E
Economics
i off Mixed-Use
Mi d U
Shyam Kannan,
Kannan Director of Public Strategies – RCLCO,
RCLCO [email protected]
skannan@rclco com
ULI Triangle District | June 7, 2012
About RCLCO
2
ULI Triangle District
Practice Groups
 Urban
U b Development
D
l
t
 Community Development
 Economic Development
 Management Consulting
Offices
 Washington, D.C.
RCLCO is a land use economics
firm delivering real estate
strategies, market intelligence,
and implementation assistance
 Los Angeles
 Austin
 Orlando
3
ULI Triangle District
Market Trends
4
ULI Triangle District
> 85% GROWTH IN HOUSEHOLDS WITHOUT CHILDREN
DIFFERENT HOUSEHOLD LANDSCAPE BY 2025
Absolute Change in Households,
United States
1980 – 2005
Married with
children 1
children,
1,376,788
376 788
Married, no
children, 5,476,979
One-person
households,
11 825 702
11,825,702
Single male with
children,
hild
2
2,165,939
165 939
Single female with
children, 4,680,913
Nonfamily,
3,416,246
Other Family,
1,758,377
,
,
SOURCE: U.S. Census
5
ULI Triangle District
GEN Y MAKING ITS MARK TODAY
SHAPING POST-RECESSION PLACEMAKING EFFORTS
RCLCO Consumer Research shows:
 41% of Generation Y plan to rent for at least three years
 77% of Generation Y plan to live in an Urban Core
4,200,000
4,100,000
Largest group began graduating in 2009 –
Greatest demand for rental housing in this
period
4,000,000
3,900,000
3,800,000
If this group rents for at least three years,
there will be more first-time homebuyers
in the market in 2013 – 2018 than ever
before
3,700,000
,
,
3,600,000
3,500,000
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
04
20
03
20
02
20
01
20
00
3 400 000
3,400,000
Number of 22 Year Olds
Same 22 Year Olds Turn 25
NOTE: Number of 22-year olds is based upon birth rate and does not factor in death rates and migration.
SOURCE: U.S. Centers for Disease Control and Prevention
6
ULI Triangle District
GEN Y WILL PAY FOR WALKABLE, MIXED-USE
CHALLENGE IS PROVIDING PRODUCT THEY CAN AFFORD
Driven by convenience, connectivity, and a
healthy work-life balance to maintain
relationships
1/3 will pay more to walk to shops, work, and
entertainment
2/3 say that living in a walkable community is
important
More than 1/2 of Gen Y would trade lot size for
proximity to shopping or to work
Even
E
among families
f ili with
ith children,
hild
one-third
thi d or
more are willing to trade lot size and “ideal”
homes for walkable, diverse communities
SOURCE: RCLCO Consumer Research
7
ULI Triangle District
DEMOGRAPHIC SHIFTS AND HOUSING DEMAND
BUILT-IN DEMAND FOR HIGHER-DENSITY LIVING
Projected Total Population Growth Rate by Age
2010 – 2020
20 - 24
25 - 29
30 - 34
35 - 39
40 - 44
45 - 49
-200,000
60 - 64
65 - 69
2,600,000
1,000,000
-1,500,000
-1,900,000
-400,000
50 - 54
55 - 59
1,600,000
Apartments and Condos:
Entry-Level and
First Move-Up Condos, TH
First time SFD
`
Luxury townhomes and condos
Luxury single-family
TND and clustered, smaller lot
single-family
3,500,000
5,000,000
5,400,000
4 100 000
4,100,000
70
0 - 74
4
Senior Living
1,500,009
75 - 79
80 - 84
170,000
1 300 000
1,300,000
85+
SOURCE: U.S. Census Bureau
8
ULI Triangle District
HOW BIG IS THE MARKET FOR “SMART GROWTH”?
ALMOST HALF OF THE ANNUAL MARKET WANTS TO WALK
700,000
600,000
500,000
400,000
Gen Y
Gen X
Boomers
300,000
Eisenhowers
200,000
100,000
0
Prefer Downtown
Prefer City,
Residential
Prefer Small Town
Prefer Rural
9
Prefer Suburb,
Mixed Use
Prefer Suburb,
Residential Only
ULI Triangle District
HOW BIG IS THE MARKET FOR “SMART GROWTH”?
ALMOST HALF OF THE ANNUAL MARKET WANTS TO WALK
4,000,000
3,500,000
3,000,000
2,500,000
Gen Y
2,000,000
Gen X
Boomers
Eisenhowers
1 500 000
1,500,000
1,000,000
500,000
0
Prefer Downtown
Prefer City,
Residential
Prefer Small Town
Prefer Rural
10
Prefer Suburb,
Mixed Use
Prefer Suburb,
Residential Only
ULI Triangle District
ACCESS, ACCESS, ACCESS
THE NEW REAL ESTATE MANTRA…
Jobs
HH
3 mile ring
490,802
116,998
30 min transit
637,593
179,745
11
ULI Triangle District
WHY MIXED-USE?
 Social Capital
 Five Minute Living
 Travel
T
l Ti
Time P
Premium
i
 Experience Economy
 The Return of Walkable Urbanism
12
ULI Triangle District
Economics of Mixed-Use Real Estate
13
ULI Triangle District
MIXED-USE DEMAND > SUPPLY
Consumer Preference: Currently Live and Want to Live in a Suburban Neighborhood With a Mix of
Houses, Shops, and Businesses
March 2011
Consumer research suggests an un-met
National Consumer Research
demand opportunity for consumers that
want this type of environment but do not
currently live in it
35%
30%
25%
20%
Currently Live
15%
Want to Live
10%
5%
0%
National
North Carolina
SOURCE: NAR, Belden, Russonello, & Stewart
14
ULI Triangle District
RESULT = GREATER LONG-TERM VALUE
Financial Characteristics of Mixed-Use Areas with Critical Mass (Blue)
versus traditional Suburban Development (Red)
+
Value Cre
eation / Cash Flo
ow ($)
250%
200%
150%
100%
50%
0%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Time (years)
SOURCE: The Brookings Institution
15
ULI Triangle District
THREE KEY QUESTIONS TO CONSIDER
16
ULI Triangle District
THREE KEY QUESTIONS TO CONSIDER
 Does the market want it?
 Will Wall Street underwrite
the deal?
 Who is going to pay for it?
17
ULI Triangle District
WALL STREET MEASURES “RESIDUAL LAND
VALUE”
To use the bank’s money to
control and redevelop the
asset the underlying land
asset,
value has to prove to be
more than $10M
Existing stabilized asset
has a discernible value
For this example: $10M
18
ULI Triangle District
RESIDUAL LAND VALUE – HYPOTHETICAL (IDEAL)
Capitalized
Value $50M
Residual
Land
Value =
$16M
. . .Higher
g
than the
$10M for
the
existing
asset
Profits $3M
Financing $2M
Construction
$20M
Cost to
Deliver=
e e
$34M
Parking $5M
Marketing $1M
Site Costs $1M
Entitlements $2M
Revenues
Costs
19
ULI Triangle District
IN REALITY, PROJECTS OFTEN LOOK LIKE THIS
Feasibility
Gap
Profits
Financing
Potential for
Premium Pricing
g
Parking
Capitalized
Value of
What Gets Built
Construction
Site Costs
Entitlements
Land
Revenues
Costs
20
ULI Triangle District
DEVELOPMENT FINANCE A CONSTRAINT TODAY
DEMAND CONDITIONS NOT YET DRIVING FEASIBILITY
Residual Land Values and % Change in Rents Needed to Achieve Feasibility
2011
($200)
For Sale Residential
Retail
Office
Residual Land Value
Hotel
Flex
Logistics
Warehouse
W
Upscale
Limited/Select Service
Trophy
High Rise
ovation and
Inno
Education
E
Light Gauge
Midrise L
Steel
Laboratory/R&D
Medical
Anchored Frreestanding
Strip
For Rent Residential
Lifestyle or Mixed Use
($150)
Wood Frame MR
($100)
Wrap
($50)
oncrete HR
Co
0%
Light Gauge Steel MR
$0
Luxury Co
oncrete HR
40%
oncrete HR
Midscale Co
$50
Light Gauge Steel MR
80%
Wood Frame MR
$100
Stacked T
Townhomes
120%
Townhomes
T
$150
-40%
-80%
-120%
Industrial
-160%
% Increase
Current Rents and Rent Premiums Necessary to Achieve Feasibility
$50.00
$12.50
$40.00
$30.00
$3.50
$18.00
$8.00
$17.50
$10.00
$20.00
$10.00
$4.00
$4.00
Warehouse
Logistics
$0.00
$0.00
Medical
Laboratory/R&D
Midrise Light
Gauge Steel
Innovation and
Education
High Rise
Office
O
ce
Trophy
Flex
Industrial
dus a
Current Rent
Rent Premium
21
ULI Triangle District
FINANCING MIXED USE
EVERY LAND USE MUST “FLOAT”
22
ULI Triangle District
THE FEDERAL GOVERNMENT
 In 2009, 84% of multifamily originations were purchased by Fannie/Freddie
 Fannie/Freddie own 35% of outstanding multifamily mortgages outstanding
 That is 3X the private nongovermental MBS market
 In 2011,
2011 Fannie/Freddie/FHA drove $57
$57.6B
6B of the $184
$184.3B
3B CRE/MF business
 The second-largest contributor was pension funds and life insurance companies
 These
Th
capital
i l sources come with
i h serious
i
restrictions!
i i
!
• Commercial FAR
Davis Bacon
• Davis-Bacon
23
ULI Triangle District
Potential Solutions and Work-Arounds
24
ULI Triangle District
MULTIPLE USE BEFORE MIXED-USE
25
ULI Triangle District
ECONOMICS OF MIXED-USE DEVELOPMENT
TOOLKIT – PLANNED DENSIFICATION
26
ULI Triangle District
ECONOMICS OF MIXED-USE DEVELOPMENT
TOOLKIT – PLANNED DENSIFICATION
27
ULI Triangle District
RALEIGH EXAMPLES
28
ULI Triangle District
Conclusions and Next Steps
29
ULI Triangle District
NEXT STEPS
 Regional Competitiveness
 Capturing Gen Y
 Fiscal
Fi
l Responsibility
R
ibilit
 Recession-Proofing the Economy
30
ULI Triangle District
E
Economics
i off Mixed
Mi d U
Use
Shyam Kannan,
Kannan Director of Public Strategies – RCLCO,
RCLCO [email protected]
skannan@rclco com
ULI Triangle District | June 7, 2012