Thursday, August 26, 2010

On Self-Cannibalization in Real Estate

I'm sure this view will draw the ire of many professional contacts, and I would mostly understand.... We are driven by the market and too often lack the power to make huge changes in "the way things are done."  But I also hope that you recognize the flaws in how things have been done in recent years -- and not just from an economic perspective, although perhaps reevaluating our typical investment strategies/perspectives could go a long way in making things better.  I'm speaking of course about the community impact of real estate, since these two components of our world are inextricably linked.

What happens when the economic life of an investment has expired?  What is one's responsibility to the community with regard to the grayish area of perceptions of blight, value, impact, etc.?  And finally, how does an all too typical 3-5, or even 10-year investment timeline impact the likelihood that we leave blight in our wake while moving on to create "greatness" or other "enhancements" and "community amenities?"  Is there a better investment strategy that also accomplishes more in the way of making our world better?  Thankfully, there are many leaders in the real estate, planning, and economic development communities finally asking these questions and applying the scientific method to our varied theories of how things ought to be done.  I plan to focus on these elements going forward, hopefully blogging more frequently than I have in the past with some thought provoking issues and their proposed solutions.

For now, I offer my follow-up comments on an article that appeared recently in the local newspaper, The Arizona Republic.  This article was posted by local business leaders seeking to take back greater control of Phoenix and frustrated that the retail landscape here is mostly undesirable to small businesses for one reason or another -- mostly due to not offering the kind of main street connectedness that they seek within the market, and yet local businesses should be the key to an economic recovery.  So without further ado:

If you've been in any area of Phoenix for a considerable amount of time, just reflect on how that area has evolved over its first two decades (or the last two if it's an older part of town). What too many in our real estate industry readily accept as a cyclical market is really just wasteful self-cannibalism in many cases.
Having grown up in South Tempe, I often think about all the office space and retail that was built on the edges of Awhatukee. Back in the 90s, this was one of the hot spots to be in the Phoenix area, but then the market "shifted." The reason for the shift? Ambitious new plans for Chandler Mall and the 101 corridor. The same thing has happened again and again throughout Phoenix, and we end up with dilapidated shells of buildings that serve little value unless, miraculously, the surrounding neighborhood gets "revitalized."
The failure of this formula is that our community often treats housing exactly the same way -- get into the neighborhood while it's new, sell high, and move on to the next booming area..... How's this working for us today? Is it maybe time for a change in how we treat our surrounding community and overall environment? I think so.
This issue has been on my mind quite a bit lately.  In fact, as I type this, I await the final word on a controversial zoning hearing for a downtown permit application to demolish an older Phoenix hotel.  One of my acquaintances appeared in this news story about the case and he has blogged extensively about it.  I too have engaged in many quite similar debates about prematurely laying older buildings to waste, or overbuilding a particular area in one way or another with little regard for the surrounding land uses, infrastructure, and/or community needs and wants.


As we throw around such massive amounts of money in the development industry, I feel that it's perhaps important to remember what it should mean to "invest."  We're dealing with a rather illiquid investment instrument here, after all.  So why not try to reap the greatest possible long-term rewards by directly serving the community and always gaining buy in from the local residents who will inevitably become customers, strategic partners, and even co-investors in a project?  I know several successful developers already employing this kind of strategy to their projects, but think the industry as a whole has a long way yet to go.

3 comments:

  1. I totally agree with you about the intentions of development, and certainly you understand this better than I do. Though realistically, Phoenix is full of these kinds of retail and commercial spaces and they'll probably just continue the cycle of bulldozing and putting a newer, bigger one in its place. Have you seen this TED talk: http://www.ted.com/talks/ellen_dunham_jones_retrofitting_suburbia.html?
    Basically just thinking about how to deal with the infrastructure that's already in place and trying to make it work. I think it's especially applicable to metro-Phoenix given the type of development in the valley (and in fact she points out Le Grande Orange as a case study). Anyway, if you haven't already seen it, you'd probably find it interesting.

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  2. I hadn't yet seen this TED talk, so thank you. She brings up some similar points about suburban quality of life issues that were raised by one of the panel members at an event in Phoenix on Earth Day. When I pointed out that each of the statewide plans offered on a survey like this one, http://www.whatmovesyouarizona.gov/your_home.asp, looked like the same old thing we've seen plus a little bit of rail, he didn't offer much of a response. I then asked if the political leadership or development community had the will or the power to change anything. Again, very little response. And yet, we're planning for much more of Arizona to look like the suburban wastelands.

    This is a topic that periodically pops up in some of the real estate and planning literature lately, but it too often neglects the fact that we already have millions of people living in communities that are vastly different than the popular new urbanism model. Unfortunately, many planning, land-use, and regional economic theorists would prefer not to take on the massive task of retrofitting what we have in a wise and practical manner. It's not like we can just scrape it all and move people somewhere else, after all.

    Ms. Dunham-Jones does a great job of envisioning how a change to the existing landscape could be accomplished, although she presupposes some very complex agreements between governments and developers. I also got the feeling that she took for granted rather massive investment dollars that were feasible in a real estate boom, but not as much now. I was pleased at the end, however, that she pointed out the flaws of many neo-urbanist concepts that just come off as phony.

    I think all eyes should now focus on Detroit, as it has perhaps passed its breaking point and is now one of the only major cities that I know to be taking on drastic measures to build a new model (and not terribly different from what Ms. Dunham-Jones described). I may be wrong, but last time I visited made me think that this was an area perfectly suited for new ideas. I don't know that Phoenix is quite there yet. We can't even agree that the light rail has been a huge success, while sprawl has been our downfall, and it seems that no one is interested in commissioning a study to show the overall economic costs and benefits of each in our market.

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  3. i think the main problem is simple yet complex/problematic: land is cheap in arizona. and even where it is trusted to the government or whatever they call it, that land can still be converted to developed land. it's like there's infinite land available. the diminished value of land inherently means it will be used inefficiently, because whatever you do TO it will be more valuable than the land itself. this is not the case, generally, in most (healthy) urban spaces. but yeah: i agree that arizona's development model will not change anytime soon. we're already pulling out of this real estate crisis, and in spite of being hit hard apparently because of these kind of development practices, i think the benefits still outweigh the consequences when land is so cheap.

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