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Urban Infill:
MBAs Reshape the Nation's City Centers
By Matt Hudgins
In cities across the nation, residents are trading in big yards and
long commutes for the convenience of downtown living. In Austin alone,
more than 5,000 people already make their home in and around the central
business district, according to the Downtown Austin Alliance, and that
number is increasing almost as quickly as new residential projects are
approved. The trend toward dense urban living will likely increase as
more residents pack the nation’s cities. The United States population is
projected to grow 33 percent by 2030, to reach 376 million, and will
strain housing supplies in most markets. Census data suggest those new
residents may be more amenable to urban living, too.
Married couples with children, which led the exodus to the suburbs after
World War II, made up 40 percent of all households in 1970 and have
dominated the U.S. housing market for the past half-century. Today, that
family structure accounts for less than 25 percent of households and is
being overshadowed by young couples without children, empty nesters,
singles and single-parent families, according to the Census Bureau.
In Austin, Roland Galang, MBA ’99, is helping to accelerate the downtown
migration. As a real estate broker at Urbanspace Realtors, Galang
markets Milago, a 240-unit residential condominium project under
construction on the northern shore of Town Lake, just east of Congress
Avenue. Galang has also helped several retail clients lease space in the
new Second Street Retail District between Congress and San Antonio
Street, and he is a private partner in several small urban infill
projects in Central Austin.
After living in Manhattan for five years, Galang is in the process of
buying a condo of his own at Milago because he misses the convenience of
living in a dense urban core. He says his MBA experience was a great
launching point for a niche career in bringing the urban-living
experience he loves to Austin.
“Each real estate project is an entrepreneurial venture,” Galang says.
“You use the same skills, whether you’re launching a high-tech company
or a new infill development.”
Team-building is especially important. Galang often finds himself
educating clients, lenders or potential investors about the benefits of
developing in established inner-city neighborhoods. Those benefits
include improved access to employment, shopping and recreation; or, for
a commercial project, access to desirable locations and markets where
usable space may be otherwise unavailable.
Infill, however, is more complex and costly than building in the wide
open spaces at the edge of town, which is one of the reasons new
construction in suburban areas tends to create sprawl. It’s also part of
the challenge for Galang and other real estate professionals, as they
pursue the more difficult course of invigorating the nation’s urban
cores.
Development Diagnostics
For some redevelopment efforts, the key to success is providing a
missing link in a chain, rather than simply replacing worn-out
buildings. Monique Salazar, MBA ’01, says real estate was only a small
part of her work to create a biotechnology park in Manhattan. An
attorney with experience in the medical device industry, Salazar went to
work for the New York City Economic Development Corp. in 2003. Her team
investigated why Manhattan’s strong medical research sector wasn’t
generating much commercial activity.
“It was a fascinating question,” Salazar recalls. “New York seemed to
have all the elements for biotech, so why hadn’t it happened?” The lack
of lab space for companies in the city emerged from their study as a
possible impediment to a vibrant biotech commercial sector.
Salazar helped to identify other elements companies in New York needed
to carry medical discoveries through the commercialization process, such
as connections between investors and researchers. Thanks to her team’s
guidance, the NYCEDC is working with a private developer to turn a
former laundry facility and parking lot into the East River Science
Park, a development that will provide 872,000 square feet of commercial
space for laboratories, venture capital offices and a business incubator
next door to Bellevue Hospital Center.
Salazar—who credits the McCombs MBA program with giving her the skills
she used in her analysis—has already moved on to her next
entrepreneurial challenge. She left the NYCEDC in January to focus on
the marketing and distribution of “The Cry,” a feature film she co-wrote
and guided through filming and production.
A Sustainable Trend?
Will urban redevelopment become a necessity as population growth forces the nation’s cities to add housing and commercial space, or is the growing interest in inner cities a fad that will dry up in a few years?“This is the big question in the back of all urban retail developers’ minds,” says David Vitanza, MBA ’84 and vice president of project development at Austin-based Schlosser Development Corp. Schlosser has brought many high-profile retail properties to Texas cities, including infill projects such as Austin’s popular retail centers on Lamar between Fifth and Sixth Streets, as well as the nearby Whole Foods Market world headquarters.
“We have to ask ourselves why we abandoned the center city in the first place,” Vitanza says. “Pollution, overcrowding, traffic congestion, cost, desire for outdoor activities—many of those reasons could occur again in a cycle and drive urban dwellers back to the suburbs.” Suburbanization is alive and kicking, Vitanza adds, both on a local scale with the growth of suburbs and nationally with the migration from dense cities in the northeastern United States to suburban communities in the South and Southwest.
“But for now and the 10-year horizon, this urban infill trend is stronger than I ever thought it would get,” Vitanza says. “The influx of residential development to central business districts is significant and obviously is enough to attract major retailers like Target, Wal-Mart and Whole Foods Market to major and midsized markets across the country.”
Where Land is Scarce
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In San Diego, Calif., for example, county leaders have limited construction in the outlying desert and mountains to one living unit per 80 acres, precluding new residential suburbs. Consequently, more than half the new homes built in San Diego County in 2005 were attached, rather than freestanding, as developers sought to meet housing demands with dense construction on a limited supply of land.
“The single-family detached home is becoming an endangered species in San Diego County,” says Stephen Quinn, president and owner of San Diego-based American Property Enterprises and a member of the advisory board for the Real Estate Finance and Investment Center at McCombs. “The major home builders here have all started divisions that concentrate on these high-density projects.”
Quinn is a 1973 University of Texas at Austin School of Law graduate, and while he just took a few MBA classes to round out his program, it was a finance course that altered his career path. That course—Real Estate Investment Analysis—convinced Quinn to go into real estate, first as a commercial mortgage banker and then as a developer.
“I discovered that legal training was a perfect preparation for a career in real estate finance and development,” Quinn says. “That was a life-changing event, because after choosing to work in the real estate industry, I never again considered becoming a practicing attorney.”
More than 30 years later, Quinn uses his legal and real estate savvy to pilot proposals through the complicated process of obtaining zoning and other government development approvals.
American Property Enterprises recently obtained necessary approvals for and then sold to another developer an infill project called Fashion Walk, which will put 161 condominium units across the street from San Diego’s Fashion Valley Center regional mall and place residents within walking distance of jobs, shopping, entertainment and transportation.
Quinn’s company also assembled eight land parcels from five separate owners to create the Boulevard at North Park, a mix of 180 residential condominiums, retail space and several floors of parking in a heavily developed San Diego neighborhood. To win political support for the Boulevard, Quinn’s company included 27 units priced to be affordable to those with moderate incomes. Those two-bedroom, two-bath units will sell for $179,000 instead of the market price of about $450,000.
Pursuing Affordability
Fei Dai, MBA ’05, learned the advantages of living in a dense, mixed-use development while growing up in China. Her family and neighbors all worked close to home, without the need for long commutes. “Most Asian countries have very high densities,” she explains. “It’s a convenient lifestyle.”Today, Dai is helping bring the concept of a live-work-play community to East Austin. Dai is a development analyst for Catellus Development Group, a ProLogis company, which is redeveloping the former Robert Mueller Municipal Airport. When completed, the 700-acre community will include Seton Health Care Network’s 640,000-square-foot Children’s Medical Center of Texas, as much as 2.6 million square feet of office space, more than a half million square feet of retail, 2,600 multifamily units, 1,500 single-family homes and 500 town homes or row houses.
Dai’s MBA emphasis in real estate finance frequently comes into play as she projects revenue and investment returns from various land-use components of the Mueller redevelopment. She says she is excited to be working on such a unique infill project.
“This is the largest mixed-use development in Austin, and it has an unusually high percentage of affordable housing,” she says. Specifically, a quarter of all homes for sale will be sold to those making 80 percent of the median income for the greater Austin-San Marcos area; and a quarter of all rental units will be priced for those at 60 percent of the median income.
An affordable price point helps infill projects enhance, rather than replace, existing communities. Dai says she doesn’t want to contribute to gentrification, in which new development raises property values excessively, forcing out residents who are unable to pay higher property tax bills.
“As the center of Austin grows toward East Austin, it’s important that people can still afford to live there and not be driven out,” she says.
Innovations in Infill
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Lorenz is the general partner in several real estate partnerships that own, manage or develop projects in Central Austin. In fact, Lorenz was one of the first Austinites in recent memory to attempt a dense urban infill project.
“We decided there had to be pent-up demand for high-rise condo living in downtown Austin. There had to be 100 people, anyway,” Lorenz remembers. He and partner Robert Barnstone began promoting the concept for a 96-unit luxury condominium in 1996; by 2001, they had sufficient commitments from banks and buyers to build the Nokonah at 901 W. Ninth St.
To cover the cost of expensive interior finishes, a deluxe fitness center, lap pool, concierge, private club and sun deck, the construction costs exceeded $300 per square foot of living space in the Nokonah. While the project sold well, Lorenz questioned whether there were enough Austin buyers willing to spend a half-million dollars on a condominium to support future projects at that price.
“The trick became how to get the price down, make it work and be more affordable to working-class people,” he says. “That’s been the challenge, and we’re making headway.”
Spring, a 36-story condominium tower in the works at Bowie and Third Streets, will offer several units priced below $200,000. Lorenz was able to reduce unit prices by eliminating the lobbies, long hallways and other shared spaces that added construction, heating and cooling costs to each residential unit. “At Spring, 90 percent of what is being built can be sold,” Lorenz explains.
Spring is a “point tower,” a concept popular in Vancouver but fairly new to the United States. The design features a narrow stack of residential units radiating from an elevator lobby at their center to eliminate shared hallways. Hallways are also minimized in the units themselves to reduce overall square footage.
“If you’re radiating out and have tall ceilings, a lot of glass, a lot of light and views, the adequacy of a relatively small unit is amazing,” Lorenz says.
As the nation’s population grows, these and other experiments in efficient housing and dense land-use mixes may set tomorrow’s standards for new construction.
“Sprawl is becoming universally detested,” Lorenz says. “But when people are facing $2-a-gallon gas prices, incredible traffic congestion and air pollution—and when mass transportation looks like it’s on the horizon—sprawl becomes unnecessary.”
Looking forward, cities in the Western U.S. may come to resemble their Eastern counterparts, with commercial, cultural and residential districts intersecting at the heart of town.
