30. Urban Awakening

When retail expansion, and later the office boom, failed to secure the economic future of central business districts (CBDs), new impetus for revitalization was necessary. Downtowns soon found themselves with many obsolete, albeit physically attractive, office towers. Similarly, the stock of 19th century warehouses and factories–often well constructed and conveniently sited near white-collar employment centers, waterfronts, and various downtown amenities-had few prospects.

As acquisition costs began to drop, many abandoned office buildings and warehouses proved adaptable for residential use. To abet this trend, some cities and older suburbs are setting goals and implementing programs to increase populations downtown, boost consumer spending, and build municipal revenues. That and several other factors suggest that residential conversions and infill construction in U.S. city centers are not short-term phenomena.

As a rule, downtowns have the largest concentration of jobs in metropolitan areas and offer the walk-to-work option, which has great appeal to many people. These downtowns are building on their historical assets to become new centers of culture and entertaimnent. Falling urban crime rates-and recognition that downtowns are not necessarily highcrime areas-already are influencing public behavior, luring more people to evening activities not available elsewhere in their region. In addition, cities’ reputation for poor schools often has proven to be false-and for many, irrelevant because roughly two-thirds of American households have no school-age children and because many adults over 55 prefer more stimulating surroundings than they may have chosen for child rearing. Plus, the perennial culprit for serving up urban violence-television-has now become a positive marketing device for downtown living. Appealing young people are regularly featured on television enjoying themselves in attractive urban places such as restaurants, bars, and coffee houses-introducing a view of a glamorous life far removed from isolating suburban enclaves. As reflected in sales and rental activity and resident survey responses, the urban setting is proving highly popular.

In lower Manhattan, where New Amsterdam was founded, the Alliance for Downtown New York is now one of the nation’s largest business improvement districts (BIDs), with an annual budget in excess of $8.8 million. In addition to typical BID activities-supplementary public safety, streetscape cleaning, and marketing-the Alliance provides a free jitney service to transport workers to and from ferry slips and currently is planning a streetscape face-lift for its 125 blocks. Of vital importance to downtown’s future is the Alliance’s Living Downtown program, through which it is turning the area below Chambers Street into Manhattan’s newest residential neighborhood-a live/work, “24-hour-a-day/seven-day-a-week” community that cares about daycare just as much as it does about filling vacant offices.

Formerly, after 6:00 p.m. on weekdays and on weekends, this area consisted of silent, empty office canyons. In the post World War II era of big office construction, even residential pockets such as a historical Syrian neighborhood were displaced. In the late 1980s, downtown’s office market plummeted. More than 30 percent of downtown’s office space was vacant in 1994. The Alliance’s challenge was to refill the towers if not with businesses, then with households. In 1970, fewer than 1,000 people lived south of city hall By early this year, more than 2,400 residential units there had been or were being converted from former office buildings. An additional 1,100 were in development, and 3,000 to 4,000 more are forecast within the next four years. By 2002, the city anticipates that 25,000 people will be in residence.

Conversions in lower Manhattan typically produce large, luxury apartments with concierge services, on-site dry cleaning, free health clubs, and party rooms to compensate for the lack of off-site neighborhood amenities common in the competing Upper East Side and Upper West Side real estate markets. But this area also offers a diversity of real estate products, a function of varying building templates as well as distinctive architecture and multiple generations of building styles. The towers here are more sophisticated than the loft -style apartments in nearby neighborhoods. In lower Manhattan, often dazzling exteriors designed by world-class architects contain wide variations in offerings. Studio units can range from as few as one in a building to 72 percent of all apartments, and two-bedroom units can represent anywhere from 3 percent to 47 percent of a building’s total units.

Acquisition prices rose after special incentives were legislated, climbing from $15 to $20 a square foot and as high as $65 to $85 a square foot for major conversion candidates, according to the New York real estate consulting fum of Hamilton, Rabinowitz and Altschuler (HRA). As the office market tightens, some buildings considered for potential residential use are being reconsidered for retention as offices. According to HRNs 1998 report, all-in conversion costs, excluding the cost of acquisition, can run $125 to $175 per square foot, depending on the nature of the building. Conversion costs per rentable square foot for residential properties can run as much as two to three times the cost of renovation of commercial space. Nevertheless, downtown residential units rent at 10 to 20 percent below Upper East Side or Upper West Side prices on a square-foot basis.

Three features explain why the Alliance’s Living Downtown program is working now. According to HRNs report, “with real vacancy rates at or below 1 percent in Manhattan’s leading residential neighborhoods and with rents rising beyond pre-1987 record levels, the market is able to absorb a wide array of competitively priced product.” HRA describes the absorption rate as “breathtaking” and notes that rental strength has provided a “compelling [investment] context for deVelopers and their financial sources.”

The second factor has been the widespread availability of second-tier office buildings. More than 50 million square feet of Class B and Class C space exists in lower Manhattan, and many of these buildings have long been empty or only half occupied. Sales prices often have been $20 a square foot. The small templates that made them unsuitable for large office tenants now make them attractive for residential conversion. Many of these buildings have handsome exteriors and dramatic lobbies, plus natural light, good views, and prime locations.

Third, HRA believes that “it is highly unlikely that any major conversion activity in downtown would have occurred without tax incentives.” The city abates both existing taxes and taxes on improvements for 12 to 15 years. “The present value of these tax savings can be in the range of $30 to $50 a square foot, depending on current taxes and the scope of improvements;’ HRA notes. In addition, some 12 pre-1939 buildings have earned federal investment tax credits and 1996 zoning changes have reduced regulatory impediments.

All three of these elements have been essential in overcoming the early reluctance of lenders to participate in residential development, which lacked both a well-established market and track record. HRA also notes that unprecedented production and absorption can be traced to the following five factors in lower Manhattan.

Access. Lower Manhattan has the greatest concentration of subway lines in North America, which connects its residents with jobs in midtown, the nation’s largest commercial center, as well as with the 400,000 jobs in downtown itself, the country’s third-largest business district. Walking to work is an attractive option, but far from the only one. Reverse commuters take the subway to work in New Jersey, Queens, and Brooklyn.

Uniqueness. Downtown Manhattan has been described as “fascinating” and “eclectic;’ with world-class views, 17th-century street patterns, and dramatic architecture.

Waterfront. Access to the East and North rivers is quick, easy, and popular.

Public Amenities. Perhaps surprisingly, lower Manhattan has desirable schools, parks, and recreational facilities.

Shopping and Dining. Because of strong tourism and office markets, 2.1 million square feet of retail exists in Battery Park City, South Street Seaport, and the World Financial Center, assets that a residential community of less than 20,000 otherwise could not support. Local bars, health clubs, and restaurants also are increasingly available.

In the center of old New Amsterdam, where streets still bear names such as “Nassau” and “Dutch;’ only 40 percent of the residents work in lower Manhattan, according to New York Living magazine last year. Many have moved here from well-settled areas like Greenwich Village and Chelsea. At 56 Beaver Street, the landmark Delmonico’s restaurant building, there are now 37 live/work residences whose current occupants-an architect, a painter, a graphic designer, a doctor, a real estate executive, a laWyer and, a Wall Streeter-represent a mix of professionals.

An occupant survey conducted by HRA last fall produced answers to questions about how to improve lower Manhattan as a place to live-such as by increasing the number of grocery stores, restaurants, and nighttime activities. Twenty-two percent surveyed said they were likely to live in lower Manhattan five years from now, while 44 percent were unsure. The most popular feature of its buildings were health club/fitness centers, followed by “attractive design.” Half of the respondents walked to work, 25 percent to jobs in securities and commodities, and 19 percent to jobs in finance, insurance, and real estate. Sixty-one percent reported household incomes above $120,000, and 14 percent, above $210,000.

Forty percent described themselves as a couple or family household, 25 percent reported sharing their apartment with an unrelated person, and 35 percent lived alone. The low share of singles probably is related to price. More than half of the householders were under 30 years of age. Only 25 percent began their apartment search with lower Manhattan as their preferred location. The respondents included many people who were new to the city. Thirty-seven percent previously lived outside the New York metropolitan area, and 11 percent lived within the metropolitan area, but outside the city.

Last January, New York’s Rockrose Development Corp. was in the process of converting three downtown buildings-45 Wall Street (435 units), 200 Water Street (576 units), and 99 John Street (453 units )-all described by the firm as a transformation from “Class D office to luxury residential:’ The tax abatement benefit was attractive, as were more liberal rules allowing wide variations in the size of units. Rockrose executive Thomas Elgahanayan says the current boom is direcdy traceable to both Wall Street wages and bonuses and the fact that “it is hip to live right on Wall Street, in the epicenter of world capitalism:’

Downtown Denver

Downtown Denver’s objectives for creating additional residential opportunities are reinforced by metropolitanwide goals established by the Denver Regional Council of Governments (DRCOG). In the process of planning how best to accommodate anticipated growth to 2020, the council found that because of highway constraints many workers would not be able to get to work unless an additional 20,000 of the anticipated new households lived downtown or near downtown worksites. Bill Mosher, president of the nonprofit, business led Downtown Denver Partnership (DDP) reports that Denver is on target, with a thousand new units to be completed and occupied this year. The goal is to add 10,000 residents in ten years.

Like New York and Philadelphia, downtown Denver has numerous buildings available for conversion; however, it also has almost 2 million square feet of vacant land available for construction. Although some new units are being built, converted warehouses still are the major trend. Of 46 conversions of vacant buildings since 1990, a third have the word “loft” in the building’s new name. Other names for new projects include the Hungarian Flour Mill, the Ice House, and the Wazee Wire Works-marketing nomenclature that offers a contrast to the formality of lower Manhattan’s former office towers.

Anne Warhover, DDP’s senior director of economic development, sees the next wave of redevelopment producing new, 500-unit multifamily projects, which will begin to generate the critical mass required for more retail. DDP estimates that at least 15,000 people will be required to support the desired supermarket. Warhover says that rents projected to be $1.25 a square foot in one to two years justify new construction and that newcomers from the East and West coasts, as well as Chicago, say they love Denver’s center city and are happy to pay what would be considered bargain prices back home.

Center City Philadelphia

In central Philadelphia, more than 60,000 people live within a 20-minute walk of city hall, department stores, hotels, and office towers. Although there are apartment towers, the residential setting is predominately low rise, dense, and fine textured, including rowhouses 12 to 30 feet wide located on quiet, leafy, cobbled streets, many of which are only seven feet from curb to curb.

Paul Levy, executive director of Center City District (CCD)Philadelphia’s lIO-block, assessment-financed system of supplementary security, sidewalk cleaning, and marketing-traces the roots of his organization’s efforts on behalf of downtown living to the city’s famous planning director of a quarter-century ago, Edmund Bacon. Bacon, says Levy, shaped the massive rehabilitation of 600 townhouses and four apartment towers in Society Hill, then a nill-down, largely working class and industrial area known more for dilapidated buildings than gracious living.

Since 1970, Center City has experienced a slow but steady growth in households. Today, occupancy rates are high despite a 12 percent loss of white-.collar employment in the central business district. The market is driven less by the opportunity to walk to work than it is by the opportunity to walk to theaters, restaurants, nightclubs, stores, movies, schools, parks, and recreational facilities-and by the comparatively affordable cost of living.

In 1995, CCD began to consider the prospects for a demonstration project to stimulate the conversion of older, vacant office buildings to residential use. Assuming no subsidies for middle-income housing, Levy launched a project to test whether the typically empty upper floors of commercial buildings in a centrally located, but downmarket shopping corridor, could, through more flexible application of the Building Officials and Code Administrators (BOCA) code, produce marketable rental units for students and others with limited capacity to pay rent. The project also assumed that current owners could manage to redevelop their upper floors with some technical information and guidance from CCD, eliminating acquisition costs.

CCD assembled an advisory committee, including city officials, and retained an architect and a redeveloper to identify promising commercial buildings for conversion. To contain costs, the building trades council agreed that the feasibility test phase could be considered a demonstration project exempt from normal wage rates. A bank agreed to offer a combined construction and permanent financing package.

illustrative apartments were laid out in several buildings, and project pro formas were prepared. The Delong Building, for example, a 100-year-old, seven-story corner building, is eligible for rehabilitation tax credits because it is a contributing structure in the Center City East Historic District. A wig shop and jewelry and clothing stores occupied the first floor, while the upper floors were vacant. In this “dry run” exercise, the team found that two 800-square-foot apartments could be created on each floor. It quickly became clear, however, that the approach would fail without additional incentives. A working committee of developers and tax attorneys recommended extending the city tax abatement from three to ten years for conversion of historic structures when owners repair and renovate buildings for residential use.

In presenting the concept to the city council, Levy emphasized that:

  • Tax abatement is needed for project feasibility.
  • Nothing would be given away. The buildings would continue to pay the sanle taxes as before, but they would be filled with residents.
  • The proposed abatement would be citywide, not limited to Center City.
  • The construction jobs resulting from converting up to 4.5 million square feet of obsolete Class C space downtown would be a significant benefit.
  • The project would help to offset Philadelphia’s citywide loss of residents, with its attendant loss of political power.
  • Tax payments by new residents at the median Center City income would produce $2,900 in wage, sales, and other taxes. A 5 percent increase in Center City residents would yield $7.5 million in new taxes.

Levy noted that whereas New York City rents can equal $3 per square foot for comparable properties, the yield in Philadelphia would be only $1.25, although $1.75 is required for a profitable project. Labor costs are high, and the absence of a strong market like New York’s and Denver’s makes progress slow.

In supporting the proposed legislation, city commerce director Stephen Mullin warned the city council that “without such an incentive, property owners experiencing high vacancy levels will continue to seek reductions in their building’s assessments to reflect the erosion in the value of their commercial properties.”

Next, the nonprofit Central Philadelphia Development Corporation (CPDC), which Levy also heads, surveyed 3,300 downtown office workers, and found that 15 percent already lived in Center City and 27 percent lived elsewhere in the city. Sixty-three percent said their trip time to work was above 30 minutes, 55 percent reported no children, and 20 percent of those not living in Center City said they would consider doing so. Of 11 Center City neighborhoods, Society Hill ranked highest as a potential homesite. Those who live in Center City or would consider living there tended to have higher household incomes (a third over $100,000) and higher education levels and were more likely to be professionals than others surveyed; they also were more likely to be women than men. The key attractions of Center City were identified as proximity to cultural attractions, entertainment, and restaurants and the ability to walk to work.

Last fall, and again this year, CPDC launched an advertising campaign on the radio and in regional and select suburban dailies. Ads, store posters, and a brochure entitled “Living in the Center of Everything” were designed to encourage families, empty nesters, and singles to live in the center city. CPDC also sees the need for a city housing coordinator to work with developers, bearing in mind that one household with a $60,000 annual income will spend $46,000 a year in the district’s 2 million square feet of retail. CPDC proposes that the city set a short-term goal of adding 2,000 residents by the year 2000, reaching a 13 percent gain by 2010. Creating a tax increment financing (TIF) district also is recommended.

The new tax incentives are working. The former National Publishing Building at 23rd and Locust streets, for example, is being converted into a 152-unit, luxury loft-style apartment building with private on-site parking for 210 cars-a $20 million project. And last March, plans were announced to convert the upper floors of an old office building near city hall into 162 luxury apartments, while an office supply store continues to occupy the first floor. The 21-floor building will have 85 one bedroom apartments averaging 890 square feet-30 percent larger than the average Center City unit. Rents will range from $890 on the lower floors to $1,100 higher up. Two large penthouse apartments will draw rents up to $3,800. The developer, Albert M. Greenfield, who will pay taxes on the building but not on the improvements, states, “The city tax abatement program is making the project happen.”

Milwaukee

Milwaukee’s lead investment in the transformation of the city’s Third Ward, a formerly bleak and lifeless relic of the era of rail based warehouses, proved successful as these blocks at the edge of downtown became the hot place for restaurants, boutiques, services, and housing. The city’s $3.4 million streetscape program alone produced:

  • 287 double-luminaire pedestrian light fixtures;
  • two mid-block arcade parks with electrical service for entertainment and special tree light fixtures;
  • two gateway arches that define the area and welcome visitors;
  • a fountain park and pedestrian mall with a performance stage and amphitheater seating, picnic tables, raised flower beds, and brick and granite walls;
  • one hundred thirty floodlights to highlight the architectural features of the surrounding 100-year-old buildings;
  • an integrated traffic and parking sign and meter plan;
  • a 400-car parking structure with ground-floor retail to serve residents and customers and reduce surface parking.

A TIF district was formed to finance the streetscape and parking. Property values have increased from $29 million to more than $40 million. The area’s success has been said to reflect the partnership of visionary business and property owners, who provided the impetus, with city government. The effort started with a development plan in the mid-1980s; owners later formed a business improvement district by which they finance common services. Today, pedestrians move about both day and night, occupancy rates are up, and the blocks are among the most attractive of comparable districts in any city. BID director Nancy O’Keefe notes that the theater and evening entertainment make the area one of the regions’ most popular destinations. Still, the fight has not been easy. First, a red light district had to be eliminated, and conflicting views still remain on historic preservation and the maintenance of the street grid.

Other Examples of Downtown Living

The widespread interest in public efforts to encourage downtown living is reflected in a number of examples from other North American communities of differing sizes and scopes.

According to the newsletter Downtown Idea Exchange, in Edmonton, Alberta, following demolition of an underused building, the empty lot produces $300,000 in taxes. In contrast, a residential conversion producing 100 units will increase city revenues by $1.6 million. While downtown workers in Alberta typically spend $2,000 per year in the city, residents spend $12,000. According to official projections, the planned 4,000 population gain will produce an additional $48 million in consumer spending.

The Downtown Development District of New Orleans found in its survey of potential residents that more space, especially two-bedroom units, was the major consumer preference; in contrast, the existing supply offered principally one-bedroom units. According to Bonnie Peace, the staff member in charge of the residential project, larger units now are being created for small families, and a tour of downtown homes in the mile-square district is held yearly.

Boston is emphasizing the conversion of renters to owners in order to retain professional households that may be lured to the suburbs. Run-down, city-owned properties are matched with contractors and buyers, with the cost of renovation included in the mortgage. Through focus groups, Boston learned that what in-town residents liked most was the sense of community and neighborliness, the ease of commuting, the diverse population, the restaurants, and cultural activities. Three television ads were produced last year, emphasizing these competitive advantages.

South Orange, New Jersey, supported a downtown master plan that already has produced a new town center, shops, and a traffic-calming and streetscape program. Currently in the works are a small hotel, an art cinema, and 150 units of residential housing. In preparing the plan, the Atlantic Group, an urban development consulting firm with offices in Philadelphia and New Jersey, surveyed downtown residents in a 75-unit complex near the train station, which has rapid connections to Manhattan. The features residents reported they liked best were the neighbors, the fast train service, and the ability to walk to restaurants and nearby outdoor recreational facilities, including tennis courts in the municipal park.

The Downtown Dayton (Ohio) Partnership and Dayton’s CityWide Development Corp. created a $33.75 million, nine-bank loan pool involving the largest downtown lending institutions. The pool covers the construction or purchase of multifamily, market-rate rental or condominium housing projects within the central business district. Developers can borrow at below-market interest rates and, because the pool allows potential risk to be shared among all lending institutions, at favorable qualifying criteria. Steven Budd, president of CityWide Development Corp., reported, “The demand for downtown housing is far outpacing the supply. With a current vacancy rate of only 5 percent, it is clear that our goal of 500 additional units over the next five years is ambitious, but realistic.”

Agents for Change

Of all the forces that affect residential development and conversions in downtowns, the greatest appears to be a strong local demand for housing fed by expanding employment opportunities, as in New York and Denver. The concentration of amenities, however, also is vital, as in Philadelphia. As more downtowns become entertainment and tourism centers, a good place to visit becomes a good place to live, and vice versa_ Important considerations include the following:

  • Goals must be set, progress monitored, and changes in strategies adopted when required.
  • The setting often requires a substantial upgrade. Milwaukee’s streetscape investment was essential to converting an entire district.
  • Downtowns have to be better and be perceived as better, a marketing challenge requiring deep pockets; high-quality, professional marketing campaigns; and sustained commitment.
  • An inventory of suitable buildings and vacant land should be made available to developers.
  • Having someone in charge, whether affiliated with government or a nonprofit organization or both, is vital.
  • Centralized information and help with permitting and tax issues both are important.
  • Special tax treatment can be crucial, especially in the early stages when a “sale” may be required to gain attention and jump-start conversions and new construction.

Some may fear that their downtowns lack the amenities required to build a residential market, but virtually every downtown has something-a university, a restaurant cluster, exceptional views, parks, good transit, recreational facilities, a theater–certainly far more attractions in one walkable area than found anywhere else in the region.

Not a melange of isolated examples, this trend is penetrating second- and third-tier cities throughout the country. While it may not replace the suburbs’ advantages for child rearing in the minds of most families, it does reflect the desire of increasingly affluent consumers for a greater variety of choices, especially for the two-thirds of households without school-age children. Quality of life is in part a function of diversity of opportunity, which itself depends on density of population and development. Why live in settings with little stimulation when more attractive alternatives are in the city center?

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