Truth in Housing: Cooling Market Impacting Homeowners, Cities, Developers

Yesterday I attended a lunch sponsored by the Sensible Land Use Coalition, a
gathering of developers, consultants and municipal officials. The featured speaker was former Minnesota
Commissioner of Transportation (and likely 2008 Congressional candidate in Minnesota’s
Sixth District) El Tinklenberg. I
discovered talking with colleagues before and after the lunch that while
transportation was on the program, the housing market dominated the collective brain. A few reasons why that’s the case:

Construction Down – Suburban and Urban Alike
The trends don’t appear positive on the national or regional
. In the Twin Cities, year-to-date
building permits have dropped 51% since the high in 2004; the number of
permitted units has dropped 47% in the same period. The value of the building-permitted construction
undertaken so far in 2007 has fallen 44% (over $1 billion in today’s dollars)
from the level experienced in 2004.Permit_value

Local Governments Feel the Permit Pinch
The St. Paul Pioneer Press this week published
a story
(reg. req’d) examining the reliance of some cities on permit fees
for revenue to finance development and in some cases, administration. As the market cools, local governments are
experiencing rapid drops in fee revenues, while buyers of recent construction
are placing additional demands on city services and infrastructure.  Combined with cuts to local government aid and county program aid enacted at the state level, diminished permit fees will fuel the fire of what is already looks a lot like a property tax revolt in Minnesota.

Prices Down Among Many Metropolitan Areas Across
Rating agency Standard and Poor’s reported
this week
the results of a national study which indicate
that home prices in major markets are falling at the briskest pace since
1991. As opposed to market chatter over
the previous year that significant declines were limited to previously
high-growth areas on the coasts and in the Southwest, the S&P analysis
profiles a much broader dynamic. From
twelve months ago, price declines include: San Diego (-7.8%), Las Vegas (-6.1%), New York (-3.8%), Minneapolis (-3.4%), and Chicago (-0.9%). Cities with positive
appreciation include Dallas, Portland and Seattle.

Investigations Abound
The Washington
Post today reported
(reg. req’d) on a tempestuous hearing of the Senate
Banking Committee yesterday; the committee heard testimony from executives of
major rating agencies including Standard and Poor’s, Moody’s and Fitch
Ratings. At issue:

The Securities and Exchange Commission said an investigation of credit-rating
companies was focused on whether bond issuers put pressure on the raters to win
higher rankings for subprime-mortgage bonds.

Once originated, loans are bundled together into “tranches” and
securitized, meaning the principal and interest revenue from loan repayments
are purchased by individual and institutional buyers as mortgage-backed
bonds. The investigation focuses on
whether the companies bundling the loans and securitizing them influenced the
rating agencies for a higher credit rating, thereby increasing the value of the
bonds to be sold.

Spiros Pina, a Whole Loan Analyst at GMAC ResCap, described the process
without equivocation:

Looking back a few years from now, some things will begin to
come into focus: the perfect storm of easy money, excessively sloppy
underwriting, and the agencies dozing at the switch. And let’s not forget that agencies make money
rating credit risk and have an interest in seeing deals go to market…

Hungry for More?
Dig a bit further into the economic prospects for the
housing market at EconBrowser,
a blog written by two professors of economics at the University of California and University of Wisconsin.  Read more about the foreclosure wave here.

Project: Paying for Downtown Parks and Gauging Their Impact on Tax Base

Since the spring, Donjek has been providing tax base and economic impact analysis for the City of Minneapolis, working with a team examining a number of sites with potential for conversion to open space (partners include the Smitten Group, Hoisington Koegler, Minneapolis Park and Recreation Board, the University’s Metropolitan Design Center, and the Trust for Public Land). Donjek is charged with addressing the public finance aspects of the project, including a look at how a downtown park could be financed and the impact of a park conversion on tax base.

Scholars in the academic world have for a number of years been active undertaking and publishing studies of the economic impact of neighborhood parks. With the powers provided by modern GIS tools combined with the large sets of housing sale data, researchers use regression analysis to separate the influence of a park from other housing characteristics such as number of bedrooms and lot size. Once isolated, the value attributed to the park can be viewed in relationship to other homes in the area. The “proximity principle” is the way economists describe the results of most of these studies, meaning that with the exception of those homes “too close for comfort” to parks, the closer your home to the open space, the more value your home will accrue from this proximity. Or, more simply, people pay to be near the park.

A comparable analysis in an environment dominated by commercial, industrial and office space is a more difficult prospect. First, the relationship of prices to rents (capitalization rate) changes throughout the real estate market cycle, making it challenging to draw conclusions from data collected in multiple years. Particularly in downtowns, the varying age of buildings means everything from floor plans to ceiling heights can be different for each building (or even each floor within the building). Where data for single-family homes is readily available and fairly standardized (for example, what qualifies as a two-bedroom versus three-bedroom home), data for downtown office buildings are neither. What’s more, leasing rates and characteristics are in many cases proprietary.

Still, a number of comprehensive studies support the intuitive conclusion that office space near urban parks are more valuable than like property otherwise located. A short Donjek summary of examples of urban parks and academic and practitioner literature related to commercial space conveys the range of research in this area.  What’s the nature of the discussion around downtown parks in your city?  If a study of urban parks has been published in your area, do let me kn0w – I may not yet have seen it. 

Stay tuned for an interview of Dr. John Crompton of Texas A&M University, who has been a leader in documenting the proximity principle and its relationship to public decision making.  Next week, I will enjoy the opportunity to discuss these and related issues with Professor Crompton.

Project: Estimating the Impact of a Highway Bypass on Tax Base

What will happen to property values and the tax base of a
community when it redirects most of its auto and truck traffic around town, or
chooses to widen a highway through downtown to four lanes? Recently, I concluded a project in Pequot Lakes, Minnesota, and provided
analysis to address this difficult question.

A town of nearly 2,000 residents located roughly one hundred
miles north of the Minneapolis-St. Paul metropolitan area, Pequot Lakes is in the heart of one of the
state’s lakes regions and is an increasingly popular destination for visitors.Pequotuses_3

Hence, the premise of the project. Annual average daily traffic (AADT) on State
Highway 371 at Pequot Lakes is projected by the Minnesota Department of
Transportation (MnDOT) to double over twenty five years. Congestion and safety conditions along the
highway, which runs north-south through the center of town, are expected to
deteriorate without infrastructure improvements. Since 2000, the City and MnDOT have been
engaged in evaluating the costs and benefits of expanding the highway to four
lanes in its current downtown alignment, or constructing a new bypass
alignment. The bypass alignment would follow
an alignment less than one mile to the east of the existing downtown alignment,
at first diverting 2/3 of the existing traffic volume. The new route would also create a different
form for the City as depicted in this graphic prepared by planners at the Community Growth Institute.

Starting with analysis of broad trends experienced by the
community ranging from market values, population and school district
enrollment, I built on existing research conducted by State transportation
departments across the country, to gauge the impact of a bypass or expansion on
land values and tax capacity. While most
of these studies parsed property into three to five categories, I created ten
to reflect the range of economic activity in Pequot Lakes. Light manufacturing, timberland and
agriculture, local commercial businesses and tourist retail are all well
represented in Pequot Lakes. 

After classifying the property into these ten categories, I
modeled impacts for each type of property based on the literature of similar
studies and other related research. The
findings included a projection that the alignment through downtown Pequot
Lakes would boost aggregate
property values and City tax capacity slightly higher than under the bypass
alignment scenario.

However, the acquisition and construction costs associated
with the expansion of the road through downtown are projected to be
significantly higher than the bypass scenario. With these costs included, the analysis suggests the bypass alignment is
a more cost-effective approach. The Region 5 Development Commission is,
at the time of this writing, completing survey work for both the business
community and the citizenry of Pequot Lakes, after which the City Council
will proceed with naming a preferred route.

Source documents: The
final planning report is located here
, and related draft and final
environmental impact statements can be found here
, or view the brief version of a bibliography of bypass studies I’ve annotated here.

Pricing Out Parking

Television advertisements for cars never
show drivers pulling in or out of a parking space, or trawling around the block
looking for a spot. In fact, most ads
show car and driver all alone on a scenic, recently resurfaced stretch of mountain
road. If only the financial picture of
managing car parking was so seemingly idyllic!

Cities struggle with parking for a host of reasons: In an aesthetic sense, it’s nondescript. Poor visibility, access, and lighting can
create safety issues. Excess parking is
also a very costly way to employ urban land. Instead of a structure that could be used to generate jobs, commercial
activity and hence tax base (or, alternatively, an open space that bears
related benefits to adjacent property and broader health and social benefits),
excess parking represents a spoiler on the economy and treasury of a community. For one, Donald
of UCLA has raised the profile of issues around how to manage and
price parking (and how to use parking revenues to leverage strength in local
economies); read
his most recent New York Times editorial here
, or look at
his 2005 book on the same subject here

The continuing dominance of the car is unlikely to fade in
the near future, and cities and urban merchants recognize that providing
parking capacity is important for commercial viability. Michael Monte, Director of the Community and Economic Development Office
in Burlington, Vermont
, noted during a meeting Friday that the Burlington
Downtown Improvement District (a small, dynamic business improvement district)
funds two hours of free parking downtown in order to strengthen its hand
against suburban strip retail not far down the road. While at first blush this appears to be in
conflict with Shoup’s ideas, the free parking complements a range of
transportation demand management (TDM) measures including aggressive metering
(I have a parking ticket to prove it), shuttling and park-and-rides, prominent
bicycle storage facilities, and transit provided through a five-city
transportation partnership. And the free
parking is an incentive for customers to shop on foot in the area surrounding
the Church Street pedestrian mall in downtown Burlington.

Near Macalester College,
a group of retailers in Saint Paul, Minnesota
formed an association to lease space for parking from a nearby church. Each retailer pays for their customers’ use
of the space based on the distance from their front door to the small parking
facility. In operation since 1994, the
arrangement is a flexible, relatively inexpensive (annual budget is roughly
$18,000) way to provide fifty parking stalls in an urban area characterized by
a mix of residential and retail uses.

Of course, no parking is truly free: There are significant direct costs associated
with building and maintaining parking surfaces or ramps. There are also indirect costs including congestion,
the cost of increasing water runoff from the impervious surface, and the
foregone cost of using the land in a more productive fashion. A great challenge for cities in coming
decades will be recognizing and paying for these costs in ways that support the
efforts of customers and employers in our cities.

Photo:  Opening Day, Lexington ball park, Saint Paul, 1929.  Courtesy of the Minnesota Historical Society.

Open Space Finance – The Post Office Square Model

En route to Burlington, Vermont this week, I attempted to book my flight via Boston’s Logan Airport in order to have the opportunity to tour
and photograph Norman Leventhal
Park in the financial
district. What’s of particular
interest? Below the park deck are seven
stories of underground parking in the Garage
at Post Office Square
; the symbiosis between the park amenity and the
parking facility is explicit in the Garage’s marketing: “Park above, park below.”

Real estate developers including Leventhal renovated
adjacent buildings in the 1980s and 1990s. Starting in 1983, Leventhal, with the support of Mayor Kevin White and a
committed group of supporters, engaged in a legal fight to wrest the property
from the owners of an existing concrete ramp which many believed had devolved
into blight. In 1990, legal victory in
hand, Leventhal and company razed the structure and built a carefully designed
subterranean version to provide 500,000 square feet of space to accommodate
1,500 cars. In 1992 the park opened to
the public. An aerial photo communicates
the prominence of the green space in the city’s financial district.

Leventhal Park
itself is just 1.7 acres and at least 54 inches deep – enough to support trees
and other foliage. Within its area are a
year-round restaurant, fountains and public art, as well as ramp access to the
cars hidden below.

The expense of the innovative project was $80 million – $126
million in 2007 dollars – and capital was raised from a range of sources. Fleet Bank made a conventional loan of $50
million. The nonprofit trust established
to construct, maintain and program the facility, the Friends of Post Office
Square Trust, issued and sold shares in the parking structure which businesses
could acquire for $65,000. In addition
to the amenity value for employees and customers, these investors received
title to a parking space and a compounding 8% dividend payable when the debt
for the construction is paid off. 450
such investors stepped up, raising almost all of the remaining $30 million. At the end of the day, the construction cost
per parking slot was $34,000 at the time (roughly $53,000 in 2007 dollars).

I have assembled a very basic sketch of what this type of cash
flow might look like; using these assumptions, the project would have commenced
producing positive cash flow after ten years of operation. But today, presumably within a few years of
paying off twenty-year debt for the construction and with parking demand in
Boston’s financial district very strong – not to mention the international
brand of the park at Post Office Square – the future of this space is very
green, in many ways indeed.

When the project’s cash flow becomes positive, if not
already, proceeds will go to pay the dividends promised to investors, and
excess beyond that to neighborhood park facilities in Boston. This is a successful model worth imitation.

Thanks to Ben Welle at the Center for Parks Excellence
at the Trust for Public Land
for suggesting an excellent summary of the
development and financing of Leventhal Park, in Peter Harnik’s (director
of the Center) valuable book, Urban
Parks and Open Space