Tuesday, May 22, 2012

Sustainability and Bending the Cost Curve

St. Louis is blessed with a rich heritage of historic buildings. It's also challenged by low property values and high construction costs.

It's the perfect storm. Great buildings and historic neighborhoods are resources worthy of preservation. But low values and high costs make that work more challenging; and, the lower the property values in certain areas, the harder the challenges are to overcome.

As part of the effort to create a sustainable St. Louis, planners, architects, contractors, developers, and government are tasked with finding ways to bend the cost curve into a more affordable range.

Do you have ideas on how to do it? Now would be a good time to start offering those ideas.


SlezakHouse said...

An aspect long on the back burner is EV = economic value. Is there a method to rethink and build value apart from the traditional (comps)? Let's have a new conversation about value and what it is. It's curious that STL seems to have lower values than similar markets.

Rick Bonasch said...

In a word, value is what others, (in the case of real estate, mostly lenders), are willing to lend on an item. The item becomes security for repayment of the loan.

Frankly, the cost of something (especially real estate) has very little to do with value.

You can spend $50,000 remodeling a kitchen, and it might raise the value of the house by $15-20,000. A bigger determinant of value is location.

And so, getting back to the question of bending the cost curve, if value is less impacted by cost than other factors, such as location, we must find ways to lower costs while still preserving historic city properties.

There are a variety of factors increasing cost. Building condition, environmental contamination, details of rehab requirements, labor costs. How can we manage to control these costs?

For example, would it make sense to package publicly owned vacant buildings for redevelopment, and bulk discount environmental abatement prior to sale of the properties? Would such an offset lower cost and attract more private investment?

Anonymous said...

St. Louis's high cost labor market is a big part of the problem. If these unionized workers would work for lower pay, there'd be less unemployed construction workers and more buildings getting rehabbed.

GMichaud said...

Blaming union workers is hilarious, how about hitting the speculators first. I would start with a law that captures through heavy taxes property that is "flipped" in short periods of time. If there are no permits, no work, merely profit taking, that so called profit should be taxed at 90 percent. A big part of the real estate bubble was all of the speculation on housing.
Next there should be programs to get buildings into the hands of people who will in effect homestead them. Sort of a hundred acres and a mule approach. With technical assistance you would get more mileage out of putting buildings into the hands of many different individuals rather that let corporations rape the public treasury before they will left a finger.
A couple ideas,both much needed, which means they probably won't be heard by the "power structure" that rules St. Louis so poorly. (How much evidence of their failure do we need?)
I know my opinions are out of the mainstream and that I should only worship the power structure, I'm bad.
My experience is the initial cost of a structure plays a major role in the ability of the next person to rehab the building.
Not surprisly speculators ramp up the price to include the tax credit benefits (if any) so that historic tax credits become a speculative tool also.
Once that is solved with disincentives for speculation, then other factors can be considered.
I doubt most rehabs use union labor to start with, not many I am familiar with unless it is a larger corporate style project.
In a rehab every building is different and every cost regime depends on those factors, but the underlying problem is property speculation.

Rick Bonasch said...

Greg, what about values? Aren't low values the real problem? That sort of takes thing to the lowest common denominator of Development 101.

If all of your costs combined are more than what you can sell the finished product for, there's no deal.

And, it's hard to invest $200,000 on a rehab in a $60,000 neighborhood.

Places like Lafayette Square, Soulard, and the Central West End have built in advantages because market values in those neighborhoods are so much higher than the average rehab neighborhood.

Kevin B said...

A problem is that property rehabilitation is so piecemeal in St. Louis (and elsewhere). The ROI on rehabbing a beautiful old building is lessened significantly because in most cases there are five more buildings nearby that are more likely to fall to disrepair/demolition than be revived.

If efforts from one or more developers could be pooled for, say, five rehabbable buildings in a single block or on a single street, the ROI increases as the eventual owner/renters are buying into a full, focused development, rather than a one-off rehab.

To take it a step further, if this becomes the norm, the opportunity is there for price sharing (as it relates to materials), skill/labor sharing and, hopefully, a sensible street plan which further ties the individual properties into a better whole.

GMichaud said...

Part of the problem is that speculation does not add value, it actually subtracts value. If a person buy a building for 10 grand and "flips" it for 50 grand it hurts at least these few people. The bohemian, self made man/woman type who will carve their existence out of a reasonably priced building. Lets assume a 100 grand rehab, it will throw anyone out on a posible purchase if they are qualified for less than 150 grand.
And finally, as you know, it is very difficult to make numbers work for a developer/builder types. It could easily make the building out of reach for someone to rehab and resell.
The speculator takes money out of the neighborhood, the others add value to the neighborhood and community.
Speculation creates false values, I saw a lot of this activity in the last bubble.
But how about other approaches?
1. Stop and seriously curtail demolition activity in the city of St. Louis. Micheal Allen just had a post about someone in Hyde Park lamenting the destruction of surrounding buildings. Neighborhoods and communities should know they have the commitment of the city to revitalize their neighborhoods. There is a corner storefront on Cherokee being demolished now. I went through the building several years ago, it was sound and a candidate for rehab. It is crazy to demolish such a structure, a three story mansard, with a newer front, that will never be duplicated in this prosperous stretch of Cherokee. Why was it demolished?
2. Completely revamp LRA, a homesteading program should be put into place to encourage rather than deter giving property to individuals. I'm not sure why corporations should be served ahead of the citizens with land banking anyway.
3. Install a low interest loan program (partially with savings from demolition) that becomes revolving for building stabilization of roofs, tuckpointing and brickwork and windows and exterior doors or board up. (Include property outside city owned also)
So then the homesteader and the city have a stabilized building and time to develop it.
I would even loosen occupancy requirements and allow a porta potty and running water insidethe building. Hell no electric or heat should be okay. Guess what? that matches early Soulard with its privies and cisterns.
What is happening now is not working. Change, even monumental change is needed. Yet other than a few words there is no debate or concern voiced other than the occasional blog post.
You bring up a serious point about affordability, but it appears city government could care less and seems to be leading the charge to demolish as much of old St. Louis as possible. I feel like they have begun to aggressively attack South St. Louis also.

GMichaud said...

The whole system of laws we are living with are screwed up.
So there was a comment from a vendor over at Urban Review about the onerous requirements for becoming a vendor in St. Louis County, the City is hardly better.
What is remarkable is the number cities around the world that actually gather transit and use city planning to create public space for the support of vendors and markets.
The whole system of laws and policies in St. Louis is distorted. It can best be seen by the fact only the insider corporate vendors have key sites outside stadiums and other venues.

To save what is left of Old St. Louis one solution is to step back and discuss the way everything is being done.

This is not nostalgia, but rather a question of how to rebuild St. Louis. Certainly transit and the old form of the city should be starting points in any discussion about exactly what it is we are trying to achieve in St. Louis.

I think the people of St. Louis need to figure out just who government officials are really serving.
St. Louis should be successful, certainly much more successful than under current conditions. Poor governance is central to the underlying problem.
That is not to say good things have not happened.
The visible city trends overall still support decline. Why after 60 years is the question

Anonymous said...

I think a far bigger problem than “flippers” is speculators who buy property and do nothing with it (LRA included and perhaps largest offender by volume).

For private do-nothing speculators, a vacant building tax (perhaps with waivers possible if demonstrable progress is being made) makes sense. I wouldn’t exclude owners with their properties listed on MLS since many have very unrealistic expectations of value.

I agree that LRA needs a revamp. Some studies seem to suggest they are rejecting too many deals. They should use a more MLS like approach. Most LRA owned buildings don’t even appear in the LRA search engine which is the first major problem. Also if a place doesn’t sell at the suggested price, they should keep cutting it. Even if they sell to the wrong person, it’s worth the risk since nothing is worse than holding buildings and letting them rot while paying for the mowing costs.

There’s no magic bullet to bring down rehab costs but there are a few things
- Remove requirements of new sewer lateral, new water service and make do with what’s there in lower market value neighborhoods
- allow people to DIY or hire out to a handyman the high labor cost jobs (plumbing, HVAC, electric).. the risk of someone screwing up new branch circuits or new pex water supply lines is pretty minimal and lots of handyman-types can manage it. If you have to pay top dollar for these things then most projects are not at all viable.
- the city shouldn’t sweat the permits so much
When I’ve rehabbed with permits, the city inspections were very cursory (I’m sure this varies a lot depending on specific inspector). Basically I view the permits as revenue generators as well as a mechanism to notify appraiser that value of building has changed. If I were purchasing a “flip”, I certainly wouldn’t rely on these inspections and would hire a thorough home inspector.