Sunday, July 20, 2014

Should Lawrence Approve the Southpoint Development on South Iowa Street?

The Proposed Southpoint Development

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

Additional Hotel Space:


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


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


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


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


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


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


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


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



Additional Retail Space:


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


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


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


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


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



Table:    Lawrence Retail Supply and Demand Conditions 1995 to 2012

 $   13,593,996
 $   13,797,066
 $   12,695,769
Demand Annualized Growth Rate
1995 to 2012
2000 to 2012
Supply Annualized Growth Rate
1995 to 2012
2000 to 2012



Source:  City of Lawrence 2012 Retail Market Report


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


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


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


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


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


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


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


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


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


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


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


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




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


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


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

Wednesday, July 09, 2014

Which is better, smart growth or giveaways?

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


Income Drives Growth in the Market, Not Growth in Buildings


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


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


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


Zero-sum Markets


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


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


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


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


Good Growth Management


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


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




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