COMMENT OF THE DAY: WE JUST RUN THE NUMBERS “If you dig a bit deeper into the Milhaus proformas, what the developer is REALLY saying is that there won’t be retail because: 1. lenders don’t like it; 2. buyers don’t like it; 3. adding retail reduces my return on cost somewhat; AND 4. mostly because of #1 and #2, it kills my numbers. If you look at the overall return on cost (NOI/cost) you get 7.7% return on cost with retail vs 8.7% return on cost without retail. That’s a substantial difference, but not eye popping. If the Midtown TIRZ really wanted some retail in the deal, they could easily toss Millhaus a bone and bridge this 100 basis point gap with ease. The real problem, at least according to Millhaus (not that I disagree), is that the lenders and buyers treat mixed use differently. In the example comparison, Millhaus assumes the non-retail deal gets a permanent loan underwrittien to 1.25 DSC [debt service coverage] vs 1.30 DSC for the with-retail deal. This means a larger permanent loan upon completion for the no-retail deal (more cash in Millhaus pocket). He’s assuming lenders will get more aggressive on a apartments-only deal. He also thinks his eventual buyer will prefer a non-retail deal. He calculates the as-completed value using a 7.00% cap rate for the non-retail project, but uses a 7.25% cap rate for apartments+retail project. What he’s really saying is, ‘Don’t blame me for not including retail in my development. Blame the lenders and buyers.’†[Bernard, commenting on Nixing Milhaus Retail: Why These New Midtown Apartments Won’t Have Shops on the Ground Floor]
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Unfortunately once again in Houston, we see that economics rule every decision, at the expense of creating a vibrant, healthy, fully functional city. In other cities with more vision,incentives exist for incorporating mixed use functions into multi-family developments (through tax incentives, free parking, etc. The addition of these uses may be slightly undesirable to both lenders and buyers, but other municipalities help to make the economics work out for developers because these uses vastly improve the urban experience–and the future of the cities in which they’re developed. Look at the recent developments in Denver’s LoDo, Portland’s Pearl District, etc etc. These neighborhoods grew up from nothing, but because of a little bit of vision, they’re now thriving, interesting places to live. If only Houston could dare to have that kind of vision for at least ONE of its many growing neighborhoods.
I’m not denying the reality of what Bernard is saying. I’m only lamenting the tragic situation of Houston development, where nothing truly good can happen, because we have no incentives to make good urbanism. Every deal is flawed in some way–sure, the Midtown TIRZ could have bridged Milhaus’s gap, but that would have taken strategic thinking about the future.
Oh no, a building that’s not mixed use. Who cares? I don’t care about a “vastly improved urban experience”. I just want low taxes, a job, and a nice house to come home to at night. I don’t need some “urban experience” to make my life better. I can get by just fine without it.
Keep Houston Lame.
Thank you Bernard – It’s a little above my comprehension level, but I really do appreciate you breaking it down. These are the comments I look for when stories like this come to light.
@ MJ: In cities that force the ground-floor retail issue, they’re only dooming themselves to high commercial vacancy rates. And that creates a property tax revenue problem on top of the initial cost of the incentive.
As someone who has owned apartments with ground floor retail, I can confirm that the retail is a drag on the entire development. As noted previously, it is often vacant and generally difficult to lease. Moreover, the retail space must have adequate parking spaces (both to meet code and to make the retail viable). Houstonians like their cars and they don’t like parking structures, making surface parking lots preferable. However, surface parking takes more land, making it impossible to site plan in many cases (due to site dimensions), and very expensive since infill land is big $$$. Increasing the size of the parking structure is expensive and makes for inconvenient parking for the residents that like to park on the same level as their unit. Moreover, the parking structure leaves the retailers less satisfied as they prefer surface parking. Consequently, the retail becomes even more difficult to lease.
Yes, ground floor retail works in excellent locations–think Gables West Ave. But, it generally is a drag on everything in less than obvious retail locations, and not just from a drag on the pro-forma standpoint…vacant retail makes it harder to lease expensive apartments. In most cases, the developer would be better served sticking with apartments.
I feel that, in an urban setting, it’s elegant living above the street. Less fear of crime. No headlights illuminating the living room. Potentially better breeze, less insects, better views…
But I certainly understand that Houston cannot support extra retail. Houston can’t decide whether it’s “urban” or “strip-mall.”
While in general I don’t want government in my bidness, I approve of a city massaging the way toward developing these mixed-use blocks. (A mixed-use re-hab was my college thesis.)
The best place (apartment) I ever lived was in a 1898 commercial building over a jeweler and a tobacconist. Bakery across the street, bar-and-grill on one end of the block and Saturday farmer’s market at the other end. Heaven.
Incidentally, I don’t think anyone commented on the cleverness of the original article’s title: Nixing Milhaus Retail, or reversed, Retail Milhaus Nixing, or switched around Richard Milhaus Nixon.
#8 MJ:
Where have you been? Gus knows how to work the words!
I’m more shocked when he doesn’t.
Yes! The Daily Demo titles are an unsung treasure and deserve a category in the end of the year awards, or at least a retrospective. Thanks to the search function, here are my favorites:
Clear Booth Loose
Airing Burr
Ireland Home Rule
Hermann’s Permits
Leffingwell is the Best Revenge