MAVD News: 2008

Real estate panel: Downtown Ann Arbor facing key changes

Posted by mtkolar May 29, 2008 09:00AM

Mark Bialek | Business Review

Downtown is experiencing changes in retail. From new zoning and design rules to a fading retail sector, to several private and city-owned projects being put on hold, downtown Ann Arbor is facing a number of challenges. But there are also opportunities to rethink what types of business can and should go on at the city center.

Ann Arbor Business Review reporter Dan Meisler invited six people involved with downtown Ann Arbor to discuss the present and future state of the area: Chris Grant of First Martin; Peter Allen, a University of Michigan professor and developer; Ed Shaffran, developer; Susan Pollay, executive director of the Ann Arbor Downtown Development Authority; Jim Chaconas of McKinley Commercial Services; and Jeff Harshe of MAVDevelopment. Here are excerpts from that discussion:

PANEL PARTICIPANTS

Peter Allen, owner, Peter Allen & Associates; adjunct professor, University of Michigan.

Jim Chaconas, managing director, McKinley Commercial Brokerage Services.

Chris Grant, senior vice president, First Martin.

Jeff Harshe, vice president, MAVDevelopment Co.

Susan Pollay, executive director, Ann Arbor Downtown Development Authority.

Ed Shaffran, owner, The Shaffran Companies.

Business Review: How would you describe the state of downtown Ann Arbor?

Chris Grant: We have a very fragile downtown right now. Retail is in the tank, most restaurants are suffering, nobody is leasing office space, and the city of Ann Arbor Planning Department is on a wild and wacky mission, wasting taxpayer money to rezone the downtown.

Peter Allen: I also think we're planting the seeds and laying the groundwork for Ann Arbor's best days. Two years from now we'll be glad we lived through this. The rezoning processes and the density premiums and the architecture guidelines are all a good idea over the long run, especially when you look at some of the unfortunate and ugly buildings that were built downtown over the last economic cycle.

Ed Shaffran: There are some big issues facing retail. Economics have a lot to do with it, the price per square foot, taxes, things like that are a huge implication. As far as the A2D2 (rezoning) plan, there are some serious issues. The market is the market. If you're going to start dictating the market from afar, though it may not be construed as a taking under the Constitution, the activity of telling me what percentage of tenant can be in my building is a huge implication. ... The beauty of architecture is that we have errors. It's part of our landscape and the ebbs and flow. The market should dictate where the market is.

Susan Pollay: Retail is struggling and that's because we Americans have changed our buying habits. We're buying online, through catalogs. What downtown is about has changed since it was created. And just like horses and buggies going out of business, we may see the whole model around retail shifting and our understanding of what happens in a downtown I think has to shift. ... The number of people coming downtown and parking is increasing every year, even through what we're now describing as a Michigan recession. That's hard to understand. Where are they going, we don't know, but we know that there are more of them. ... I don't know that retail as we've enjoyed it over the last few decades will continue to be here. But it's not all gloom and doom because there are some indications that some things in the downtown are doing better.

Jeff Harshe: There are a lot of good things happening downtown, but downtown needs to compete with all other segments of the market. It used to be that if you had space downtown, whether it was retail space or office space, you could lease it, period. And now you can't necessarily. I have storefront space and nobody wants it. I had a retail (tenant) where I literally said, "I'll reduce your rent to zero," and they said, "I don't make enough money to stay." What gets lost in the conversation is that the expenses are big and the rent per square foot is big, but the revenue isn't there. ... The thing that's changed with retail is that national retailers wanted to be here. Now, they don't. And it's not because of rent. The revenue is not there.

Mark Bialek | Business Review
Clockwise from top left: Jeff Harshe, Ed Shaffran, Peter Allen, reporter Dan Meisler, Susan Pollay, Chris Grant and Business Review editor Paula Gardner.

If retail is so bad, what's going to come in and use that space?

Pollay: Most recently you're seeing restaurants and coffee shops. (Downtown) has become our living room - our gathering space. So the function of downtown went from being retail to that sort of service. But as we're seeing great restaurants and coffee shops also on outskirts of downtown, so we're going to have to stay a step ahead and find the next thing. I'm grateful we've kept our churches, I'm grateful we've kept our government services, I'm grateful we've got amenities like the library and the museums and the post offices, because these are all reasons to be downtown, but they are exclusive to downtown. We have to keep finding that diversity.

Allen: We have had such an enormous drop off of consumer confidence. It happened with the auto demise for the last five years, and it went off a cliff with the demise of Pfizer ... We've got to create some serious job growth to begin to rebuild that confidence.

What role do building values play?

Jim Chaconas: The best we can hope for is that assessed value goes down so we pay less taxes, but we haven't been seeing that.

Allen: Over last couple of years, office rents and retail rents are down 10 to 25 percent. So the cap(italization) rates (of return for investors) have moved up a little bit. If you're selling an old building, and getting normal financing - and today there is no normal financing - values are going down 10 to 25 percent. That's better than in most places in Michigan.

Grant: That's not showing up in the sales here. A building goes on the market in this town and it sells on an 8-cap on last year's rent, like the Anderson Paint building.

Allen: What's that tell you about values? Downtown Ann Arbor is a little immune to even the short-term problem.

Grant: Yes and no. We're trying to finance stuff - we can't get it. They did the spreads on the income to value. Now all of a sudden you're at 65 percent loan to value.

Chaconas: We're starting to have problems with stuff that was easy to finance.

Harshe: We're seeing it where we've never seen it before. We're seeing it with people trying to refinance their buildings, and they're having to walk with cash to the table.

What is the demand for housing downtown?

Shaffran: Our apartments, they have unbelievable demand. We've never had a vacancy in our downtown loft apartments.

Allen: Downtown rental housing is one of the few bright spots in the economy.

Pollay: There are a lot of projects coming to market. It will be unclear over the next five to 10 years how much demand there is - and who that rental market is. Most of downtown has been student rentals. ... So I think there's going to be a lot of changes over the next 10 years, not the least of which is that the supply is finally opening up.

What about projects, like The Gallery in the former Greek church on North Main, that aren't getting done?

Pollay: Some of it is the scale of the projects. The project at the Greek church was a larger project and a different kind of project than say what Village Green is doing. Village Green is only 146 apartments. It's a much smaller scale, much different kind of project, did not involve retail, did not involve two street frontages. The Greek church is a really big project.

What is the goal of the A2D2 zoning and design changes, and how will they affect downtown development?

Pollay: We have people battling it out at the Planning Commission and (City) Council and you've already invested hundreds of thousands of dollars in the site plan, and these policy boards are being asked to review them with people yelling at them saying, "We hate this building." In fairness to the developer, it would be helpful to have some clarity up front about what the community wants.

Grant: What difference does it make? They're still going to vote at the end. I don't see any guarantee with this change.

Shaffran: What if the economy continues to stagnate, and five years from now Mike Martin wants to build a four-story building with a little bit of residential on the Brown block (at Ashley and Huron), on a third of it. What's the city going to say? Nope, you've got to be 12 stories and you've got to be retail.

Allen: I think it is within the government realm to say we want our sidewalks to be active. Now, how to define it? If you look at the county building and some of the bank buildings, and where there's not retail at grade, it is a dead zone. It's a huge dead zone.

Chaconas: But who's going to go there? Who are the active tenants?

Allen: You can create a first floor retail that's active.

Shaffran: On the cost per square foot, name me a tenant that's going to pay the dollar amount that you need to support that project.

Allen: That's another issue.

Shaffran: That's part of the issue!

Allen: The first-floor, street walk-by traffic - (a tenant) is going to pay a premium to get access to those bodies.

Chaconas: I have 27 retail listings right now. I've got them on South (University), State Street, Liberty, and I've got a few national tenants, and all of the locals can't afford it. If you're not a national tenant with a big corporation behind you, you can't pay $35-$40 per square foot.

Shaffran: You can't pay $20.

Harshe: If you take, just on the retail level, what people can do in other places besides downtown and eliminate those, that's what needs to happen downtown. Susan, you mentioned that government, churches and education are all still viable. Well, you can't do those anywhere but where they are. You can't do it on the Internet, you can't go out to the mall and do it. If you take the things that previously used to happen downtown and you eliminate the things that can be done better somewhere else, that's where our problem is right now. Galleries can't be done better somewhere else, they're done most effectively downtown. Restaurants for the most part are done pretty effectively downtown, but you could make an argument that freestanding fast casuals do a better job than downtown and are putting a crimp in downtown restaurants. You're not going to do what Wal-Mart does better than Wal-Mart, you're not going to do what Target does better than Target, you're not going to do what Briarwood does better than Briarwood, you're not going to do what the fast-casual restaurants do better than the fast-casuals. What's left?

What are the prospects for a downtown hotel?

Chaconas: We have a 54 percent occupancy rate in hotels. Are you going to build a hotel with a 54 percent occupancy rate?

Grant: You can't afford to build it.

Allen: You guys are all saying there's no market for a small, boutique hotel downtown? Well, not today, but you wouldn't build it today. Shaffran: We're a town of 125,000 people. We're not fricking Chicago. We're not New York. .... We can only bring in so many cars at one time downtown.

Allen: I've talked to enough people (who say) if you could get the scale, it could be a nice hotel downtown.

Harshe: On the Y site, we had legitimate interest from a hotel operator there. It would have been successful.

Pollay: It wasn't lack of demand that caused (hotel) projects to go away. ... The added value in your hotel stay downtown is something that we can offer that goes to what you were describing, Jeff. What can we offer that you can't get someplace else? There is this added pleasure of being downtown if you're staying someplace. That goes to the point that where we're going in the future is finding those things that are unique and special about downtown. We really haven't maximized that very well.

Allen: That's going to spawn people walking around who want to do other things. At the very least you're going to have more shops selling Ann Arbor souvenirs.

Chaconas: Shopping is done between 11 a.m. and 3 p.m. Everybody's worrying about nighttime restaurant instead of worrying about the downtown density of workers. Those are the ones who could support another dress shop, art studio or furniture store. Unless you get the office density downtown, then you're not going to get the retail downtown. And your restaurant (patrons) are only going to be nighttime browsers.

Allen: That's what the new A2D2 is all about. If you take the buildings downtown and go from an average of 3-5 stories and double it, and maybe go denser than that with premiums, you're not going to create more retail except at the sidewalk level and the upper levels are going to create hundreds of thousands square feet of office space.

Grant: We can't rent the office space we've got.

Allen: Again, you've got to stand back from this current economic demise. We are going to recover from this.

Grant: You don't make this grandiose zoning plan today for the whole downtown, you do it one building at a time.

Allen: You've got to have a template in place ... Do we set the master plan for downtown at the lowest point in an economic cycle? I would think that's the best time to do it ... If you've got the zoning in place, does it attract the density? I think it could.

Chaconas: I think the tenants have already moved out of downtown ... We've been on a downward spiral, I don't care what the economy has done.

What impact do the city-owned vacant sites like the YMCA and the Klines lot have on downtown?

Pollay: The question I think for all of us is how much involvement should the community have in dictating what goes on there ... In our community, we've been very detailed going in on what we want. It's because we are, as a government, are trying to protect the public good. The challenge is by the time we're able to get it out there, we may have missed the wave. But the second side to it is we're asking the private sector to shape their plans around our expectations. An example is, we asked for things like high amount of public parking on your site. You've got to accommodate that in your planning. Or affordable housing. ... That's an incredible burden to put on the private sector.

Shaffran: How much money will the city lose on the Y site?

Pollay: Counting public dollars, the land was purchased from the Y at $3.5 million, we're going to spend approximately $1 million-plus to demolish the building, there was $1 million-plus to house residents. We will end up with a site that is clean, we have removed a building that had a lot of asbestos. The water mains are still there. Everything you need for redevelopment is there.

Shaffran: So at 20,000 square feet, you've got $6 million in, you've got $150 bucks a square foot? I think what's going to happen at the Y is that the underground parking (at the library) and the air above it is going to happen first, you're going to use (the Y) for your staging, and the Y will happen afterwards.

Grant: It's going to be a surface parking lot. Allen: Until the right use comes, that's the right use. It's a convention center site.

Shaffran: I have proposed for how many years on Klines parking lot (at Ashley & William) to sell it off in small parcels to the community to build a 3-, 4- or 5-story building. That's done simply without any future planning - you can duplicate downtown, maximum of five stories, simply by a deed that says this is it. Put them back on the tax rolls and you've accomplished your goal. In 10, 15, or 20 years, it'll be all absorbed. Same with all of them. If they're not going to be used, let the community have them back.

What's your bottom line evaluation of what's going to happen in downtown?

Chaconas: Downtown's going to be flat. Nothing's going to change. We're not going to see anything exciting happen. We're going to see smaller office spaces. We're cutting stuff up in to 2,000, 1,500 square feet spaces. The rental rates have dropped 20 percent. The values of the property, if things don't change, are going to go down 20-30 percent. So when investors take a look at it, I think the luster of downtown is starting to tarnish.

Harshe: I'm a little more bullish on it than that. You see office space continuing to absorb. You see a lot of pipeline new office space, which kind of helps the solidity of the downtown office market. I don't see the sales of people buying things and carrying them in a bag are going to happen downtown. ... I'd say basically flat in the next year.

Shaffran: Aside from A2D2, I'm bullish on downtown. Small userspace from 200 to 1,000 square feet, the demand for small space, we have done well with. ... We have the benefit because we have very little costs on our buildings, we're very flexible on rent. When Jim says rents are down 20 percent, now they're coming down to the rent level we've maintained. ... A2D2 will have a major impact as written. It will be very bad for the downtown.

Allen: I teach 100 students a year about real estate development for 25 years and I use Ann Arbor my laboratory. ... These students, when they get out of school, they all want to go to the big city. Why do they do it? For lifestyle. Some of these students are beginning to see character of downtown Ann Arbor. And so I think the downtown quality of life - street scene, walkability, services, not auto-dependent - is in our future.

Pollay: My view for the next year is fairly small compared to those views. I think we're going to incrementally see more changes taking place. The addition of new residents at Ashley Terrace and Liberty Lofts is adding more people to the west side of downtown. Decisions about 414 W. Washington, the Y going in, the western edge of downtown is taking on a new identity and a new feel. Those new activities are going to continue to change what's happening there. The addition of the new dorm on State Street is going to dramatically change the identity of that corridor. What we're not seeing going on in Kerrytown will change what's happening there. ... The evolution is still underway. These are incremental.

Grant: I agree with you 100 percent. We'll lose a Subway and get a Black Pearl martini bar. Very little retail will change. We'll just suffer along. We'll get a few more people downtown. But 18 to 24 months from now, they'll be no new construction. We'll be very flat. And that's if the economy stays the way it is.

Contact Dan Meisler at (734) 302-1721.

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