Thursday, August 24, 2006

Catalyzing Downtown Cleveland's Residential Growth

There has been a long-standing debate over how best to attract new residents to Cleveland's downtown. Potential residents clamor for more housing and more retail & services. Developers, for their part, hesitate to build more housing until there's more residents (paradoxically) and more retail & services. Retailers, of course, don't want to set up shop downtown until there are more residents. If all three groups play their part, then downtown should prosper (ie: potential residents commit to signing leases / buying condos; developers commit to building those apartment buildings; service/retail providers commit to opening stores). If, however, any one of the groups fails to honor its commitment, the project as a whole fails: if residents don't move in to the new homes, developers and retailers go out of business; if developers don't build the homes, residents can't move in and the retailers have no customers; if retailers don't open their new stores, residents won't be able to conveniently access essential services and won't move in to the neighborhood).

It's a rather compelling example of The Prisoner's Dilemma: the mission (in this case, building up a downtown neighborhood) succeeds only if all the players freely choose to do their part. Each player, however, has no assurance that his teammates will take the same risk and play their respective roles. It's an exercise in trust.

In simpler terms, the downtown growth question can be understood as a "chicken-and-egg" debate. Residents will only move in when there is sufficient housing & retail. Housing & retail only move in when there is sufficient residential population. Which comes first, the chicken (residents, I suppose) or the egg (housing & retail) ?

Regardless of which theoretical model you prefer, the practical result has been slow residential growth in the downtown core. If it really is a question of trust (or, shall we say, political consensus) among disparate actors, then we must conclude that there's a lot of mistrust.

All of which brings me to an article about a new development in Minneapolis. To quickly summarize: a developer (Don Milliken) has just gotten approval from the city's Planning Commission to build his proposed 33-story (290-unit) condo building downtown. This building will include a ground-level 75,000 square-foot Whole Foods. The project formally brings together exactly those three key groups necessary for downtown rebirth: residents, developers, and retailers! Whole Foods commits to opening a store in the condo building; the developer commits to building it; and residents (one hopes!) commit to moving in.

Well, to be fair, that last part is still unclear: the article does not discuss whether Milliken's financiers will demand a certain percentage of pre-building sales before ponying up the cash. My guess is that to secure $200 million in financing he will absolutely have to pre-sell at least a third of the building. Assuming that's the case, this project may well prove to be an excellent case study in how to bring together the three essential players in downtown growth.

Theoretically, this whole project could be a shining example to the rest of the country. Let's say Milliken pre-sells enough units; the banks in turn agree to finance the construction; Whole Foods agrees to set up shop (selling to a captive audience, no less); Milliken builds it; the contractors actually get it done on time (!); residents move in; and finally everyone wins: The city gets new property tax revenue, Whole Food makes a killing selling over-priced organic tomatoes to the condo crowd, and Milliken makes a fortune and contributes it all to the Gates foundation (well, who knows, right?).

On the other, we should consider how this could go wrong. The easiest way for the project to collapse is if Milliken can't pre-sell enough units. If the housing market isn't interested in downtown Minneapolis living, then there's little Milliken can do. In that event, the financing would fall through and the whole project would evaporate. Even if Milliken can pre-sell enough units, Whole Foods might decide that it's not good business to open up. And even if Whole Foods doesn't back out, there could easily be cost- and time-overruns in the construction process, delaying the move-in date for all those pre-sold residents and causing Whole Foods shareholders to complain that the company isn't expanding fast enough.

But I've said enough. Let's keep our eyes on this project and see if they can make the magic happen...


Blogger Frank A. Mills said...

Steve, can't speak for Minneapolis but I just read an artical in a real estate magazine, FORUM if I remember correctly, that in many regions pre-sales do not factor into whether or not a development project goes forward. If I interpreted the article correctly this region is one of the few where pre-sales are a factor. In one major East Coast city the developers were astounded to find that so many wanted to buy into a condo project before it ever got off the ground. In fact, pre-sales weren't even being offered as the developers saw no need to offer them and had never before done so. I suppose it all has to do with the robustness of a city's economy.

8:39 PM  

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