Upper Story Residential: Conversation with Main Street Managers

Howard Langner, Main Street Architect, and Brian O'Connor, Economic Development Specialist  - notes from TMSP roundtable:

Budget: Upper story residences, with their inherent requirements for equal access, life safety, health, and construction codes can be quite expensive undertakings. The number of units, the level of finish specified for each unit, the fire code requirements (sprinklers, two-plus hour separation between floors and/or living units, etc.), access to proper egress (two distinct means of egress from each unit, proper window sizing for egress, the requirement for an elevator under some circumstances, exit stair requirements, etc.), and the requirements for fresh-air-per-unit relative to window area all have significant financial impact on the success of an upper story residential project. It was discussed if Main Street managers could use their network of contractors to provide rehabilitation estimates to property owners considering repurposing their upper floors for rental housing.   It was suggested that with hard construction costs, managers could begin to offer solutions to financial gaps.  

Zoning: The proposed program must conform to the relevant code/zoning requirements and these factors will impact the budget. Due to the fact that the upper story residential project scope is inherently complex, it usually requires input from skilled professionals who have good working knowledge of codes, architectural design, financial results (pro forma), and residential construction in complex situations. Perhaps Main Street managers could create a team of local officials; city administrator, building official, fire and economic development personnel to ensure that fire prevention, accessibility and life safety codes are applied in a predictable and flexible manner that supports local goals.

Demand: Another consideration is the marketplace; as with any other goods or services it is essential to glean reliable market data at the very beginning of the project. The virtues of downtown living should not be clouded by the fact that there needs to be a demand for product. One suggestion that came up during the conversation was to approach local residential contractors and discuss the market; have they noticed a demand for downtown living, do people want to live within walking distance of the commercial district?

Demand for downtown housing is hard to evaluate in traditional terms because it does not have a long history.  It was agreed that pent-up demand for downtown housing can often be verbalized but is seldom quantified in industry studies. It was discussed how the local Economic Development Corporation or the Chamber of Commerce might support a residential strategy by funding consulting services to quantify the demand for downtown housing.  Discussion followed on how a few investors in the City of Elgin were creating a market for downtown rental housing prior to obtaining retail with the assistance of EDC funding.  It was also cited how the City of Corpus Christi was offering a Neighborhood Living Center grant of $10,000 per new residential unit to developers to help re-populate the downtown as part of a revitalization strategy. 

Residential Development as a Downtown Revitalization Strategy

February 2016 - Brian O'Connor, Economic Development Specialist

In many downtowns the upper floors sit vacant; forgotten spaces that offer untold potential for downtown living.  Unfortunately, many communities fail to recognize the economic value of residential and mixed-use development.  Their rational is we need jobs, not housing.  The fact is that providing housing options within the downtown isn’t just a real estate issue, it’s an economic one.  From a business owner’s perspective, the increased business activity of tenants translates into higher rental income and property values.  These economic benefits stretch throughout the entire district through increased pedestrian traffic and sales, rents and property values. 

The reality is that residential and mixed-use developments do produce jobs, as well as other long-term benefits. Temporary construction jobs, as well as permanent jobs, in both the ground-floor commercial units and upper floor spaces are typical of mixed-use developments. Additionally, resident spending on goods, services, restaurants and entertainment feed the local economy that then creates even more jobs. 

Today, many of our nation’s 80 million millennials are choosing to live in small and medium-sized cities that offer employment opportunities and affordable housing, but also have remade themselves with walkable urban cores, cultural amenities and a social and creative scene that once could only be found in the largest cities.  It is estimated that millennials, individuals born after 1980, will make up roughly half of the U.S. workforce by 2020, and 75 percent by 2030. 

These changing market dynamics offer many Main Street downtowns a renewed opportunity to compete for population and consumer spending.  However, planning and building toward a sustainable density is critical if Main Street cities hope to achieve their full economic potential.  One of the most promising strategies is for cities to focus on increasing downtown residential opportunities to increase population density.   

Contrary to what occurred in previous generations, it is projected that half of all new housing demand between 2016 and 2040 will be for attached homes, the other half for small-lot homes.  Simultaneously, the demand for large-lot suburbia, by contrast, is declining.  Surprisingly, while the demand for rental housing has been growing, the supply of rental units has been slower during the past two decades than at any previous period.  Only 11 percent of rental housing has been built since 1990, in contrast to the more than 25 percent that was built in each of the preceding 20-year periods.

Although the urban housing market is still considered a niche market, nationwide studies have proven that the two largest demographic groups attracted to city living are growing.  The groups growing the fastest, people in their mid-20 and empty nesters in their 50’s, are the most likely to seek an alternative to low-density, single-family housing.  The simple truth is that the market for outer metropolitan development peaked in the mid-1990s, and there is no evidence that it’s coming back.  The fact is that downtowns are growing again, after decades of decline – and, for the first time in a century, growing at a faster rate than their suburbs.

Today’s seniors are living longer and require a broader spectrum of care than previous generations.  Changes in health insurance, Medicare and Medicaid reimbursements and technology are changing the way we view aging as a nation.  Today, many seniors are looking for multi-generational and eco-friendly housing opportunities in urban communities that allow them to age in place.  According to the U.S. Census Bureau, the population of individuals aged 65 and over is expected to grow by 20% through 2017, in contrast to a 3% overall population growth rate.

Many retirees and empty nesters are looking to downsize their suburban multi-bedroom house for a city apartment, condominium or townhouse. In anticipation of this growing market segment, the City of Toronto has begun requiring that 10 percent of all new downtown residential construction offer three or more bedrooms. However, the disproportionate numbers of the urbanites still belongs to the 20 to 34 year olds.  This demographic grew 26% from 2000 to 2010 in major cities’ downtowns, or twice as fast as it did in those cities’ overall metro areas, according to a CEOs for Cities report.   Their housing choices are largely driven by a desire to delay marriage longer than their parents, combined with tight lending standards that have made it tough to get around their heavy student debts and light savings.  According to a recent national homebuilder survey, as much as one-third of the millennial population is unable to qualify for a home mortgage.   

However, the overriding charm of urban living is that dense urban living provides millennials with broader job and dating prospects as well as opportunities to share rent, and access to more varied social activities. The City of Cincinnati, Ohio for example, has doubled its downtown population in the past decade to 15,000 residents.  That shift is due in large part to millennials choosing a dense urban lifestyle that offers opportunities all within reach by foot, bike, or public transit.  A City of Louisville, Kentucky survey found that 23% of suburban residents under the age of 31 would like to move downtown, especially as more housing stock is developed. According to 2012 data from Louisville’s Downtown Management District, downtown residency is up 19% from a decade earlier and nearly 45% from 1970.

A recent study on the Resurgence in Midwest Secondary Markets released by Commercial Real Estate Services (CBRE) highlights the pressures major corporations are placing on cities to become more appealing to college educated workers.  An obvious shift is afoot among people choosing to live in and around downtown versus the outlying suburbs. According to CBRE, ten of the 11 Midwest markets studied saw population growth in their downtowns from 2005 to 2015.

As location is the essential component to the real estate market, population density is the key to turning downtown Main Streets into places of residential choice and viable investment options.  Mixed use projects can help in this regard; as many downtown ordinances now allow newly built residences over supermarkets and retail centers.  However, additional density can be achieved by reusing upper floors for housing, adapting vacant buildings for new uses, encouraging infill development of vacant lots and developing parking lots with lower parking requirements.

Some cities are maximizing the residential potential of vacant lots by using them for commercial and leisure activities.  The point is to incorporate nature into the cityscape that provides residents with opportunities for social interaction. Consequently, many Main Street communities are adopting a strategy of pervasive greenery to transform vacant lots into lifestyle spaces for community activities. 

There is no ideal formula for cultivating a critical mass of downtown residents. Some Main Streets have chosen to focus on entertainment with a cluster of restaurants, a theatre, and specialty shops, while others strive to meet the needs of daytime office workers.  While both strategies can be equally compelling, both strategies are strengthened with the inclusion of downtown residential development. 

A May 2012 study by the Canadian Urban Institute (CUI) report determined that downtowns often take up as little as one percent of citywide land area, but attract ten or twenty times that in terms of contributing to the City’s assessment base and generating property tax revenues. 

Similarly, the Downtown Memphis Commission’s 2013 Downtown Metrics Report found that a square mile of downtown property generates more than twice the county and city taxes as an average square mile in the city as a whole and more than three times the county tax revenue when compared to the same amount of land in the county.  

It is widely anticipated that households over the next few decades will consist of more singles, and empty-nesters, none of whom want the big yards and long commutes they may have grown up with.  The market for large suburban lots will continue to exist, but it will be a much smaller portion of overall housing demand.  The reality is that the Main Street communities that take advantage of the emerging preferences for affordable, smaller housing and more walkable neighborhoods will be the ones that are successful. 

Fortunately, many historic downtowns were built with the finest materials and architectural finishes and are natural places for public gatherings and the cultural hub for the community.  These same attributes are exactly the ones that prospective residents are seeking.  Main Street communities can start by inventorying their upper floor areas and vacant lots and ranking their condition. Main Street managers could initiate a local redevelopment team comprised of the city administrator, building official, fire and economic development personnel to ensure that fire prevention, accessibility and the life safety code are applied in a predictable and flexible manner that supports community goals.  

Local ordinances should be reviewed to allow for infill residential and higher-density structures. Downtown housing options should be available for different sizes and prices, a mix between ownership and rentals, and variances in styles that will appeal to a cross-section of people (singles, retirees, etc.).  Possible types of infill housing for consideration could include condominiums, cottages, town homes, cooperative housing, senior living facilities and other types that appeal to multiple generations and incomes. 

A local tool-kit of financial incentives and tax credits should be created with flexible land development regulations to promote upper-floor and infill residential development.    

Admittedly, demand for downtown housing in some Main Street cities may be hard to evaluate because it does not have a long history.  While the demand for downtown housing may be intuitive it may not be easily quantifiable in industry terms. Furthermore, residential development is typically under the radar in many downtowns as an economic development strategy and is therefore ineligible for financial incentives.   

However, the residential component of downtown contributes significantly to the property value in and around a downtown.  Greater residential density in and around downtown contributes significantly to the customer base for downtown merchants.  Residents and workers located within walking distance to retail spend as much as three times as much auto dependent shoppers, according to the International Council of Shopping Centers.  

In 2013, Budget Travel conducted its annual poll of America’s Coolest Small Towns. Nearly 100,000 readers nominated 924 small towns typically with populations under 10,000.  All but three of the towns had a population density above 500 people per square mile; and six had populations of approximately 1,000. 

It is important to remember that residential development is best achieved through a targeted focus on an under-served demographic within a limited geographic area. Identifying a target market allows for more thorough outreach to prospective residents.  However, appealing to a targeted population will still require multiple outreach strategies.  Door to door surveys, neighbor-led outreach as well as partnerships with churches, businesses and other neighborhood institutions are critical before starting a downtown residential initiative.   

Main Street communities with Type B Economic Development Corporations, Tax Increment Financing districts or Hotel Occupancy Taxes may use tax revenues to support a residential revitalization strategy by funding consulting services to quantify housing demand.  This information is essential, as most communities don’t have information on local vacancy and rental rates to capture the interest of residential developers. Providing this type of market analysis may instill property owner confidence and peak investor interest.  Community banks are also an important partner, as they understand the local market, where larger banks may consider projects riskier if comparable projects are not available. Additionally, Main Street might form partnerships with large local employers to guarantee unit rentals to offset near-term expenses during the project lease-up period. 

Main Street communities might consider packaging developer incentives to support downtown living. Beyond the profit motive, developer efforts may help to preserve and repurpose historic buildings that might otherwise be left to languish further eroding the city’s tax base.  A subsequent phase to a downtown property inventory could be application for a historic district designation so that developers and property owners could avail themselves of tax credits.    

Downtowns might also consider financial incentives to support single and multi-family properties within the downtown.  The City of Waterloo, Ontario has developed a program to provide buyers and builders of new homes with $2,000-$4,000 to spend at local merchants in a program sponsored by local merchants and home builders designed to increase the capture of new home starts in the community.  

To encourage downtown living, the City of Houston offers developers up to $15,000 per unit for constructing multifamily housing in and around downtown.  The City of Corpus Christi offers a Neighborhood Living Center grant of $10,000 per residence for new construction or conversion of commercial space.   The City of Niagara Falls, NY, developed a downtown residential program focused on retaining local students. In 2014, the City offered up to $7,000 in student loan reimbursements to recent college graduates willing to live downtown; as of this spring 13 renters have taken the city up on its offer.

However, your city must start by making downtown the easiest and most advantageous place for conversion and construction of new residential development.  Outdated zoning regulations and overly prescriptive building codes make it difficult to reuse older structures and to retain the human scale of older neighborhoods.  If a thriving downtown is important to your community, then the idea of increasing downtown population should be a guiding principle of your comprehensive plan. 

Accordingly, Main Street cities might consider adopting three sets of policies to promote housing production. One is to encourage housing as a means of attracting evening activity and customers for downtown merchants.  The other policy is to improve the jobs-housing balance by encouraging development of housing that is affordable to the downtown workforce. The third is to increase the local tax base through higher density development.  

Municipal officials should start by thinking about how to encourage more downtown development, and also about what kind of development could increase the value of buildings in the surrounding neighborhoods.  As 80 percent of all municipal tax revenues typically come from property taxes, it is in the city’s financial interest to nurture their building stock and cultivate new real estate development.      

The benefits of increasing density extend well beyond those of increased population.  The Federal Reserve Bank of New York’s 2010 report, Productivity and the Density of Human Capital reviewed 363 U.S. metropolitan areas from 2001 to 2005 to understand how density effects an area’s productivity.  Although this report reviewed metropolitan areas, many of the findings are applicable to small towns, especially those with higher-than-average densities. The sectors most affected by increases in density were more knowledge-based, relying on an educated workforce where sharing ideas is important to productivity.  Sectors with the highest productivity gains were professional services, arts and entertainment, information and finance.

The opportunities are there for Main Streets to effectively compete for population by creating places people can call home.