs counter to the plan. Having people from the development industry is constrained and even prohibited in many cities; in Lawrence, it is the norm.

Developers claim that all they want from the planning process is predictability. This is not true except in the narrow sense that the developers and a predictable answer of "Yes" to their every proposal. This means that they want the answer to be "Yes" even when the proposal is contrary to the plan and not good for the community. They are willing to pay heavily to get the answer "Yes".

The citizens of Lawrence need to protect themselves from the harm that can be done by a City Commission and a Planning Commission that is biased in favor of developers. Overbuilt retail space will blight older shopping districts and damage downtown redevelopment plans. Overbuilt subdivisions will cause the deterioration of older neighborhoods, hurting the capacity of the City to bring reinvestment to these existing neighborhoods.

Independent of the amount of money contributed, the predictable answer from the planning process should not be "Yes" to every development proposal, but "Yes" only to those proposals that serve the wants and needs of the larger community.

Tuesday, January 30, 2007

Will the Smartcode be modified to reflect Lawrence's needs?

Questions for Placemakers

1. Pace of growth of retail space and of housing stock

Like many cities nationwide, Lawrence has a lengthy history of building retail space faster than the growth in demand for that space. This produces "dead malls," usually older shopping centers, blighting their surrounding neighborhoods. In an effort to reduce losses on these properties, owners are leasing space for office uses, spreading the problems of an over-built market from the retail sector to the office sector.

Like many cities nationwide, Lawrence also has a lengthy history of building housing faster than population growth. The new units tend to be located at the perimeter of the city. The result is an out-migration from the older neighborhoods. In these older neighborhoods, owner-occupied units are being converted to rentals, neighborhood schools are being closed, homes are deteriorating, and value is being lost.

The Smartcode being proposed appears to rely on zoning and the development of infrastructure to set the pace of development. This fails to recognize the problems that Lawrence is confronting. Will the Smartcode be modified to include specific provisions permitting the City to regulate the pace of growth of retail space and housing space, seeking balance between the growth in supply and the growth in demand?

2. Revitalization of downtown and older neighborhoods

Lawrence has invested millions of dollars to foster the revitalization of its downtown. A few years ago, the City built an $8 million parking garage to be financed, in part, by tax revenues from new mixed-used development. The new development did not materialize because of insufficient demand for the space. The taxpayers are now carrying the debt on that garage. Other downtown developments are confronting difficulties landing retail tenants. Yet, the City has permitted competing shopping centers to be developed at the perimeter of the City.

Lawrence has also invested millions of dollars to foster the revitalization of its older neighborhoods, especially in the east and north sides of the City. However, these efforts have not brought sufficient new investment into these neighborhoods to stop their decline and bring about their revitalization.

How will the Smartcode ensure that sufficient investment is directed toward the downtown and the older neighborhoods and not siphoned away to new shopping centers and new subdivisions?

3. Public input on development proposals

Citizens in Lawrence are concerned about the timing, location, design, public sector cost, traffic impact, market impact and other implications of new development. Citizens know that real estate development is complex, with many and varied implications for different parts of the community. The Smartcode appears to provide for very rapid movement from a development proposal to a building permit, with little or no opportunity for public review, input, and negotiation. This process seems to assume that every development implication has been anticipated and properly accommodated in TND charrette process. This seems improbably in the extreme.

Will the Smartcode be modified to provide for citizen review and input on significant development proposals, with decision by the City Commission?

Saturday, January 20, 2007

How do we ensure retail survival?

The editorial on retail survival (Lawrence Journal World, January 7, 2007) correctly identifies the problem but misidentifies the solution. Lawrence, and especially downtown Lawrence, confronts a problem with a surplus of retail space. As you say, “demand has slowed”. Population growth has slowed as has income growth. This leads to lower growth in retail spending, the engine that drives demand for retail space. Unfortunately, growth in the supply of retail space has continued at an unsustainable pace, leaving the city pock marked with vacant and, in some cases, blighted shopping centers.

You suggest that, as downtown competes with this surplus of retail space elsewhere in the city, that it “meet that competition head-on”. Experience in many other markets tells us that this is a prescription for failure. If more space is built than can be supported, competition will pick some winners and leave some losers to deteriorate. The community will be left with the blighting influence of the failed space. Topeka is a nearby example; both its downtown and its White Lakes Mall sit largely empty and blighted because of overbuilding elsewhere.

Lawrence can overbuild and let competition pick the winners leaving the city to suffer with the deteriorated losers. Alternatively, Lawrence can be smart and limit the growth in retail space, keeping it in line with the pace of growth in retail demand. Stores will be occupied, and downtown can thrive rather than just survive.

The market left to itself is not smart enough to pace its own growth; it is prone to overbuilding. Planning for balanced growth is an essential function of local government if the city is to protect the retail centers it already has and is to prevent the blighting influence of surplus growth.