Recently: instant neighborhoods, unmasking institutional capital, dockless bikeshares compared

Cranes around Navy Yard, from roof of 100 M SE

Three things I’ve written elsewhere this week, the first two inspired by the mechanics of my neighborhood’s growth:

1. “Instant neighborhoods” don’t make for great cities, but DC insists on them in GGWash. I really do relish living in a neighborhood that’s growing and changing quickly, but it’s a little bit unnerving to think that we may be repeating the biggest mistake of Southwest’s past — the hubristic assumption that our best-laid urban plans can anticipate every need, for all time.

2. Meet the everyday people who own these iconic Washington-area buildings in  GGWash. Amidst a lot of dark insinuations about outside money, it’s kind of funny to uncover the rather more quotidian reality of who’s paying for all these new buildings.

3. I wrote a Twitter thread about riding all four of the new, dock-less bike sharing systems that have launched in DC this past week. Click through for the reviews:

 

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Idle speculation: what Amazon’s HQ2 RFP prioritizes

Parking crater at Spooky Park, Yards

Site availability, not incentives, are of “paramount importance” to Amazon.

A lot of the early press around the Amazon HQ2 announcement zeroed in on the usual economic-development narrative of a company shopping around for incentives. Yet a close reading of the RFP reveals that incentives are actually a middling concern for Amazon.

The RFP reveals (as Benjamin Romano also writes) that Amazon feels that it’s outgrown Seattle; they feel as if they’ve hired everyone in Seattle who could work for them, and growth requires tapping into a new labor pool. The company isn’t hungry for cash; it needs people, space, and speed.

I’ve plucked out the various considerations listed in the RFP and rearranged them roughly in order of urgency:

“Paramount importance”

  • “Finding suitable buildings/sites,” i.e., initial size of 500,000+ (up to 1.0 MSF) available in 2019, expandable nearby to 3.5 – 6 MSF over three phases and potentially up to 8 MSF beyond 2027
    • Keep in mind that a high-rise office building takes about a year to build, so groundbreaking should occur by mid-2018
    • For perspective: the TSA just awarded a build-to-suit contract for a 625,000 sq. ft. headquarters on a greenfield site in Springfield, Virginia, where the buildings are drawn, the developer has cash in the bank, the land is already cleared, and the office will open in late 2020
  • “Optimal fiber connectivity”

“Must be” or “required”

  • Close to a significant population center that can fill 50,000 jobs (many of them technical)… Direct access to significant population centers with eligible employment pools
  • Strong university system
  • Compatible cultural and community environment, diverse population, higher ed, officials eager to work with company

“Critical”

  • Highly educated labor pool
  • Initial and ongoing costs
  • Travel/logistics for employees and to other facilities
  • Site has access, utilities, zoning

“High-priority considerations”

  • Stable and business-friendly environment and tax structure

“Key factor”

  • Travel time to major highways and arterial roadway capacity

“Significant factors”

  • Incentives offered by state/province, local communities

“Important”

  • Near airport with daily flights to SEA, NYC, QSF, WAS
  • Stable and consistent business climate (demonstrated via testimonials from other large companies)

“Ideally”

  • <30 miles to major city
  • <45 minutes to international airport
  • <1-2 miles to highways
  • 0 miles to mass transit (rail or bus)

“Preference for”

  • Metro with 1M+ people
  • Urban or suburban location to retain/attract technical talent
  • Communities that think big

“Want to”

  • Employees will enjoy living there, recreation, education, high quality of life

“Could be, but does not have to be”

  • Urban/downtown
  • Similar layout to Seattle campus
  • Development-prepped site

Site-specific statistics that must be provided, and therefore will be considered:

  • General site information
  • Ownership structure, notably if government owned
  • Current zoning
  • Utilities present
  • Total incentives offered and terms, if legislation is needed, estimate uncertainty thereof, timeline
  • Highway, airport travel
  • Transit options, including bike and pedestrian

Regional statistics that must be provided, and therefore will be considered:

  • Labor pool information
  • Ability to attract talent regionally
  • Opportunities to hire software engineers
  • Recurring sourcing for software engineers
  • “All levels of talent”
  • Executive labor pool
  • Existing and potential university-employer partnerships
  • List of higher ed institutions with relevant degrees
  • Number of recent grads
  • K-12 computer science programs
  • Transit and transportation options
  • Traffic congestion ranking
  • Quality of life
  • Recreational opportunities
  • Diversity of housing options
  • Availability of housing locally
  • Housing prices
  • Crime data (“also”)
  • Cost of living (“also”)

So, what locations make sense on the East Coast?

The RFP only calls out two criteria as “of paramount importance”: fiber data service, and having a shovel-ready site of 0.5-1.0 million sq ft, with on-site or adjacent expansion to 8 MSF.

The site not only should be zoned already, it needs to have utility capacity in place. The 2019 timeline leaves zero time for rezonings, public hearings, geological surprises, soil contamination, lease buy-outs, tenant relocation, wish-upon-a-star transit lines, etc. It means either clean dirt that’s ready to go, or a monster of a cold-shell building that already has construction crews hard at work.

It’s hard to overstate how enormous this project is. It’s more than the total commercial (retail, office, hotel) space that now exists at National Harbor. It’s more than the total commercial space contemplated in the long-range plans for Downtown Columbia or White Flint — much less what’s already gone through zoning approvals. It’s bigger than the entire Capital One campus plan at the McLean Metro, or Under Armour’s Port Covington campus plan in Baltimore. It’s more office space than even what could be built under the Navy Yard area’s zoning.

The Greater Washington office market is the country’s third biggest, after NY and Chicago (other large cities’ employment bases are more industrial). This is one of a few regions in America where developers regularly propose 1+ MSF office sites — largely hoping for giant federal leases. (Granted, cities like Atlanta, Chicago, and Dallas often give away zoning for the asking; Toyota doubled its Plano campus’ size during negotiations.)

Most local sites might have shovel-ready space for Phase 1, but not necessarily plans in place to accommodate phases 2-3-4. Only two come to mind: Tysons Corner and Crystal City-Pentagon City.

  • Tysons: 50,000 jobs is a 50% increase on Tysons Corner’s current employment, and 25% of the 2050 “buildout” number there. As far as I can tell, no one owner at Tysons can accommodate the full 8 MSF buildout, but sites could be combined at two locations:
    • McLean station: Scotts Run, next to Cap One, is the largest single project at Tysons with approvals for about 4.5 MSF of office. Another 0.5 MSF has been approved in two parcels to its southwest, and the Mitre campus can also expand.
    • Tysons Corner station: Lerner has entitlements for an additional 2.3 MSF of office south of the Galleria, Arbor Row has approvals for another 1.1 MSF to its north, and Macerich has approval for another 0.5 MSF office tower south of the station. The Galleria itself hasn’t been rezoned yet, although one idea that’s been presented adds about 1 MSF of office; there are also sites to its west (closer to Greensboro station) that would still be within walking distance.
  • Crystal and Pentagon City have seen 20,000+ federal jobs in defense and homeland security depart since BRAC; there’s over 2 MSF of vacant office available today. What’s especially notable is that most of the offices are already controlled by one very interested  landlord (JBGS). There aren’t many closer analogues anywhere in America to their partnership with Vulcan in South Lake Union: one deep-pocketed owner, one neighborhood, and a placemaking/planning framework that forecasts tremendous growth.
    • Crystal City has long-term plans to renew the existing buildings and expand office space by about 5 MSF net, including active or expired plans for 0.7 MSF at the vacant 1900 Crystal and 0.65 MSF at 223 23rd St. There’s also about 1 MSF vacant today, and over 1 MSF in 2018-2019 lease expirations that could free up sites for incremental additions.
    • Pentagon City has an entitled site for 2 MSF at the shovel-ready PenPlace, and two adjacent sites are also approved for ~1 MSF of office apiece: Brookfield’s TSA/DEA block (leases are up in 2018-2019) and Kimco’s Costco site.
    • Potomac Yard has a power center to redevelop, where JBG is a partner and could build 1.9 – 5.3 MSF of office after the new Metro station opens after 2020. (There’s vacant land in Arlington, too, but it’s owned by Lidl’s headquarters.)

These sites compare favorably to other leading East Coast contenders: Schuylkill Yards or UCity Square in Philadelphia and Seaport Square in Boston are by far those cities’ largest sites, with superior access to intercity transport and higher ed, but both are approved for only ~3 MSF of office. (The Philadelphia sites are adjacent to air-rights parcels that may be available later, and for which plans have been floated, but the metro area has a considerably smaller technical talent pool.)

The obvious sites in downtown Atlanta, like the Gulch, are still visions rather than plans, with fragmented ownership and poor infrastructure/access; that city would probably do better offering a greenfield site.

Colossal loft conversions might fit the bill elsewhere, as with the warm shell of Chicago‘s Old Main Post Office — one of the country’s biggest buildings at 2.5M sq. ft., and so impossibly huge that its size had been the stumbling block to several previous plans. It happens to sit astride a subway line, highway, and fiber lines, and within a block are three approved plans for five new build-to-suit office towers.

It could also spread across a few six-figure spaces on the Brooklyn waterfront; although the area’s comparatively small office market isn’t promising, industrial space is relatively plentiful.

Which locations have a deep enough talent pool to draw from?

A large labor force, primarily technical but also executive, is another “required” factor. Crain’s Detroit points out that “Amazon’s biggest business impediment is labor”: it has over 6,000 current vacancies in Seattle, 75% of which are technical. Real estate brokerage CBRE recently published a report, based on BLS data, comparing cities’ engineering employment.

Three of CBRE’s charts stood out to me:

  1. 50,000 Amazon employees will include tens of thousands of software engineers, yet only 10 metro areas have more than 100,000 to begin with. For context, consider Amazon’s current need for 4,500 technical employees: hiring those people in Pittsburgh today would require poaching 11% of its tech workforce, 9% in St. Louis, or 7% in Raleigh. In Toronto or New York, you’d only have to convince 2% to leave their jobs, and in the Bay Area or Washington-Baltimore it’d be less than 1.5%.
  2. A key advantage for DC, Boston, or LA is that only these three regions export CS graduates in large numbers. Seattle, Atlanta, DFW, and the Bay Area already have to import thousands of tech employees a year; since there’s only a limited pool willing to pick up and move, recruiting thousands more every year could be that much more difficult. (The RFP specifically asks about university hiring partnerships.)
  3. Regarding costs, CBRE did an interesting analysis looking at the cost of running a 500-employee technology office. DC, Boston, and Seattle all come in at about the same price; SF is about 20% more. The big winner in that table is Toronto, with its large workforce and low wages — which more than offsets the relatively high cost of real estate there.

The problem is inequality, not speculation

Need homes? Build homes (even the Communist youth thought so in 1946)

In 1946, even the Communist Party USA agreed that the obvious solution to a housing shortage was to build housing. Why is that controversial now?

In a recent fit of contrarian cutesiness (which I partly responded to earlier, here), Chuck Marohn wrote about out-of-control housing prices: “The simple answer is downzoning.”

That’s as dishonest an answer to the question as Tommy Lasorda, in those vintage Ultra Slim Fast commercials, saying that the secret to out-of-control weight is spaghetti-and-meatball dinners — the daily treat, rather than the three calorie-restricted, high-fiber shakes that you choke down the rest of the day.

Marohn balances his call for downzoning with a casual mention of his previous “floating height limit” idea — allowing, across all zones, somewhat bigger buildings than the norm. This would, in essence, upzone the vast majority of metropolitan American land that’s currently zoned solely for low-rise single-family residential, while lowering allowable heights in the much smaller proportion that’s subject to more-lenient commercial zoning. (Of course, in his contrarian telling, a call for raising allowable building heights for 90% of America is titled “the case for height restrictions.”)

He pins the blame for metro Portland’s housing affordability crisis — and, by extension, the broader housing-affordability crisis afflicting bicoastal Blue America — on property speculation, saying that developers are bidding up residential land prices around transit in hopes of winning rezoning to build multifamily TOD. Thus, his call for downzoning, to frighten off those vile speculators. There certainly exist a few situations where transit-oriented speculation distorts markets — I’ve written about these pretty extensively in GGWash, pointing to why “parking craters” surround Metro stations instead of 8-story high-rises.

But these are fringe situations, affecting only a few square miles across the entire country. Even when I lived in the highly desirable, transit-accessible neighborhood of Bucktown, where zoning was infamously corrupt, the upzones that the local alderman brazenly sold did not result in the dumpy single family houses being replaced with parking-light apartments, as Chuck’s hypothesis holds. In fact, the exact opposite occurred: dumpy, parking-light apartments were replaced with swanky single-family houses! In countless other areas which have been downzoned, housing prices have increased regardless of speculation.

Why? Because the price increases in Bucktown, and on Portland’s east side or Los Angeles’ west side, have little to do with transportation (Chuck’s bailiwick) — and much more to do with rising income and wealth inequality, both within and between regions, combined with a largely static land-regulation regime that hasn’t adapted. The gains accruing to the wealthiest means that the wealthy can bid up housing prices, substantially raising housing prices in high-income regions where both demand and barriers to entry are high. As I wrote earlier, this imbalance has held on for decades in some cities, particularly in coastal California, and the political dynamic that sustains it appears to be utterly implacable.

As I also wrote earlier, the economies in different regions have diverged in a way that has fed this dynamic. Economists Stijn Van Nieuwerburgh and Pierre-Olivier Weill found that “house price dispersion” between regions increased much faster than income inequality between regions (which has also been increasing): their statistical measure of the variation in house prices increased by 38 percentage points, vs. 8.6 points for wages, from 1975-2007. As their paper explains,

The increase in productivity dispersion creates flows of workers towards high-productivity metropolitan areas, driving local house prices up because of limited housing supply. Conversely, households flow out of low-productivity areas, driving local house prices down. This increases house price dispersion.

The situation has gotten even worse since the 2007 crisis, with housing prices in wealthy Census tracts increasing almost twice as fast as those in more modest areas.

Just to be sure, the Harvard Joint Center on Housing Studies examined metro-level data about the uneven recovery in house prices more closely and observed:

a strong case for the gap between recent changes in supply and demand exerting a strong upward pressure on house prices… the overriding importance of the imbalance between population growth and housing stock growth in explaining trends in prices…

Sure, pointing the finger at transit, multifamily, and TOD burnishes Chuck’s prickly-independent bona fides, a long tradition in Upper Midwest politics. But he’s searching only within his narrow sphere of expertise (transportation) to find the cause of problems that have much larger global causes — and which don’t lend themselves to his hyper-local bootstraps approach.

How housing supply/demand imbalance remained for an entire generation

Chuck Marohn puzzled a bit over housing costs over at Strong Towns last week, writing that “You can’t sustain increasing demand while also sustaining increasing prices and increasing supply.”

Wiltberger St NW

Would you pay $700/sq. ft. for this 2-bedroom alley house? Somebody did, paying 170% above its 2006 tax value. Sure, valuation growth like that isn’t sustainable, but what about our cities is?

You can if (1) demand grows just a bit faster than supply, or if (2) incomes are growing, or if (3) slightly more income can go towards housing — and certainly so if all three occur. Indeed, all three of these dynamics have sustained housing price inflation in gateway cities over the past generation.

This inflation has been politically possible because many existing residents (and thus voters) are sheltered from the resulting affordability crisis. Only a minority of people are exposed to housing affordability; most current residents are sheltered from price increases, having purchased or rented their housing at yesterday’s market prices. It’s pretty much only in-migrants who have to pay today’s housing prices, and since they’re migrants, they don’t vote. In-migrants are also a surprisingly small share of Americans: in any given year, fewer than 3% of Americans move across state or national borders.

1. Between job growth, smaller households, and natural growth, housing demand is increasing faster than population (and construction) in many metro areas. This has been the case in California for decades; the LAO’s 2015 paper estimates that since 1980 (my entire lifetime!), California has built 100,000 fewer units every year than it should, and yet (a) demand to live in California continues, although definitely abated; (b) prices have skyrocketed; (c) construction has added some new supply.

2. Median incomes nationally have been flat for the past generation, but incomes in the richest gateway cities have been soaring — especially at the top of the distribution, due to rising inequality. The minority of households that are exposed to high prices may very well be able to afford those prices in these cities, explain Gyourko, Mayer, and Sinai in their paper on ‘superstar cities’: “Recent movers into superstar cities are more likely to have high incomes and less likely to be poor, than recent movers into other cities… In short, residence in superstar cities and towns has become a luxury good. The cities’ increases in housing price appear to outstrip known productivity increases and the value of any additional amenities.”

Since only a small proportion of housing units trade hands each year, cities with rising incomes at the top and relatively few houses available (e.g., the “superstar cities”) see “new money” outbidding others for those few units, pulling prices up. Because house prices are based on comps, prices for other houses also rise. As Matlack and Vigdor write, “In tight housing markets, the poor do worse when the rich get richer.”

I know this seems insane, but income inequality has gotten so far out of hand that in many cities super-luxury housing is under-supplied, with tremendous consequences all the way down the housing ladder. There are over a thousand Bay Area households with million-dollar bank accounts for every single house that came on the market last year in Atherton, the choicest of Bay Area towns. Hence, house prices in Atherton have doubled in four years.*

3. Metro economies have evolved in lots of small ways to cope with higher housing prices at the margin. At first glance, “the poor will always be with us,” but in reality metro areas differ very substantially in terms of their economic makeup. Having moved from low-cost Chicago to high-cost DC, I’ve noticed that this slowly-accumulating, giant gift to high-cost-regions’ landlords has been cobbled together by squeezing a few dollars here and there from other sectors:
– Higher labor costs: the minimum wage here is about 15% higher, and high-labor-input services (like haircuts) cost substantially more here, because the staff earn more.
– A shift towards higher-wage work and reduced labor inputs (see #2 above). There are, of course, lots of well-paid jobs in DC; nearly half of households here earn over $100K. Many dual-income “power couples” who have no problem with the local cost of living. But there are surprisingly few on-site support staff for them, and instead there’s often off-site help. Even in labor-intensive industries like restaurants, on-site prep work can be minimized by relying on commissaries and distributors based in cheaper cities. (You can forget about Jacobsean “import substitution.”) Anecdotally, I’ve heard that employers are willing to make do with thinner staffing here than elsewhere.
– People work more; DC’s female labor force participation rate is 15% higher than Chicago’s.
– Housing itself can’t be substituted (everyone needs somewhere to live), but houses can be. People downgrade their locations or living standards, living in smaller or lower-quality housing units in less desirable neighborhoods than they otherwise would. They also “pay” for housing with long commutes, often from what are technically other metro areas.
– People borrow more. DC has more mortgages and higher student-loan bills than any other metro.
– People spend more on housing, and less on other goods and services. Brookings’ Natalie Holmes notes that the 20th-percentile unit in DC costs 48% of a 20th-percentile income, vs. 38% for a 20th-percentile individual in Denver.

That these coping mechanisms exist by no means implies that high prices are benign. From a local economic development standpoint, high housing prices don’t just deter potential employers, but also vacuum up dollars that could be more useful elsewhere in the local economy. Rent checks, unlike haircuts or restaurant meals, don’t have big job multipliers. As a Global Cities Business Alliance report puts it:

Citizens are spending money on accommodation that they would readily divert to goods and services if their housing costs were lower… the money ‘trapped’ in the housing market runs to billions… Unleashing this spending would in turn boost business revenues and create more jobs. Assuming that businesses were to channel all additional revenue into employment, we estimate that Beijing could generate more than 400,000 new jobs, Mexico City more than 200,000, São Paulo more than 143,000, and Hong Kong nearly 148,000.

* Chuck’s follow-up post posits that property owners are speculating on upzoning. This line of reasoning is beloved by so-called “SF progressives,” who relish pinning the blame for everything upon evil, greedy developers and the obnoxious “kids these days” who inevitably fill their apartments. Yet this densification/speculation theory cannot explain the skyrocketing housing prices that are at the very epicenter of America’s metro affordable housing crisis — in places that have zero multifamily growth and zero transit investment, but LOTS of high-wage jobs, like Atherton, Menlo Park, and Palo Alto in Silicon Valley, or Chevy Chase in Maryland, or the Hamptons. Atherton is the most extreme example: the town banned all multifamily housing and sued to stop transit, and yet house prices have doubled in four years.

Perhaps, instead of transit-oriented speculation, exclusionary, single-family-only snob zoning has left supply and demand imbalanced. Believe it or not, the demand for $3M houses in Atherton vastly exceeds the supply of $3M houses, so the $3M houses have been bid up to become $6M houses. I know this seems insane, but there are over a thousand Bay Area households with million-dollar bank accounts for every single Atherton house that came on the market last year.

There are also many fashionable urban neighborhoods where housing prices have spiraled even while housing unit density is declining: the demand for mansions is so high that humble apartment buildings get demolished for glamorous single-family houses. (Once again, life imitates the Onion.) This was even the case in my onetime home of Bucktown in Chicago, where the ward boss infamously handed out spot rezonings upon “request”; in theory, these could have been used to add units, but in practice the McMansions just got fatter.

Some guesses as to implications of autonomous vehicles

Autonomous vehicles, driverless cars: ask two people what they think, and it seems like you’ll get three opinions. Here are my reactions to four recent publications on the topic — keeping in mind that previous reports of distance’s death were an exaggeration. (As CBRE’s Revathi Greenwood notes, vehicle speeds won’t change, and so Marchetti’s Wall still remains. Even if the drudgework of driving is taken away, travel time still has a cost, and we’d rather be at our destinations already — e.g., “are we there yet?”)

WSJ (columnist Christopher Mims):

  • AVs will be limited to small areas for the foreseeable future. “We’re likely to see vehicles that don’t require drivers but can only operate on a fixed, well-mapped route in cities with fair weather… the consensus of those I interviewed is that it will be many years before we get cars that can truly go anywhere.”
  • Existing trials (Singapore, Pittsburgh, Babcock Ranch), which are limited to relatively small, intensively researched areas that are frequently remapped. Level 2/3 autonomy will remain limited to expressways, which have a protected ROW.
  • Echoes some of Recode’s timeline (perhaps similar sources were interviewed).
  • Takeaway: Autonomous shuttles will appear within campuses, urban districts, and planned communities, initially as “walk extenders.” “Robot valets” will enable more remote parking and reduced parking footprints. Freeway driving may shift to autonomy, but uptake is limited by consumer acceptance (see next).

Kelley Blue Book consumer survey:

  • Americans are still broadly uncomfortable with the idea of Level 5 autonomy.
  • Level 4 autonomy is most popular with current US consumers, who still want to be able to take the wheel. Level 3 seems less comfortable than Level 2.
  • However, key early-adopter groups feel more comfortable with complete autonomy: luxury car buyers, consumers with experience with Level 2 AVs, and people used to the backseat: ride-hailing customers and teenagers.
  • Takeaway: The transition to AVs is dependent upon social acceptance, and currently many Americans want to maintain the status quo. The transition might take a while (more Americans will have to try AVs), but may be steep once it happens.

Rocky Mountain Institute forecast:

  • Mobility services in major US metros are a potential $120 billion annual market by 2025, including $60 billion just in large Sunbelt metros.
  • Because AV and EV technologies reduce operating costs and increase capital costs, they will find broad acceptance in high-utilization fleets first, where their low costs will subvert the individual-car-ownership paradigm. (2017’s EVs will be cheaper for fleets than gas cars.)
  • AVs will cut the cost of rides by 60% to be cost-competitive with car ownership by 2018, with another 60% decline in costs as economies of scale are realized. The switch from personal cars to AV fleets will occur between 2020-2025, with long-term demand for cars falling to ~6 million.
  • Lower mobility costs will result in a $1 trillion annual consumer surplus to be spent on other sectors. (Keep in mind that spending on autos has a low multiplier effect.)
  • Even if VMT doubles and more power plants are built, these two technologies will result in sharply lower CO2 emissions (nearly -1 GT CO2E by 2040 = ~13% cut in today’s emissions).
  • Takeaway: Parking demand may sharply decline, but what parking is left will need significant EV infrastructure. Loading/valet zones will quickly need to be implemented. Consumer spending on cars could be pivoted to other spending, like higher-quality real estate.

City Observatory (Joe Cortright) [part 1] [part 2]:

  • RMI’s cost estimates of <$0.50/mile are roughly in line with other published estimates, with lower costs associated with smaller/lighter vehicles. This is lower than the per-mile cost of not just driving, but even short transit trips.
  • However, $0.50/mile is much higher than the perceived $0.15-$0.20/mile marginal cost that most Americans assume for private-auto trips. (Most Americans only consider the cost of gas when driving; costs such as depreciation/wear, insurance, repairs, monthly parking, and wasted time are all considered sunk.)
  • “Pay by the slice” mobility, like car-sharing, tends to encourage shorter trips. Pricing will probably be more, not less complex, with various “surge” surcharges that use information to optimize the balance between travel demand and supply.
  • Rush-hour capacity will still be an issue, especially in high-density downtowns. Rail transit, walking, and cycling will still move more people in less space.
  • Takeaway: Mobility won’t be “too cheap to meter,” as optimists once said of nuclear electricity. As such, central locations will still matter, even if price differentials flatten somewhat. (TNCs are already “filling in the lines” between transit corridors and increasing the value of secondary urban locations.) Whether dense downtowns built around rail/walking remain useful is an open question.

What everyone agrees upon is that this is the first huge shift in metropolitan mobility since the 1940s-1980s shift towards mass car ownership. It’s important to remember that American suburbia is a political and social construct, not a fact of life, and that policies put into place immense structural supports for American suburbs.

Brand-new timber loft offices, now for lease

N. Vancouver Ave. frontage of One North

Last week, I published a ULI Case Study about One North in Portland, an architecturally inventive response to my previous speculation that “new-build loft offices could be popular in similar downtown-adjacent submarkets, and transformative for Sunbelt cities where sparse ‘warehouse districts’ have little competing product.”

Indeed, the anchor tenant at One North is a mid-sized tech company that had outgrown its space in Portland’s Central Eastside. As in many other growing cities, there just wasn’t a cool old loft big enough, so instead they found a cool new loft.

T3 Minneapolis under construction

Southwest corner of T3 Minneapolis, showing CLT column stacked above concrete podium

I also had a chance last week to check in on T3, Hines’ new cross-laminated timber office building in Minneapolis. Less than a year after groundbreaking, the structure is complete and the facade is almost completely hung — almost a year faster than a comparably sized concrete building takes to build. The superstructure took less than 10 weeks to build.

The model is so successful that Hines is now replicating the T3 building at another location that’s even hungrier for lofts: Atlantic Station in Midtown Atlanta.

Here in DC, one great location could be the PDR-2 zoned land (90′ height permitted with setback, no residential) on the west side of the Met Branch Trail along Eckington and Edgewood, one of the hottest corridors in town. Another could be around Union Market/Gallaudet, where JBG’s Andrew VanHorn says “we see the tenant base there evolving. The pre-lease opportunities we’re talking to for our office building are all private market, very young companies, as far as their employee demographics.” Or maybe this is what his firm has in mind for the “creative loft office” at RTC West.

An aside: this is another strike against “Investment Ready Places.” It sounds counter-intuitive, but it’s easier to move buildings to people than to move people to buildings. The “good bones” that economically unviable places have can have “good enough” replicas in New Urbanist settings like Atlantic Station and Reston Town Center. Not to mention that building all of the new infrastructure to overcome IRPs’ deficient locations, and then rehabilitating their buildings to code, would be much more expensive than just building anew in prime locations. It’s cheaper and easier to build new lofts in Reston than to rehab lofts in West Baltimore, and to build the new rail connection that would make West Baltimore feasible for NoVA’s growing companies.

Cities are built around people, not the other way around.

2017 update: Construction has started on an 800,000 sq ft HT building on the Brooklyn waterfront.

DC has “parking craters,” just not downtown. Here’s why.

Most American downtowns are surrounded by “parking craters,” as Streetsblog has termed them. Here in DC, downtown’s successful redevelopment has almost eliminated downtown parking craters, with one key exception. This success hasn’t completely eliminated parking craters from DC, though — it’s just moved them outside downtown.

parking crater at CityCenterDC

DC’s last privately-owned parking crater has a very unusual backstory. Gould Property owns the site free and clear, but only due to a land swap to get the Marriott Marquis built two blocks north. Gould had purchased part of the Marriott site back in the 1990s, when prices really were cheap enough to justify parking craters. The land basis and opportunity cost on this site is unusually low, especially since the former building on the site could not have remained.

Most surface parking lots are built as what zoning calls “an accessory use,” which means they’re an “accessory” to something else on the same lot. The parking lot at Sam’s Park & Shop in Cleveland Park or the Capitol’s parking lots, are “accessory” parking lots.

Parking craters, on the other hand, are usually not accessory parking directly tied to another land use; they’re paid parking lots whose owners are holding onto land that they speculate could be a future development opportunity. A parking lot requires minimal maintenance, but pays out some income in the interim. Most importantly, a parking lot is “shovel ready” — unlike a building with tenants in place, whose leases might or might not expire at the same time, a parking lot can be emptied and demolished on short notice when opportunities arise.

High rents and short buildings limit speculation

The opportunity that many “parking crater” developers are waiting for is the chance to build a big office tower. Offices pay higher rents to landlords than apartments (although in the best locations, retail or hotels can be even more valuable). However, the banks who make construction loans to developers rarely allow new office buildings to be built before a large, well-established company has signed a long-term “anchor tenant” lease for much of the new building’s space. If the building isn’t pre-leased, the result can be a bank’s worst nightmare: a “see-through tower” that cost millions of dollars to build, but which isn’t paying any rent.

Within downtown DC, robust demand and high rents mean that landowners face a very high opportunity cost if they leave downtown land or buildings empty for a long time. Instead of demolishing buildings years before construction starts, developers can make room for new buildings by carefully lining up departing and arriving tenants, as Carr Properties did when swapping out Fannie Mae for the Washington Post.

Less often, a developer will build new offices “on spec,” or without lease commitments in place. A spec developer usually bets on smaller companies signing leases once they see the building under construction. Downtown DC has a constant churn of smaller tenants (particularly law firms and associations) that collectively fill a lot of offices, but few are individually big enough to count as anchor tenants.

Because office buildings in DC are so short, they’re relatively small, and therefore the risk of not renting out the office space is not that high. In a city like Chicago, by contrast, few developers would bother building a 250,000 square foot, 12-story office building to rent out to smaller tenants. Instead, they could wait a few more years and build a 36-story building, lease 500,000 square feet to a large corporation, and still have 250,000 square feet of offices for smaller tenants.

While height limits certainly constrain the size of offices in DC, other cities with much less stringent height limits have also managed to eradicate most of their parking craters. Boston and Portland are similarly almost bereft of parking craters within their cores, not because of Congress but because other planning actions have maximized predictability and minimized speculation. In both cities, small blocks and zoning-imposed height limits of ~40 stories (!) encourage construction of smaller office buildings

Another factor common to these cities are policies also encourage non-car commutes — Boston even banned new non-accessory parking downtown — and rail transit that distributes commuters through downtown, rather than focusing access along a freeway or a vast commuter rail terminal. Metro’s three downtown tunnels, and DC’s largely freeway-free downtown, help to equalize access (and property values) across a wide swath of land. In retrospect, it’s impossible to identify which one factor had the greatest effect.

This customer is always right

There is one big anchor tenant in DC’s office market: the federal government. The government has some peculiar parameters around its office locations, which also help to explain where DC does have parking craters.

Private companies often don’t mind paying more rent for offices closer to the center of downtown, which puts them closer to clients, vendors, and amenities like restaurants, shops, or particular transit hubs. The government, on the other hand, has different priorities: it would rather save money on rent than be close-in. The General Services Administration, which handles the government’s office space, defines a “Central Employment Area” for each city, and considers every location within the CEA to be equal when it’s leasing offices. It also usually stipulates that it wants offices near Metro, but never specifies a particular line or station.

As rents in prime parts of downtown rose, the government began shifting leased offices from the most expensive parts of downtown to then-emerging areas. Large federal offices filled new office buildings in the “East End,” helping to rejuvenate the area around Gallery Place and eliminate many parking craters.

This one rule scattered “parking craters” all around DC, but they’re steadily disappearing

Over the years, DC noticed the success it found in broadening the federal government’s definition of the Central Employment Area, thereby spreading federal offices to new areas. It successfully lobbied GSA to widen the CEA further, encompassing not just downtown but also NoMa, much of the Anacostia riverfront, and the former St. Elizabeth’s campus. Because the latter areas have much cheaper land than downtown DC, and lots of land to build huge new office buildings, federal offices are now drifting away from the downtown core.

A developer with a small site downtown usually won’t bother to wait for a big federal lease: the government wants bigger spaces at cheaper rents. It’s easier to just rent to private-sector tenants. However, a developer with a large site within the CEA and next to Metro, but outside downtown, has a good chance of landing a big federal lease that could jump-start development on their land — exactly the formula that can result in a parking crater.

One recent deal on the market illustrates the point: the GSA recently sought proposals for a new Department of Labor headquarters. GSA wants the new headquarters to be within the District’s CEA, within 1/2 mile walking distance to a Metro station, and hold 850,000 to 1,400,000 square feet of office space.

The kicker is the timeline: GSA wants to own the site by April 2018, and prefers if DC has already granted zoning approval for offices on the site. It would be difficult for a developer to buy, clear, and rezone several acres of land meeting those requirements within the next two years, so chances are that the DOL headquarters will be built on a “parking crater” somewhere in DC. Somewhere outside downtown, but within the CEA, like:

Parking crater at Spooky Park, Yards

Parcel A at the Yards.

  • “Spooky Park,” or Parcel A at The Yards, formerly the National Geospatial-Intelligence Agency offices across from the Navy Yard Metro. It’s zoned for 1.8 million square feet of offices, and is probably the largest single parking crater in DC.
  • Behind the Big Chair in Anacostia are several parking lots that could house a million square feet of offices.
  • The Portals, next to the Mandarin Oriental Hotel at 14th and D streets SW, has two empty lots left. A residential tower will soon sprout on one, but the other is being reserved for another office building, across from to another building that was built for the FCC, but which will soon be vacant.
  • The two blocks just west of the Wendy’s at “Dave Thomas Circle,” in the northwest corner of NoMa, are owned by Douglas Development and Brookfield Asset Management. Brookfield’s site could house 965,000 square feet of development, and Douglas’ site could have a million square feet.

High-rise residential seems like it would be an obvious use for land like the Yards, which is outside downtown but atop a heavy-rail station. Yet even there, where one-bedroom apartments rent for $2,500 a month, it’s still more valuable to land-bank the site (as parking, a small green area, and a trapeze school) in the hopes of eventually landing federal offices.

Many federal leases are also signed for Metro-accessible buildings outside the District, which helps to explain why prominent parking craters exist outside of Metro stations like Eisenhower Avenue, New Carrollton, and White Flint. (For its part, Metro generally applauds locating offices at its stations outside downtown, since that better balances the rush-hour commuter flows.)

One reform could fix the problem

One esoteric reform that could help minimize the creation of future parking craters around DC is to fully fund the GSA. Doing so would permit it to more effectively shepherd the federal government’s ample existing inventory of buildings and land, and to coordinate its short-term space needs with the National Capital Planning Commission’s long-term plans.

Indeed, GSA shouldn’t need very many brand-new office buildings in the foreseeable future. Federal agencies are heeding its call to “reduce the footprint” and cut their space needs, even when headcount is increasing. Meanwhile, GSA controls plenty of land at St. Elizabeth’s West, Federal Triangle South (an area NCPC has extensively investigated as the future Southwest EcoDistrict), Suitland Federal Center, and other sites.

However, ongoing underfunding of GSA has left it trying to fund its needs by selling its assets, notably the real estate it now owns in now-valuable downtown DC. GSA does this through complicated land-swap transactions, like proposing to pay for DOL’s new headquarters by trading away DOL’s existing three-block headquarters building at Constitution and 3rd St. NW.

In theory, it should be cheaper and easier for GSA to just build new office buildings itself. In practice, though, they’ve been trying to do so for the Department of Homeland Security at St. Elizabeth’s West — a process that Congressional underfunding has turned into a fiasco.

Parking craters will slowly go away on their own

In the long run, new parking craters will probably rarely emerge in the DC area. Real estate markets have shifted in recent years: offices and parking are less valuable, and residential has become much more valuable. This has helped to fill many smaller parking craters, since developers have dropped plans for future offices and built apartments instead.

Goodnight, parking crater

A parking crater in NoMa that’s soon to be no more, thanks to apartment development.

Even when developers do have vacant sites awaiting development, the city’s growing residential population means that there are other revenue-generating options besides parking. “Previtalizing” a site can involve bringing festivals, markets, or temporary retail to a vacant lot, like The Fairgrounds, NoMa Junction @ Storey Park, and the nearby Wunder Garten. This is especially useful if the developer wants to eventually make the site into a retail destination.

Broader trends in the office market will also diminish the demand for parking craters, by reducing the premium that big offices command over other property types. Demand for offices in general is sliding. Some large organizations are moving away from having consolidated headquarters, and are shifting towards more but smaller workplaces with denser and more flexible work arrangements.

Unlike the boom years of office construction, there’s now plenty of existing office space to go around. Since 1980, 295 million square feet of office buildings were built within metro DC, enough to move every single office in metro Boston and Philadelphia here. While some excess office space can be redeveloped into other uses, other old office buildings — and their accessory parking lots — could be renovated into the offices of the future.

A version of this appeared in Greater Greater Washington.