Why Build New Buildings in Distressed Neighborhoods?

Modest WalK-up Mixed Use Building in Lowell, MA By Sandy Sorlien/The Transect Collection
Small Walk-up Mixed Use Building in Lowell, MA By Sandy Sorlien/The Transect Collection
(–From an email exchange today about transition strategies that will work for new rental apartments and workspace in distressed neighborhoods).
“Lean development should make marginal neighborhoods more complete and complete neighborhoods more affordable”. —Rob Sharp, Architect & Urbanist
For example, let’s take a scenario where current apartment rents in the distressed neighborhood (in older buildings with deferred maintenance) are at $0.85 to $0.90 per SF per month for 2 and 3 bedroom units, and rents for dumb garden/carport apartments out by the highway are at $0.90 to $1.00 per SF per month. In that setting newly constructed, better designed, smaller units (studios, 1 and 2 bedroom units) in the distressed neighborhood can probably see a 20% to 35% bump in likely rents over the current $0.85 – $0.90 paid for the older units, bring them to the $1.00 to the $1.20 per SF per month level.
That rent level will put single stair walk-up into a reasonable range of return on risk and capital at 7% to 8%. This would be just clear of the 2 point spread you should see when you compare a new construction project with a 5% Cap rate on the purchase of an existing building with limited deferred maintenance in the same distressed neighborhood. The project needs to have a good enough return to justify the construction and leasing risk when compared to just buying an existing building with tenants.
If what you build contributes to the neighborhood getting better, that neighborhood amenity will show up in increased rents and reduced vacancy in your new buildings. If you are building apartments in that distressed area, it is in your interest to invest your time , attention, and learning curve in pressing the city to correct the lousy street design, improve services, transit, and policing. It is also in your interest to support local businesses and local institutions; community center, parks, schools, and churches.
If your residential apartments have decent cash flow, you can take a risk on a local food and drink operator on a % of sales lease to help them get up and running in one of your work spaces (in lieu of a straight dollar amount on the rent). The reason why it is possible for you to take these next steps in helping the distressed neighborhood is because you are making the same money on your in-town urban walk up apartments as you would if you had built units in a dumb garden/carport apartment complex out by the highway. One of the reasons why you are motivated to take on that additional effort is that it will translate directly into stable or rising rents.
An OK building at $1.25 a SF per month rents becomes a wonderful building at $1.50 per SF per month rents. When the $1.50 likely rent number is established as a comparable in a single stair walk up building this allows for more expensive building types such as Walk-up Buildings with two stairs + corridors or Elevator Buildings with two stairs + corridors. What is important in this strategy is that the leaner Lean Building Type of the Single Stair Walk-up opens the way for a succession of more expensive Lean Building Types, while keeping the scale of the individual project small enough for a small developer/builder to make a living without having to get any subsidy for their projects.
That is the baseline business model I am focus on working through with small operators. The building types and site configurations can still be aggregated into larger scale projects and can still be used by CDC’s and private builders who choose to pursue projects with subsidies. The intent is to encourage folks to use better tools for making small possible. The tools can be deployed by enterprises in a range of sizes, although this approach is likely to be beyond the grasp of larger conventional operators.

6 thoughts on “Why Build New Buildings in Distressed Neighborhoods?

  1. rjohnanderson March 29, 2015 / 8:02 pm

    I figured out that if a blog post runs past a certain number of words the WordPress Theme template squeezes the formating. I will try to be mindful of this constraint in the future.

  2. Benjamin Douds March 30, 2015 / 3:42 am

    The more information the better, I say. Formatting be damned.

    • rjohnanderson March 30, 2015 / 3:58 am

      Fair enough. It’s kinda frustrating to put together something that looks quite readable on the page before it gets transmogrified into the WordPress template.

      • mpeers March 30, 2015 / 7:41 pm

        Consider a suitable Tumblr theme perhaps.

        Great solid summary. So many subtle points made. Small buildings and builders weave new buildings into living and rebounding landscapes. They bring the tapestry of built form alive and make it visible as regional planning and investment strategies.

      • rjohnanderson March 30, 2015 / 8:03 pm

        Thanks Morgan. Tumbler? I don’t even know what that is. To be honest, the prospect of one more social media adventure has rather limited appeal. Getting the blog written and cross-posted to Twitter and Facebook is already a lot. If there is an easy way to post to Tumbler, I will try to figure it out.

      • mpeers April 16, 2015 / 9:53 pm

        just glad you’re blogging. your material is invaluable to someone like myself starting out. thanks! wish I coulda made it to Dallas. I’ll be at the Detroit Reclaiming Vacant Properties conference in May though. it’s a bit closer to Toronto. 🙂

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