The dynamics of downtown HoustonToday 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.
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.
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.
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.