Unpacking a Solution For PD-15: The Envelope, Please … Part 1

Weeks ago, I began telling people that I already knew what should happen to PD-15 to make the most people happy. I said I was going to write it down, put it in an envelope that I would open at the end to see how accurate I was.  Now that I’m not part of the task force, screw it, I’m opening the envelope.

In this first part, I will explain how my plan was formed using some key information.  In the second part, I will go building-by-building and explain how the information in this section informs that plan.

Note: To burst bubbles from the outset, my opinion is based on uplifting the area, not personal gain.  While it’s true I would benefit from any financial uplift, over the past 15 years, there are only two people who paid less per square foot in my building. So I’m good financially.

Aside from PD-15, the remainder of the Pink Wall is zoned MF-1 (three stories). The botched Preston Road Area Plan “allows” them to go to four. However the whole area is mired in ancient deed restrictions whose extinguishment is unlikely.  The reason it’s more unlikely than you may think is because, as I will lay out below, the three restriction zones run north-south. The southern, Northwest Highway-facing are best positioned for redevelopment while the northern properties are stuck.  People being people, with no financial benefit for the northern properties, they will not vote to extinguish the restrictions for their better-placed southern neighbors. Stalemate.

The Financial Benefits

After performing a rough economic feasibility study for the remainder of the Pink Wall (something the Preston Center plan didn’t), I discovered that the remainder of the Pink Wall is extremely unlikely to ever redevelop – even without the deed restrictions.

The buildings on the north side of Bandera Avenue are limited to three stories due to the residential proximity slope that controls building height adjacent to single family homes (on Del Norte Lane). Regardless of the increased density and fully underground parking, those condo units will always be worth more as condo units than as dirt to a developer.  There’s simply not enough money in the equation.  So Villa Capri, Carlton House, Park Carillon, Harcourt House, Park Soverign, Prestwick Manor, and the northern section of Park Deville are all that they will be.

Crossing Bandera Avenue to the south, those buildings would be able to eke out another story to four.  This is still not enough to redevelop because four stories would require selling to a developer for less money than a condo unit is worth. Should they be able to go to five stories, there may be some financial upside. However these lots are long and narrow which may be less efficient for a high-density design.

Note: Before you wag your finger at me about the Laurel being four stories, realize that Townhouse Row was extremely low density. That means the sellout price was split between fewer mouths. Let’s say a complex has 35 units on an acre of land that are worth $250,000 each.  That values the complex at $8.75 million. How much above that would it take to get approval from owners to sell?  Thirty percent?  Forty?  At a 30 percent uplift, that places the land value at $11.375 million, at 40 percent it’s $12.250 million.  Let’s say you were able to cram 80 units on the acre with four stories. That’s a sunk land cost of $142,000 to $153,000 per unit for units that would likely be perhaps half the size than what’s there.  And that’s before construction has begun.  Developers tell me land costs are typically 10-20 percent of a project’s cost. Do you see what I mean?  No matter how you slice it, four stories crammed full of apartments still isn’t profitable to anyone.

The three complexes on the north of Averill Way are a mystery to me.  Averill Manor, Deville and Averill Devol may be able to get to seven stories (the same as A.G. Spanos is proposing for Diplomat).  However their MF-1 zoning would have to be changed after the deed restrictions were lifted. And were that the case, Diplomat has 15 units on an acre. Fewer mouths to feed makes the price doable but at a proposed seven stories.  Averill Manor and Averill Devol are tiny lots while Seville is long and thin which may not be as conducive to high-density.

Complexes on Northwest Highway – Imperial House, Averill House, and 6040 Place — may be able to go 20 stories, having escaped the residential proximity slope and being on much thicker lots.  However, unlike PD-15 their zoning is still MF-1.  For these complexes to rise, their deed restrictions must to be extinguished.  As I said, with no financial upside for the properties behind them, they are unlikely to get approval to ditch those restrictions.  This may explain Imperial House’s decision to not seek redevelopment and instead start taking care of their maintenance issues.

Days on Market 2003 to 1Q2017

Pink Wall Financial Reality

I’m a data collector.  When I looked at the building I now live in, I had my Realtor provide all the sales data they had going back as far as they could.  I now have every public sale in my building going back to November 2002 – 15 years of data.

On a cost-per-square-foot basis, we received the barest blip of increase prior to the housing crash in 2008. Renovated units sold in one band while unrenovated units sold in another (lower) band. Owners buying and selling within those six years made little to no profit. Even if they renovated, they at best broke even. After 2008, the building dropped about 15 percent and stabilized back to lower-priced renovated/unrenovated bands in 2010.  It wasn’t until 2013 that we saw prices begin to increase.  Today’s prices are slightly higher than they were in 2002, but when you factor in inflation, the homes haven’t really budged in 15 years.

The biggest change in the past 15 years is the reduction of the average number of days a property sits on the market, dropping from six months to a couple of weeks.  But you know what? That’s a citywide trend of low supply that has nothing to do with the Pink Wall being “hot” again.

I assume the rest of the Pink Wall can tell a similar story.

Why?

The area is rundown. On the surface, the mature trees and low-density appear to be a haven.  But a lot of the units are outdated, which scares away a significant portion of buyers. It’s doubly scary when the demographic the area attracts is 60-plus years old and who often lack the stamina for a full-on renovation. It doesn’t help that Preston Center west is an eyesore.

Couple unit acquisition and renovation costs with buildings that have not been maintained, and buyers are wary of purchasing into a money pit.  Especially a pit not of their own making.  Many buildings are not maintained because HOA dues are not sufficient, and owners, often on fixed incomes, can’t afford it. A commenter on a prior post railed at my calling the area rundown, but while not universal, many complexes are.

Within PD-15, I know that two of the four low-rises are facing large maintenance bills from neglect.  The third burned down and the fourth I don’t know the state of.  So yeah, there are a lot of problems that can only be fixed with money.

These are the reasons the area hasn’t kept pace with the broader market. And of course the Pink Wall is about as hip and cool as the average grandparent.

What’s needed? Youth and Money

Money means younger buyers who will renovate outdated units, and who also have the steady income needed to pay for the maintenance prior owners let pile up.

The best way to do that is to bring them to the area to live.  Given the staggering post-Recession shift towards apartment renting (how the Pink Wall started), new product is needed.  The Laurel is an OK start. The Bandera a more iffy one.  Both charge market-rate rents that will, in many cases, be significantly more than the cost to purchase a Pink Wall condo. Proximity to those condos will help convince them that moving a block to their own home is better than paying rent for an apartment.

At least that’s the hope. Neither building will win any design awards nor are their locations great.  The Laurel sits on Northwest Highway and Preston Road, while the Bandera is sandwiched between other residential and commercial buildings.

Many heralded the over-priced expensive Park Hollow development east of Edgemere on Bandera.  But its poorly designed units hit the market with the Recession and never sold very well.  Much of the complex turned to equally difficult-to-rent apartments.

PD-15 offers likely the last, best hope to construct buildings that will uplift the area. As I outlined above, the remainder of the Pink Wall will likely never be redeveloped (good or bad depending on your opinion). But PD-15 with its MF-3 zoning offers hope of attracting one great building and a few scattered OK buildings to bring in new blood.  The new blood they bring can be used to catalyze the neighborhood, bringing it back to being a desirable location for people under 60 years old … as it was 60 years ago.

Why Not?

If nothing is done, those maintenance-challenged complexes will continue to deteriorate until the special assessments will be so high, the units will become worthless.  In an extreme example, ask the owners at Edgemere on the Parkway if they will ever recoup the $150,000-per-unit special assessment that’s currently re-skinning their building. Wait, you don’t have to ask … the answer is “no.”  Funny how buyers expect a building to be structurally sound, leak-free, with working plumbing. And if it’s not, they pay a fraction of the price … if they don’t run away.

So the aging Pink Wall complexes with units currently trading in the $200,000 to $300,000 range will move lower as maintenance issues become more visible. That $50,000 special assessment postponed today may knock $100,000 off your selling price tomorrow.  And smart buyers look at the books, but also have home inspections that inspect the building as well as the unit.

Unfortunately, given the age of residents, waiting is an option. Hoping the bucket will be kicked before the assessments kick in.

Today or tomorrow, the piper will be paid. But what if there were a way to mitigate all this?  And even if your complex is wonderfully maintained, if the neighborhood continues to deteriorate, even well-maintained buildings will lose value. The best house on a block is worth more next to the second best house on the block … and it’s worth less next to the worst house on the block.

Of course there are Pink Wallers who just don’t want anything to change, period.  These people probably cringe when the grass is mowed. I will not pander to this philosophy of leaving a mess for the next guy. But it’s also because PD-15 will change the Pink Wall, it’s absolute truth. The only question is whether the best projects are built.

This installment lays out why I think the way I do based on the economics.  In part two, I’ll fully detail what I see happening to each of the four low-rises within PD-15 and how that can reshape the neighborhood for the better.

 

Remember:  High-rises, HOAs and renovation are my beat. But I also appreciate modern and historical architecture balanced against the YIMBY movement.  If you’re interested in hosting a Candysdirt.com Staff Meeting event, I’m your guy. In 2016 and 2017, the National Association of Real Estate Editors has recognized my writing with two Bronze (2016, 2017) and two Silver (2016, 2017) awards.  Have a story to tell or a marriage proposal to make?  Shoot me an email sharewithjon@candysdirt.com.

 

One Comment

  • Great article. My takeaway is that the Charoistas need to stop acting and thinking like totalitarian apparatchiks
    based upon their equivalent of a five-year-plan and go about fashioning a public policy solution that employs market forces to clear the old construction condo lots. Just don’t see the logic of setting a height standard below the clearing density allowance needed to entice the existing old construction unit owners to sell.