Thursday, November 03, 2005

The dynamics of downtown Houston

Today we have a fascinating guest blog post from Steve with an insider's perspective on the dynamics of downtown Houston. As of "press time", I'm not sure whether Steve wants to remain semi-anonymous or not, so, Steve, if you would like to go public and get a little PR for yourself and/or your company, please feel free to put your info in the comments.

A major part of the vision for Downtown Houston, at least among most who are interested in seeing it become something more than it is today (and it’s come a long way in the last 10 years), is for it to become a residential neighborhood in addition to an office and entertainment center. There are two main reasons for this. (1) A larger residential population will help encourage and sustain the development of an active “street life” that includes street-level retail and well-used public spaces, including parks and public sidewalks. (2) Given that it will be probably be a number of years – perhaps many years – before there is support for conversion of the huge amount of underutilized land Downtown into office buildings, residential development would seem to be one way of ridding the area of the depressing surface parking lots or dilapidated structures. (If you count on those parking in one of those lots you might not find that idea to be a good one.)

Unfortunately, for various reasons, it looks like this objective is going to be much more difficult to achieve in the near term than initially thought. Three main factors combine to produce difficulty: (1) high land costs and stubborn landowners holding out for development of the next office tower, (2) high and rising construction costs, and (3) Houston’s astoundingly low housing price structure compared to other large, thriving metropolitan areas. There’s an additional factor which I’ll get to shortly.

Reason (1) is pretty self-explanatory. Even recent land transactions have indicated values in excess of $100 per square feet in areas near the central part of Downtown and next to the planned park in front of the Convention Center. Such land costs are prohibitive to most types of housing development, except high-rises. Values get lower as you approach the southern and eastern perimeter of Downtown but are still an issue.

Reason (2), construction costs, is probably the most damaging factor in the near term. Costs for items like cement and steel, obviously major components of taller structures, have risen dramatically in the last 18 months, with an extra bump after the hurricanes. Projects that might have been feasible two years ago aren’t any longer. There’s speculation that costs will eventually drop but no one really knows when or how much.

The third reason, housing prices, is the most ironic in some ways. You might sum up Houston’s big three attraction factors for employers and employees as a growing economy with a solid base in the energy and other industries, mild winters, and low real estate costs. So I doubt anyone would want to give up our cheap housing prices, they’re too critical for our economy. But this means that it’s really, really hard to get the prices needed to justify concrete-and-steel construction. It shouldn’t be a surprise that several proposed high-rise housing developments, in Downtown and elsewhere in Houston, have recently been canceled. Construction costs went up but buyers (most of these projects were condos because the rental market has been so weak and overbuilt here) wouldn’t pay the increased prices the developers needed. And why would you pay for a condo when you can go get one of the ubiquitous new townhomes, with up to twice the square footage, an attached garage, your own land (maybe with a tiny yard even), nobody living above you, lower monthly association fees, and a location within a few miles of Downtown (even literally a few blocks from Downtown), for AN EQUAL OR LOWER TOTAL PRICE? And with a lack of development regulations to restrict it, townhome and apartment supply will continue to explode, including into previously “no-go” areas like Third Ward and Near Northside, satisfying most of the demand for urban core residential locations. The townhome development shows there’s definitely substantial demand for living in the core, but there’s also a huge amount of developable or re-developable land in the core. (An aside: I went to Thelma’s BBQ today in the “East Downtown” area north of IH 45 and east of US 59, off Dowling. Its streets and infrastructure, and its public environment in general, are shockingly and appallingly decrepit. Yet, there they were, multiple groups of brand new and under construction townhomes, spurred I believe entirely by the private sector. Amazing.)

This brings me to the last factor, related to reason (3). It’s the idea of a “place premium.” It’s been shown that areas or developments with a walkable, lively, mixed-use environment obtain premiums on residential prices. Some areas also get a “hip” premium, especially among younger buyers or renters. Prices can literally change greatly with each block further away from the “zone” that you get. These types of places can generate successful dense housing markets, with prices that justify new construction, because people are willing to pay more to consume what they consider to be a quality public environment and close access to the “heart of the action,” trading off the size (but not quality) of their private environment. This can happen on a large scale, like in San Francisco. Or it can occur in very localized but intense places like Philadelphia’s Center City or, dare I say, the Uptown Dallas / Turtle Creek area in our neighbor to the north.

This has basically not happened in Houston, or more accurately, has happened over a very large area so the price gradient is much flatter and the effects less intense. The only area within the central city where new high-rise housing appears truly viable under current conditions is Uptown. That’s because you have wealthy homeowners from nearby Tanglewood and River Oaks who can trade their single family homes for luxury condos and remain “in their ‘hood” with all their favorite stores and restaurants but with a lower-hassle housing product. There’s also the sprinkling of international buyers who want their pad in Houston for their shopping and medical trips. Areas like Downtown and Midtown don’t have that surrounding base of luxury single family neighborhoods from which to draw, and they’re not shopping destinations. It’s questionable how truly deep that market is anyway – we’re talking the very top of the price/demand pyramid here. So, Downtown and Midtown will have to focus on wood-frame construction for the time being, meaning a maximum of four residential stories. Dense for Houston, perhaps, but less dense than many had hoped.

In Uptown Dallas, and apparently to some extent in Austin, a market has been created where wealthy or high-income young folks are buying or renting pretty high-priced high-rise units. I’m told they’re generally looking very specifically for condominiums and want a very central location in a very hip urban neighborhood – walkable retail etc. Houston has not created that type of neighborhood, yet, though they’re working on it in Sugar Land and The Woodlands. By and large, I don’t think Houstonians assign much value to the walking-distance environment. Partly this is because it’s incredibly easy to drive (and usually to park) in Houston. (Please don’t complain about our traffic, we’re much better off than most cities our size, especially in the urban core.) It’s also because we ignored our street and sidewalk environment and let it deteriorate so badly over so many years, its lack of value became ingrained in our local culture. So we think of being within two or three miles of Downtown as practically being in Downtown – it’s only a five minute drive, right? Finally, I have to wonder if the type of folks who live in Houston just have different tastes and sensibilities from Dallas and Austin (and Atlanta and Charlotte, and…). I mean, how many folks ever moved here seeking a high-density urban lifestyle? Maybe Dallas’ connection to the financial, advertising, and fashion industries skew its real estate tastes more than we might have thought.

I have more thoughts on what this means for the development of "walkable urbanity" in Houston, but I'll save those for another day.

All of these comments match pretty much exactly with my own experience and thoughts. As noted in the comments debate here, it seems like density is deeply intertwined with high housing costs, and that it's almost impossible to develop any significant high-density residental areas when quality, affordable lower density is available nearby.

Building on Steve's point, Houston's near-term best bet for density may not be downtown or Midtown, but a pedestrian/transit/taxi evolution of the Uptown/Galleria area into Houston's own version of Manhattan's wealthy "upper east side". The residential towers are already there and more are being built, they just need the pedestrian-friendly streetscape to go with them.

2 Comments:

At 2:02 PM, November 04, 2005, Anonymous Anonymous said...

I think "Steve" makes some useful points about the downtown housing market
dynamics, especially about the tendency of developers to hold out for the
bigger opportunity later. In any case, it's always about what can be
profitably built and sold in any situation. I would add several comments:

(1) Experience from other cities shows that the development of brand new
neighborhoods takes a lot of time. Observing the Houston scene as a one-time
resident of Midtown and a window shopper in Downtown, I think the city has
come a long way very quickly. Maybe that doesn't square with a Houstonian
sense of development time, but that's the view of a relative newcomer.

(2) If there's an under-achievement in the production of new urban housing
and the creation of new urban neighborhoods it surely has something to do
with how much ground we have had to make up in developing the complex
amenities that make up a "walkable urban neighborhood." This has to do with
street scape design, connections to transit, proximities to retail, and
overall density. It hasn't helped in Midtown, for example, that new retail
is conventional suburban style box-in-a-sea-of-parking development, or that
places like Camden and AMLI are basically barricaded islands. Overall, if
these neighborhoods have done less well than we hoped, it is in part because
the "product" as it should be offered doesn't fully exist yet. What it
suggests to me is a stronger role and more aggressive approach by the
management districts who have jurisdiction in these neighborhoods to shape
both development and investment in public amenities.

(3) Finally, I think it clearly *is* possible to develop high-density,
high-rise housing even when other choices are available, including
low-density and single family housing. To say otherwise is to suggest that
all Americans want the same thing. What the trajectory of the housing market
suggests, instead, is that even while single family housing continues to
have a huge appeal in our nation and our city, there is a great diversity of
preferences for housing in terms of location, form of tenure, building type,
and more. I suspect that diversity of preferences will widen, not narrow, as
the years go on.

Regards,

Bradshaw Hovey

 
At 2:03 PM, November 04, 2005, Anonymous Anonymous said...

Mr. Bradshaw, I generally agree with your comments. By the way, my name is
Steve Spillette, my firm is Spillette Consulting, specializing in Urban
Development Strategies. I look for that fuzzy nexus among Houston's free
market dynamics, public policies and investments, and the goal of making our
region a better place. I have had numerous management districts, area
associations, municipalities, and civic groups as clients.

Some things to add to your points:

1. In Houston, because of the freedom to add housing supply (lack of
regulation), the large, dispersed quantity of available land to develop and
redevelop in the urban core, and the willingness of developers and buyers to
go into such a wide diversity of the city's core neighborhoods, it's
theoretically more likely to take longer to develop very focused locations
of high-density, walkable, urban mixed-use environments at a significant
scale. I think this is a useful contrast with Dallas where such infill and
redevelopment hasn't been as widespread, focusing almost exclusively in a
narrow corridor stretching north of their downtown. There's obviously a
(big) negative side to that for Dallas, but it did help them I believe
create quicker momentum for a high-density mixed-use environment in Uptown.
I should note that Uptown Dallas started seriously redeveloping in the early
1990s, reaching a milestone with the West Village development (vertical
mixed-use residential with retail, very pedestrian-oriented) around
2001-2002 and since then attracting high-rise condos and apartments.

2. We shouldn't be overly dismissive of townhomes and four-story apartments
in terms of density. They ARE dense, especially for Houston, and can
certainly support a walkable urban neighborhood with a limited quantity of
retail. Think of the brownstone and townhouse neighborhoods in NY, DC, etc.
And central Paris is mostly 4-5 stories.

3. The points regarding urban design and market diversity and segmentation
lead to my assertion that the creation of the idealized walkable urban
neighborhood can be sped up by a concerted collaborative effort between
public entities and the real estate community. If you really have a focused
effort to improve the pedestrian environment, plus regulatory changes that
require pedestrian-friendly structures and site design (but don't dictate
land use), plus a set of willing developers and property owners, plus land
values that are not too limiting, you can set the place-making process in
motion that will start to overcome the barriers of construction cost and low
housing prices - achieving the "place-making premium." I know people focus
on management districts, but their financial resources are really quite
limited and they have essentially no regulatory power. Those things lie
primarily with the city, to whom management districts must advocate for
changes. TIRZs have more regulatory authority but nearly all have chosen
not to utilize it. As long as most Houston developers can make enough money
using their traditional designs and layouts, they are unlikely to make
changes that cost time, effort, and $. It partly goes back to the perceived
lack of value of a walkable environment; developers don't think you help
yourself enough (obtain market premiums) and can even hurt yourself in terms
of market appeal if you depart from a traditional suburban (auto-oriented)
design, especially for retail. For the most part, they won't change unless
they are forced. There are exceptions - many of the Dallas urban projects
have been purely private sector initiatives, for example (West Village is
one).

While I think with some effort we can generate compelling walkable urbanity
- and I think we should make the effort - we shouldn't expect high-rise
condos etc. immediately. Given Houston's cost / price hurdles, it will take
time to generate the market values and premiums necessary for really dense
stuff. Right now, let's focus on the little things that can make it work
for the density that's happening now - just getting the retail strip
centers, banks, and drug stores moved up to the sidewalk, combined with
wider sidewalks (heck, sidewalks at all) would be a great start.

 

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