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Mixed Use Development (or not) in Midtown Houston

Posted on February 19, 2012 by Greg Martin

We believe in mixed use, but in order for a mixed use project to be successful, all components must succeed themselves. Over the past 12 years, the principals of Milhaus have developed projects with and without mixing uses. Some have worked well and others have not so well (during 2007-2009). Last Thursday we received approval for multiple setback variances in Houston for two city blocks in the Midtown neighborhood. Over the course of the last week, several blogs in Houston have been discussing our project, the neighborhood, and the rapid development currently underway in their great city. You can find their continuing discussions here:

• Nixing Milhaus Retail: Why These New Midtown Apartments Won’t Have Shops on the Ground Floor - from Swamplot
• MILHAUS IN MIDTOWN - from Innerlooped
• Milhaus Midtown - from Houston Architecture

Indeed, Houston is not a mid-tier city by any measure. As the 4th largest city in the country with 23 of the Fortune 500 companies in the metro area, we think its is on the path to becoming a 24 hour city, to be mentioned in the same breath as Chicago, New York, Los Angeles and Miami. When we looked at Houston, we chose to focus on the Midtown area for a variety of reasons. It has easy access to jobs downtown as well as the medical center. By its transit service, block patterns, and ongoing streetscape improvements it has the potential to be the most walkable of all neighborhoods in the city. To the west of Main Street: the funky shops, number of new residents, and the type of nightlife and dining options attracted us as well. As we explored the area east of Main Street, it reminded us of other urban areas attractive to redevelopment. While it is lacking in retail uses, it does have a large component of home ownership. From discussions with retail brokers and tenants in Houston, there just isn’t enough housing density east of Main Street to justify new commercial space. However, we believe that if enough residents move into the neighborhood that will change. Our project includes 280 units. It’s hardly enough to warrant new commercial space on it’s own, but we think it will help set the stage for more development there.

In order to complement what the Midtown Redevelopment Authority is planning in the area, we designed the first floor of the building along Gray Avenue, between Austin and La Branch to be built to hold commercial tenants if the demand is ever warranted. Until then, we will locate all of the building’s leasing and club rooms/amenity areas along the street front. It’s not retail, but it will help create a pedestrian experience along Gray Avenue. Since the apartment market is currently very hot, the common perception might be that it would be easy to obtain equity and debt financing for a mixed use project, let alone an apartment project. However, this is not an accurate perception in today’s financing world. In the past many financial firms and banks have been burned by investing in Houston, due to the boom and bust cycle that tends to predominate the real estate market here. We are facing challenges just like everyone else, which is somewhat complicated by focusing east of Main Street. Nevertheless, we are committed to Midtown and we will continue to focus on making this project a reality.

Photos

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This entry was posted in Our Philosophy, USA West

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Time factor of mixed use development

Posted on December 19, 2011 by David Leazenby

It was a simple question overheard at an event recently: How much longer does a mixed use project take to develop? Well, maybe one day if we can write a book, there will undoubtedly be a chapter devoted to the time cost of including commercial space in our buildings. We have a rule of thumb at Milhaus for project timeframes that vary depending upon the size of the project, the role of neighborhood groups and government approvals, design complexity, construction method, and even the weather. From contract signing to starting construction, it varies from 8 months to 24 months depending on many factors.

To understand development of mixed use and urban-infill properties, one must first understand that signing a contract to buy a property for development has only earned you the right to spend lots of money and risk lots of time and even more money. You've basically bought the right to promote a vision for changing something. That "something" can be a building, a city block, a vacant parcel, etc. Whatever it is, there are many other ideas for how it should be developed that are contrary to yours. Moreover, there are many other people that have some "ownership" of that something like you do. There are neighbors, customers, concerned citizens, and advocates of preservation that all have a voice in our business. It takes time to build trust and relationships with each of these stakeholders. It takes time to design and redesign a building to respond to reasonable concerns. It takes time to navigate the myriad neighborhood meetings, city entitlement processes, and bring the project team members along the way.

Mixing the uses takes time to explain why you are doing it, how it will work, and why it will be successful. It increases the complexity of approvals, design, and financing that just takes more of everything to get it done. Depending on the other factors at play, just adding commercial space to a residential building can add 25%-50% more time to your schedule to reach construction. Of course, this extra time has a cost and it needs to be measured against other goals and objectives of the project and the company. Is it worth it? Well, sometimes the value of mixing uses in the project cannot be measured in dollars and cents. We'll leave that thought for another day.

This entry was posted in Our Philosophy

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Great places need enough residences

Posted on October 18, 2011 by Tadd Miller

Developed by Woodbine Development Corporation and now fully owned by Macerich, Kierland Commons is a very successful and award winning project. It’s retail spaces are well-leased and has heavy volumes of very diverse, multi-cultural and high-end traffic. For the residential units it has a great sales team led by Bill Hammond of Signature Properties and they are offering a terrific residential product. The amenities, quality, unique design, mountain views and finishes exceeded my expectations. However, I am not sure this is the place where I would want to purchase a home. Although I am a strong supporter, investor, and promoter of building residential into large-scale retail projects, I believe there is one critical element to this concept that was missed at Kierland Commons - and its perhaps not the developer's fault. In order to create a sustainable residential neighborhood and a place that feels like home, it is important to create enough residences to build value around each other. The 84 units at Kierland Commons seems to be floating in the middle of a mall, with no real hopes for neighborhood expansion. With such a small number of units, it makes me wonder if the residential will always be a second class “tenant” dominated by the retail space? It’s a fantastic place and I wish more units could be incorporated there. I am not sure if the 84 units was negotiated by strict zoning guidelines. However, this project demonstrates the effects of building too few units in a major retail center. A critical mass of residential units (at least 200) and at enough density (at least 25/acre) are critically important. I could see this being a great hotel location, a place to spend a night away near the shops and dining, but a long term residential commitment with so few neighbors seems less likely. Just like the retail space in a new development needs a critical mass of shops, the residential product needs to have enough people living there to build a true neighborhood. It creates stability and adds more long-term value.

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This entry was posted in Our Philosophy, Project Highlight, USA West

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Approvals often underestimated

Posted on September 26, 2011 by Tadd Miller

The last few years has brought many lessons to developers. One important one is that the design and approval process in all mixed use development should include maximum flexibility. This doesn't mean having a variety of potential uses for a block. It means to consider stacking, parking lot development, and alternative building uses in every site plan, and stretch for the stars when getting your approvals. Here are a couple things to keep in mind:

First, have three or four alternative development scenarios and make sure they are all included in your entitlements. It is a challenging task, but it is important to do this thoughtfully so you still design and approve something that is marketable under different conditions.

Second, it's critically important to have a residential developer and her architect involved from the beginning, no matter how many residential units are being contemplated. The risks involved in mixed-use development are too great to save the residential discussion for later.

There is no doubt that approvals will only get more difficult and expensive over time, and the processes involved will continue to be prolonged. No one wants to go back through a year or two of municipal approvals to make changes to a plan that already saw intense scrutiny the first time around.

This entry was posted in Design, Our Philosophy

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Houston - drive time, but lots of options

Posted on September 08, 2011 by Tadd Miller

I have to admit Houston was not high on my list of cities to spend time. Milhaus was led here by incredible job growth and demand by our investors. Houston contradicts Indianapolis in many ways: horrible traffic, car dependency, oversized personality, and a focus on driving their economy through energy consumption. To be fair, the population size of Houston is five times that of Indianapolis. This size of a city, no matter how it’s planned, will provide a foundation for a dynamic city. Houston’s cultural mix is reflected in the diverse restaurants and retail scattered throughout its large land area. As a daily walker, I would prefer to not need a car, but once you learn your way around and understand the amount of variety in each visit, it just seems to work. Every visit opens up new areas, restaurants, entertainment, and new things happening or being built. As long as you are in the car, it is a quick 30 minute ride to Kennedy Space Center, an hour drive to swim in the Gulf of Mexico in Galveston, or a 45 minute drive north to the Woodlands Town Center. It’s much different in Indianapolis where in a couple weeks you would exhaust the variety of things to do. Yes, Houston is clearly opposite of what all the planners and theorists talk about as an example of how to develop a thriving urban metropolis. However let’s not underestimate what is perhaps the most eclectic, diverse, and entertaining mix of dining, attractions and architecture in the country.

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This entry was posted in Our Philosophy

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Does Mixed Use Really Work? Part One.

Posted on August 12, 2011 by Milhaus Development

We are often requested to explore projects with entire first floors of retail with two or three levels of apartments on top. There are actually some cities that require some degree of commercial space at the ground level of every new building. While we appreciate the amenity that such a use can provide for residents, there are very few markets that support that amount of commercial space. In fact, there is often no financial reason to do it. It usually requires a dense urban market where barriers to entry are very high (eg. New York, Chicago, San Francisco) or some form of subsidy (eg. free land, free parking, TIF, tax abatement, etc.).

To do it in a mid-market city, it requires shrinking the retail space down to a very limited component of the project (see our project that we filed in Indianapolis yesterday as an example). The solution in most places is to keep it in all wood construction and provide flexibility in the design so that it can also be residential space or office space or whatever the market brings. To illustrate, we’ve created an example that is compiled from two different projects that highlights the financial differences between these two building types. Today, we’ll look at the construction costs. Next week, we’ll examine the operational revenue and expenses and finally the results of permanent financing and financial returns to investors.

Our example today (download below) includes the following assumptions to begin looking at the construction side of the deal: identical sites in a mid-market urban area, 4-story buildings with surface parking. On the left is “apartments-only” and all wood construction. For purposes of our illustration, the "apartments-only" building could have a small amount of retail in place of one or two apartments and it would not materially change the numbers. The right column assumes “apartments over retail” with an entire steel first floor and wood construction sitting on top of it. Our “apartments-only” building has 67 units. Our “apartments over retail” building includes 50 units and 12,260sf of commercial space. You can see the differences in pricing according to type. Customary build-out numbers are assumed for the commercial space. The total project costs are $858,715 greater or 15% more in the mixed-use building. Assuming a loan-to-cost ratio of 75%, this translates into $214,679 more funds required to get the construction loan. While significant, this by itself isn’t a deal breaker; but we’ll see when we look at the operational expenses and revenue of the two different parts of the project how these smaller differences result in big financial hits to the returns and feasibility of the project. Let us know if you have any comments or questions. Check back next week for Part Two as we continue diving into it.

Download proforma sheet here: Milhaus Mixed-Use Proforma Compare Construction.pdf

This entry was posted in Finance, Our Philosophy

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Milhaus Issues Resolution to Support Transit Referendum

Posted on July 27, 2011 by Milhaus Development

It seems like we can't get away from tough fiscal times in our country today. Whether its the national debt issue or a local budgetary constraint, every organization is focused on making dollars go farther. Isn't this the time we need to be even more creative to stimulate the economy at the local level? In one of our original posts at the beginning of this blog last year, we highlighted the importance of efficient transportation to the health of our business and to our city and neighborhoods. Today we added our name to the list of groups issuing resolutions in Indianapolis calling on the Indiana General Assembly to create legislation that will give voters the choice to pay for transit. We believe creating a funding mechanism is the first step to overhauling our transportation system, which ranks among the worst in the world of cities our size. Rethinking how we move around on transit and on highways can only help grow our economy and create jobs (see also Brian Suiter's thoughts on the previous post here about how government subsidizes so much of suburbia). Putting this issue in front of voters is the right thing to do. It affects us all. Please consider adding your business or organization to the list on CIRTA's site. You can find our resolution here.

This entry was posted in News, Our Philosophy, Transportation

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Individualism vs. Growth - Growing an Organization

Posted on July 19, 2011 by Tadd Miller

There are great examples of corporate growth and leadership in real estate development. Hines and Trammell Crow come quickly to mind. As a startup we struggle regularly at Milhaus with trying to keep control of our brand and our product with the goal to grow and make a significant impact in our industry. How do you balance growth that you desire without giving up control? I think the answer is you have to give up some of the control, but it is incredibly important to find the right people and partnerships. Some of it depends on whether you believe in the inherent nature of the good in other people, and that combined with being fortunate enough to find the right people who have the same philosophical leanings and goals as your organization. It seems that the best way to keep control of the situation is for trust these people enough that they trust you.

There is no greater lessen I have learned in my somewhat short business career when thinking through how I can maximize my impact on my industry than the focus on building a solid team. Finding solid teammates and giving them enough room to do what they do well, yet at the same time staying on top of them to drive them to compete and push them outside their comfort zone is a delicate balance. There is of course a risk and reward with every relationship, and you can’t always win; but it seems like when I look at the relationships that were not successful, it seems that there were early signs that those would have never worked. The people upon which any organization grows require constant communication among them and a realization that no one can do everything themselves. Success here allows you and the organization to grow in new and meaningful ways.

"There must always, always be a burning in your heart to achieve. In the quiet of your solitude, close your eyes, bow your head, grit your teeth, clench your fists, ache in your heart, vow and dedicate yourself to achieve, to achieve." - Trammell Crow

~~

Photo from Murphy Center at UNT where Crow received a Murphy Award for his lifetime achievements in business and philanthropy.

This entry was posted in Our Philosophy

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Mixed Use Trends

Posted on June 15, 2011 by David Leazenby

People ask us a lot about our social media experiences. This blog is among many elements that we employ to extend our reach into the conversations of mixed use development and place making. A recent question from a reader got me thinking. She asked “Where are there conversations going on that pertain to your business?” Essentially, she was asking me where do we spend our time online. There are many places online to stay engaged in your business, to seek new ideas and to remain competitive. Here are just a few below that help keep us plugged in to trends. We’ve also added them to a new “Links” area here on our site in the right column.

Multi-Housing News Retail Traffic ULI Magazine LinkedIn ULI Group Planetizen Streetsblog Greater Greater Washington Urban Indy

This entry was posted in Our Philosophy

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Hundreds of school buses, one parking lot, and a major economic development

Posted on April 04, 2011 by Tadd Miller

Looking at the former Coca Cola building at Mass Avenue & College Avenue in Indianapolis, a sea of yellow school buses sit idle. There I sit as the 10th car back at the stoplight in the middle of rush hour. The children have already been delivered home and their 100+ buses are parked while traffic inches by. I make the assumption that there are people whose full time job is driving these busses, however their two routes a day leave most of the day unused. Additionally, there are three months of the year when there is no bus service at all. I hear the mass transit debate in Indianapolis, and it appears to me a combined system of IPS and IndyGo buses provide at least an option for increased efficiency and service. Is that really such a big leap?

Aaron Renn talks about successful public transit connecting “transit addressable trips” to create a system that works. It seems to me that there are thousands of students in the downtown area who depend on these busses that are necessary "transit addressable trips" that are already being addressed in a completely separate set of costs. (Makes me wonder...have I seen school buses in Manhattan?) Anyway, with IndyGo’s need to increase routes and cut back expenses, an exploration of this combination seems at least a scenario to consider and do some serious studies to figure out. In addition, it would open up a large tract of developable ground to bring more development downtown Indianapolis.

This entry was posted in Our Philosophy, Redevelopment, Transportation

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Recent Posts

• Mixed Use Development (or not) in Midtown Houston
• Can Adaptive Reuse and Mixed Use Save a City?
• Milhaus starts its third year
• New Lawrence Office Space Available
• Time factor of mixed use development

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