Thursday, May 31, 2007

WSJ on the surge of urban mixed-use projects in Houston

Yesterday the Wall Street Journal had a fascinating piece (7-day nonsubscriber link) on the explosion of urban mixed-use projects coming to Houston. Some excerpts:
In Sprawling Houston, Urban Style Gains Traction
Slate of Mixed-Use Projects Shows City's New Embrace Of Live-Work-Play Notion

In recent years, as cities across the Sun Belt embraced urban-style projects featuring a mix of uses, this vast city sat quietly on the sidelines. Now Houston is making up for lost time.

More than a half-dozen high-profile developments mixing residential, retail and office space are either under way or planned here. The projects, which promise well over $1 billion in development, underscore a fundamental shift in the development patterns of a city that has long preferred sprawl to density. And they mark a significant breakthrough for the increasingly popular concept that developers pitch as "live, work, play."

"Houston is one of the last truly open markets for mixed-use development," ...

A desire to walk more and drive less is in part responsible for the proliferation of mixed-use projects, as is a broader national trend toward urban living. Houston's economy is also a factor. Buoyed by the oil and gas industry, job growth is up while office and retail vacancies are down. Meanwhile, the region's population grew at more than double the national rate in 2006 from a year earlier, to 5.5 million.

The development of so many projects at the same time has created a highly competitive environment in which there are likely to be winners and losers... Even some of the developers involved in the Houston projects wonder whether they can all survive. "The big question is whether there's enough demand out there," ...

Today's mixed-use developments are rooted in the rise of New Urbanism, a movement of architects and planners dating to the 1980s that calls for a return to traditional towns. Such developments are more challenging to create than shopping malls, especially in urban cores, where land can be difficult to assemble. But they have proved popular in cities such as Atlanta, Dallas and Denver.

Now, with demand for mixed-use projects satiated in many cities, Houston's scarcity of such developments and its robust economy make it something of a prize. "There's sufficient pent-up demand," ...

While a number of projects are sprouting up around Houston, including in far-flung suburbs such as The Woodlands, the biggest impact is likely to be felt in the city's urban core. Four projects are planned or under way along about a six-mile stretch from downtown west to the city's inner loop ...
Much of the article has details on several of the projects, many of which are listed in this graphic (click on it to see a sharper version).

There have been concerns from some (including Councilmember Peter Brown) that big mixed-use developers wouldn't come to Houston because our "unpredictable" land-use patterns (i.e. lack of tight zoning controls). It's good to see that's not the case - we just lagged a little behind some of the other cities. I would argue there are two factors that helped them get these developments sooner:
  1. A larger starting base of young professionals, although Houston has seen a strong surge in this population along with the recent oil boom. Now people are talking about the generation gap in energy companies: a lot of 45-and-overs + now a lot of fresh college grads, because few people went into the business in the 20 years from 1984 to 2004.
  2. Those tighter land-use controls in other cities helped limit competition, reduce risk, and improve profitability. Houston developers had to wait until the "pent-up demand" was strong enough on its own, without government help. In the long-run, we should get more of it, and at a lower price, than we would in a more tightly controlled environment.
I have little doubt places like Victory Park in Dallas will be successful, but part of that success will come from a semi-monopoly "cornering the urban market" in Dallas. Here's the essence of their formula, IMHO, which has also been followed by projects in Atlanta and elsewhere:
  1. Go mega-big to be super high profile. That gives you lots of power with local politicians and regulators, getting you the land assembly and variances you need - maybe even tax breaks and public infrastructure.
  2. Knowing you can't fill everything in such a gigantic project immediately, plan to phase it out over many years, staying just ahead of demand.
  3. Being high-profile means the powers-that-be don't want to see you fail, because the bad PR will reflect badly on them and the city. They also want to see you fully built-out as soon as possible. They'll take subtle and maybe not-so-subtle actions to limit competitors, usually via zoning and permitting limits, channelling demand into your project.
  4. This protection allows you to price your stuff very profitably, but of course that keeps many potential buyers out of the market. Competition increases supply (and variety), lowers prices, and increases demand.
It's probably no surprise to you that I think Houston's more wide-open approach is a better way to go. And, based on this article, it looks like our patience is really paying off.

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5 Comments:

At 5:48 PM, May 31, 2007, Anonymous Steve said...

Tory,

I hope your point about more of these developments at a lower price is right! Though, the lower price part can actually make them more difficult to get done (many construction costs don't vary much across cities).

One point I want to make regarding the risk of these projects. You'll notice that most of them are of fairly large size. That's because developers are then able to control for the lack of support and certainty in the adjacent urban environment by creating their own, internal one.

I do think you'd see more small-scale, urban pedestrian-friendly projects being done if developers believed the surrounding environment was heading in the same direction. Right now, most do not feel sufficiently assured of this. If that's what we want to achieve, I think public policy can play a supportive role without overly restricting opportunity.

 
At 6:23 PM, May 31, 2007, Blogger Tory Gattis said...

That's a good point, and hopefully what the Urban Corridors initiative will achieve.

 
At 7:14 AM, June 01, 2007, Anonymous random thoughts said...

Not sure if "patience" is the right word here. It seems to me that Houston is behind the curve and, if anything, slow to react. Urban development is improving in Houston but it is still so spotty. Midtown, where I live, has dense buildings right next to strip malls and all this right at the base of downtown.

 
At 8:48 AM, June 01, 2007, Blogger Gavin said...

A quick glance of TIRZ, PID and management district locations and the location of the new sites demonstrates that these may not be completely free of government involvement. It is nice to believe that these have been developed without government incentives and subsidies, but the truth of the matter is that nothing is done free of government involvement at some level. These projects were much less likely to have happened if the TIRZ, PIDs and management districts were not actively providing incentives and building infrastructure. I am not saying it is good or bad that there is some level of public agency involvement, rather I am suggesting it is naive to believe that these are happening without government influence. The number of requests made to the city to create PID, TIRZs and consent to management districts demonstrates the developers unwillingness to develop without the government being involved in some way. As mentioned in the post, no zoning can make developers risk adverse, the presence of the government institution reduces the risk by lowering costs of development.

 
At 4:15 AM, June 02, 2007, Blogger hugh Pavletich said...

Sometimes Houstonians and Texans can be a little too harsh in their criticisms of themselves.

Lets compare the total new housing and multi housing numbers for Texas and Californis for 2006 - from the National Association of Home Builders website.

Total permits / multi / single - California 160,000 / 52,790 / 107,710 and Texas 216,640 / 53890 / 162,750. California population 36.5 million - Texas population 23.5 million.

the international standard for measuring housing performance is the build rate per 1000 population - and this is where Texas (and particularly Houston) really shines. During 2006 the build permit rate / 1000 population for Texas was 9.21 / 1000 whilst California was an abysmal 4.39 / 1000. On multi units Texas 2.29 - California 1.45 per 1000 population.

The reality is that all forms of development in Texas have greater scope to be successful, because the open Texas markets ensure land costs are kept as low as possible making it possible to market copmpleted developments at lower prices.

Im picking that the Houston mixed use developments will be the most globally successful in time.

Houston is being increasingly recognised around the world as a leader in urban governance.

Hugh Pavletich
Co author - Annual Demographia International Housing Affordability Survey
www.demographia.com
Christchurch
New Zealand

 

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