Planning March 2014
Hotter in Texas
While parts of the country still struggle, investment in Lone Star cities is on fire.
By Bridget Mintz Testa
Like a compass needle seeking magnetic north, billions of dollars of capital are seeking a lodestar to direct them toward profitable investment opportunities. Today, that star points straight to a handful of hot cities — those growing in size, population, and economics.
"Real estate has proven to be very attractive in producing high rates of returns when Treasury notes produce zero returns," says Stephen Blank, a senior fellow in finance at the Urban Land Institute. "We have more capital right now than we have [projects] from the years when we didn't have enough capital from overbuilding."
Every year, Emerging Trends in Real Estate, jointly published by the Urban Land Institute and the accounting and consulting firm PricewaterhouseCoopers, identifies the top 20 urban markets — those most inviting for investors. "What is attractive to them are high-tech, energy, medical, and educational services, stable financial services, or some combination of them," says Blank, one of the study's authors.
"The market should have growing in-migration, and it should be a place where Millennials want to live," he continues. "It must have an attractive business environment and many choices in housing. The market must draw enough attention, investors, and capital so that either side of the market — buy or sell — can do what they want when their strategies change."
Texas cities dominate in Emerging Trends' 2014 top 20 hot urban markets, and the state as a whole fared much better than others in the recent recession and recovery. But what makes the Lone Star cities of Houston, San Antonio, and Austin sizzle?
To answer that, one only needs to look at the state. Texas is the number one producer of crude oil, natural gas, and wind energy in the country, and it has 27 percent of the nation's oil refineries, according to the federal Energy Information Administration. But it has much more than energy: a strong government sector, international trade, manufacturing, top universities, renowned medical facilities, banking and finance, and a strong and steady tourism and hospitality sector.
According to the Texas comptroller's office, the state's unemployment rate has been equal to or less than the nation's rate for 83 consecutive months (in November 2013 Texas's was 6.1 percent versus seven percent nationally). The state's real gross domestic product also has grown faster than in the U.S. overall, and it's tops in job growth.
Live music capital of the world
Austin is seventh in the ULI report, but number one nationally, according to the "most recovered from the recession" rankings by Brookings Institution's Metro Monitor for the third quarter of 2013. Texas's state capital has successfully branded itself as "the live music capital of the world," thanks to events like SXSW and the nearly 40-year-old music performance television show, Austin City Limits. The city's unofficial motto? "Keep Austin weird."
Weird or not, Austin has lots of what investors want: the highly ranked University of Texas with world-class research and more than 51,000 students; large and small high-tech companies; software, music, and video game entrepreneurs; a youthful and growing population; a fun and "funky" vibe; and a pro-business attitude. Austin also owns its electric and water utilities, which are "leveraged to bring in businesses such as data centers because we can guarantee reliable electric and water services," says Greg Guernsey, AICP, director of the city's planning and review department.
Low-density outward growth has increased Austin's area by six times since 1960. Therein lies the genesis of Imagine Austin, the city's new 30-year comprehensive plan. "We are really trying to focus on redeveloping downtown, which limits expansion and growth," Guernsey says. Austin's plan, the first since 1979, is compact and connected and focuses on complete streets, Guernsey says. "We want to make sure that the things people enjoy and want to protect are all addressed," he adds.
One downtown redevelopment converted Austin's former municipal airport, a 550-acre site, into a residential area. Another transformed an old downtown water treatment plant into a library, offices, retail, and condos. Commercial redevelopment includes new retail, high-rise hotels, and a Veterans Administration hospital.
To realize Imagine Austin, Guernsey needed more staff. The sticking point was funding. Fees for permits, inspections, and other services hadn't risen since the early 1990s. "To help make the case to hire back people who were laid off between 2008 and 2010, we did a cost-of-service study to reflect the value of the work we do," he says.
"The study showed that we were bargain-basement," Guernsey says. "Our fees were even less than those of the bedroom communities around Austin. If we raised our fees, we could help pay the cost of adding more people." Guernsey prevailed: Planning department staff size will rise from 304.5 in FY 2010 to 351 in FY 2014.
Alamo City
San Antonio is another hot city, ranking number 14 on the Emerging Trends list. It's high up at number four in the Metro Monitor. "It has a very strong, diverse economy," says John Dugan, AICP, director of the city's planning and community development department. Its leading industries are energy, tourism, and a large military presence — 80,000 to 90,000 military retirees and another 100,000 active Army and Air Force personnel live there.
San Antonio is situated roughly 40 miles northwest of the Eagle Ford Shale — a distance that many San Antonio residents consider an easy commute. Since the shale was first drilled in 2008, it's brought 80,000 high-paying jobs and tens of thousands of home purchases to San Antonio, according to Dugan.
"We issued $2 billion worth of building permits last year, and that's only half of the growth and development in the area," Dugan says. "About 2,000 residential units are in the pipeline. Our goal is 6,000 or 7,000 new units by 2020, and we're about halfway there. We're building about 2,000 new single-family units and 3,000 new multifamily units each year — many in the central city." This is a shift for the city, which for many decades grew mostly at the fringe.
Tourism annually brings 28 million visitors to San Antonio. The Alamo and the River Walk, both situated downtown, are the city's top two visitor magnets. Tourism drove the construction of more than 1,000 new hotel rooms downtown.
More is coming — an industrial and low-income area south of the River Walk will be redeveloped into an "active living" district. The River North district — about half of the city center — is now subject to form-based codes for all new construction. In the rest of the city center, new construction is subject to design guidelines ensuring compatibility with existing buildings.
The city's exploding growth and its 2020 Vision Plan, which was adopted in 2011, have created a "new resurgence of interest in planning," Dugan says. "There's a realization that this growth is coming, and we must plan so we don't get overwhelmed. The planning staff and tax increment group have both doubled in size — from seven to 14 and from four to eight."
Energy capital of the world
In Houston, it all starts with energy, "which is our biggest export," says Brian Crimmins, chief of staff for Houston's planning and development department. Imports figure big in the city's economy, too: The 25-mile-long Port of Houston complex is the top U.S. port in foreign tonnage and the number two U.S. port in total tonnage. More than 200 million tons of goods pass through annually, according to the Port Authority.
Houston is also a manufacturing hub for the oil industry as well as for some tech products, Crimmins says.
Health care is big business, too. The Texas Medical Center in Houston is "the largest medical research center in the world," Crimmins says. With 54 member institutions, 290 buildings, and 106,000 employees, the complex is 45.8 million square feet. Its total annual operating budget is $15 billion.
Rice and Baylor Universities are highly ranked. And though aerospace's role in the city's economy declined after the space shuttle program ended, it's still a factor.
ULI ranks the city number two overall in the hot city beauty contest, but the Bayou City tops the list in real estate investment. In other words, more financial investors and more lenders of every type are putting their money in Houston than in any other city in the country. Houston comes in at number two in the nation in Metro Monitor.
Development is booming, too, and it isn't merely at the city's edge. "Houston is spreading out, but it's also densifying in downtown Montrose (the city's arts and oddballs district) toward the Heights (a well-to-do area of historic neighborhoods)," Crimmins says. "It's the first time there isn't a real conflict between pro-urban and pro-suburban proponents. Both markets are doing well and are in equilibrium."
Within the city and definitely within the 610 Loop, more town homes are sprouting. "There's an explosion in multifamily, but with mid-rise and high-rise buildings, not garden apartments," he says. "Condos are the new hot sellers."
One of the biggest planning innovations in the area is the Bayou Greenways initiative, a multiphase $480 million project. It will add 4,000 acres of new and better distributed green spaces to the city, and it will integrate 300 miles of continuous hike and bike trails. "It won't be a River Walk, but it will be a world-class amenity," Crimmins says. The project is set to open in 2020.
Also new is a citywide parking ordinance, passed in 2013, which is notable for its requirement that businesses share spaces. "The ordinance was opposed by bars and restaurants, but now they like it," Crimmins says. Parking needs have dropped 30 percent since the ordinance took effect. "Bars and banks share perfectly," he adds.
Planning has historically gotten short shrift here, but "people are starting to see more value in it," the top planner says. "We've hired four more staff because we could show platting had almost doubled — back to the 2007–2008 level. We've also added previously laid-off staff. We're doing a much better job of reaching out to [other city departments] and tearing down silos. We're pushing for an overarching plan that can integrate everything."
Texas has tremendous natural and man-made advantages — size, energy resources, the Gulf, international trade just across the Mexican border, no income taxes, and a state government that's always pro-business. All these factors help make Lone Star cities hot for investors. But the state certainly has no monopoly on heat.
If your city isn't hot, you can transform it, according to ULI's Blank. "Find out the perception of your city," he says. City leaders must then decide how to change that perception. "Declare what you're going to be and show the investment community," Blank says. "Show some pattern of growth in the attractive areas — tech, medicine, research, education, financial services — the jobs of the next 10 years."
Bridget Mintz Testa is a Houston-based freelance writer who specializes in business, technology, and the places where they intersect.\
Resources
Images: Top — A show by the Flaming Lips at Auditorium Shores was one of the free offerings of 2013's South by Southwest. Visitors from around the world flock to Austin for SXS's annual festival of original music, independent films, and emerging technologies. Photo Tye Truitt/SXS. Middle — San Antonio is halfway to its goal of adding some 7,000 new housing units by 2020 — a great deal of them in the central city, which represents a shift in the usual development pattern. Photo courtesy SanAntionio.gov. Bottom — Cranes are a common site in Houston, where development is booming. Photo courtesy HustonTX.gov.
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By Bridget Mintz Testa Texas may be booming, but California is recovering from the recession as well. Its pace is about the same as the nation's, according to the California Department of Finance and the U.S. Bureau of Economic Analysis. And projections out to 2017 by the state's department of finance indicate that conditions — including jobs and personal income — are only going to get better. Two California cities, however, are absolute stand-outs — thanks mostly to high-tech. But that boom comes with growing pains. City by the Bay "People have always paid attention to planning in San Francisco because they are so passionate about it," says John Rahaim, director of the planning department in the City by the Bay. For years, the department worked on plans to bolster growth, but the current boom far exceeds expectations. It demands new resources, such as the increase in planning staff numbers from 135 in 2010 to 175 in 2013. Possibly the biggest factor in San Francisco's boom is that high-tech companies and startups have started seeing the city as an attractive place to do business. Historically, high-tech companies started out in Silicon Valley, so this is a major change. Another factor is young people's desire to live the urban life and forego suburbia's houses and cars. For the first time, more than half of the available venture capital is being spent in the city rather than in the valley. "One challenge is dealing with increases in property value," Rahaim says. "We are the most expensive city in the country for housing." ULI's recent report, Emerging Trends, puts San Francisco's 2014 median home price at about $783,000 versus the country's median of roughly $205,000. "We're trying to figure out how to bring middle-class people back into the city because they're being forced out," Rahaim says. "There's not much government help for the middle class. They are moving out to the suburbs and away from the center. Then they commute to work back in the city, which creates a new traffic challenge." The reward for the city planners' efforts? "We can see the planning work we've done in the last 10 years coming to fruition," Rahaim says.
Capital of Silicon Valley "San Jose is a bedroom community for Silicon Valley, and we don't want to be," says Joseph Horwedel, AICP, who was the director of planning, building, and code enforcement for the city until his retirement late last year. San Jose, which brands itself as the "Capital of Silicon Valley," is the "largest city in the nation where the daytime population is less than the nighttime population," says Horwedel. "It's bad financially for us," says Horwedel. "We deliver services for the residents, but their revenue goes to other cities." Consequently, bringing more jobs to the city was one of the primary drivers of its new general plan, Envision San Jose 2040, approved in late 2011. To accommodate the expected job growth, the plan calls for building 32,000 housing units and 28 million square feet of industrial and commercial space. The construction will take place in four carefully calibrated phases. "We are trying to build housing so it's not draining for city services and doesn't get too far ahead of job growth," says Horwedel. On the commercial side, Samsung is building a 660,000-square-foot office building in northern San Jose. "We offered incentives for it," Horwedel says. The 10-story building sits next to light rail, and "it has a very green, very urban design," he adds. "It is a high-tech vertical campus — a significant building." A former IBM campus also was revamped to free up space for new housing, parks, offices, industrial facilities, and open space. The city is doing a "village" plan to look at underutilized areas, as called for in Envision San Jose 2040. "For the village plans, we [look for] good transit via light rail, BART, and CalTran where we can add jobs and new housing. We're focusing on the central corridor and radiating out from there," Horwedel says. Development in San Jose is proceeding at a record pace that's even faster than the dot-com days. In calendar year 2013, the planning department processed $475 million worth of permits, which is almost four times the volume of permits processed in 2012. To meet the crush, Horwedel added a couple more staff members, and the department has city manager and council approval to hire additional temporary personnel. The city's "one-stop permitting" process is a crucial element in the speedy development that attracts companies from the Silicon Valley and elsewhere. "We bring in the company's whole team to meet with the city planning team," Horwedel says. "We plan-check the whole building in a couple of hours, taking months out of the process. We charge a 50 percent premium for that, but either you walk out with permits or with documents that red-line the differences so that you can resolve them and come back to get the permits. You leave with a permit 70 percent of the time." Image: Samsung's new campus features green walls and solar power arrays on the parking garage, an amenities pavilion, and good transportation access. Photo courtesy SFGov.org. |
