Plain talk on building and development
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Blog: Plain Talk

Plain talk on building and development.

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Instant Comfort from New Shoes?

OLYMPUS DIGITAL CAMERA In between the polar extremes of that beloved great old neighborhood and the bland shiny new subdivision of garage forward tract houses there is a third possibility.  The Traditional Neighborhood Development (TND)  There are lots of these places built over the last 40 years. One of my early favorites is Kentlands in Gaithersburg, Maryland.  TND's demonstrated that narrow, slow streets with cars parked at the curb, houses with porches, and alley's serving garages at the back of the lot were not the work of some distant lost race.  They show that better places can be built again by regular humans.  We are not stuck with a world assembled out of housing tracts, McMansions, apartment complexes, office parks and strip malls.  Finding out that we can do better lets us move on to wrestling with questions like "Will we do better?"

A common criticism is that TND's are "inauthentic" places, that they lack the subtle layering and nuanced patina of the great old neighborhoods they have been modeled after.  This really does miss some very important points, in my view.  Yes, Kentlands is not Georgetown or Adams Morgan.  But seriously, look around.  Kentlands may not be Georgetown, but it is way better than the crappy sprawl across the arterial road in Montgomery County, Maryland.

We will be building a larger number of new buildings, new streets and new public spaces in the coming years.  We should do this with care and attention to detail, but we should also recognize the what time can do to subtly improve a place. May of the aspects we value in older places have been accumulated over time, through trial and error.

The authentic stuff always requires time and wear. We don't expect instant comfort from new shoes.

A substantial definition and explanation of the term Traditional Neighborhood Development can be found in the Lexicon of the New Urbanism.  I recommend downloading the PDF for close study.

http://www.dpz.com/uploads/Books/Lexicon-2014.pdf

Philip Johnson was Half Right
University of Virginia  photo by Alex McLean

An email inquiry from a 27 year old working in a California Architecture firm:
"I once saw an interview online with Phillip Johnson where he stated that most successful architects are either born rich or marry rich because you have to commission your own projects. I often wonder how accurate this is but I guess I will find out one day. I'm still trying to figure out my own strategy of opening up my own firm one day so it's always helpful to get little clues from those with greater experience."
My first clue would be to suggest that Philip Johnson may not be the best role model for a young Architect (for a number of reasons).   But broader advice  requires a big picture view of the Architecture profession.  MIT offered its first classes in Architecture in 1868 taught by William Ware. Prior to that time, formal study of Architecture was difficult and Architecture was not a licensed profession (like the practice of Law or Medicine).  Guys like Thomas Jefferson who designed the Great Lawn in the photo above, learned by reading books and by trial and error.  Specializing and professionalizing the Architect's work divided the tasks previously performed by  generalist master builders into the design professions (Architects and Professional Engineers) and the building trades.  This division and specialization made some things more efficient, but also created some unfortunate problems and cultural gaps that continue to mess us up when we try to design and build places worth caring about.
Many architects do not understand the fundamentals of how a building makes money or loses money as an enterprise. Most universities limit training in basic business practices or finance to a single class in "practice management", so understanding where clients come from, or what drives their program or decision process is abstract at best for many Architects.  If you combine this particular blind spot with a lack of direct experience in any of the building trades, an Architect's grasp of the complex world of building construction and operations can sometimes be too "thin" and theoretical to be useful to the client.  When clients and Architects are not able to understand each other the work gets significantly harder.
While you are young and still logging hours toward completing your IDP and taking your license exams, I would recommend learning how to create a financial pro forma that corresponds with a schematic design and site plan for a potential project.  This skill and the broader thinking that it requires will set you apart from your peers.  You will also be less vulnerable to the frustration that comes when the client tells you that "the numbers don't work" for the design you have worked on for the last 2 weeks.  Which numbers don't work?  The construction costs?  The likely rents?  The operating expenses?  If you understand how the numbers work you can ask questions and fix stuff in the design, just like you would if the stair section does not work.
If you have an opportunity to work in a building trade; framing &  finish carpentry, electrical, plumbing, drywall, etc.,  I recommend it.  Seeing a building progress through construction on a daily basis at full scale will give you much more confidence and capacity as a practical professional.  Spending your days on a construction site will also help you to understand the culture of the trades and the rhythm and pace of building.  That's hard to do if you are just an occasional visitor/tourist.
Understanding the numbers and spending time in the trades will help you tremendously if you decide to build a couple of buildings with a financial partner.  Build something that you can hold onto can provide passive income, those checks that show up in your mailbox regardless of how many hours you bill as an Architect.  The mechanics of having your own practice and managing projects, clients and employees is another thing that your formal studies or daily experience working in an Architecture firm may not prepare you for, but that is a story for another email.
I think that rather than limiting yourself to a specialized corner of the building business, it is better to be fully engaged, even if you have to limit yourself to projects of a modest scale.  You can own a building with partners without having to be rich or marry rich as Phillip Johnson suggests.
Cap Rate Compression --- Dinosaurs, and Squirrels - Part 2

Bruge, Belgium

The years leading up to the financial crisis saw global capital flooding the US markets with cheap capital for individual mortgages (which was used to over-build the wrong stuff).  At the same time, capital for building apartments was reduced.  Now we find ourselves in a market where shortages of skilled labor will prevent us form coming remotely close to delivering on the backlog of pent-up demand at the same time as we are seeing rapidly increasing new demand for rental housing.

Capital is available for building large scale apartment projects at unbelievably low Cap Rates these days because rents will be stable or continue increasing until the problem of low supply can be addressed in 20 or 30 years.  Capital for apartments will not be a problem for a very long time.  The fundamentals are that far out of whack.
The yield on the 10 year US treasury bond below 2% and Cap Rates on large multifamily deals have dropped to just over 3%.  That little tiny one point spread means that the people  who are managing money for insurance companies, investment banks, pension funds, etc. don't see any serious risk in investing in apartments.
For those who want to explore the fundamentals in greater detail, I recommend reading Multifamily Executive from time to time. This trade magazine covering the business of  large scale apartments is available online for at no cost.
The steady trend of Cap Rate compression shows how institutional capital is crowding out small investors in the world of conventional sprawl garden/carport apartments and in large (and capital intensive ) apartment mid-rise and tower buildings.  This pressure makes the incremental building of modest apartment portfolios in walkable urbanism a solid opportunity for small investors, because they are being crowded out of the other stuff.

So, the good news is there will be no shortage of capital for building apartments in walkable urbanism.  The delivery of apartments in walkable urbanism will not be constrained by any lack of capital.

The bad news is that apartments in walkable urbanism will be constrained by a lack of capacity to deliver competently and to deliver these buildings at any meaningful scale.  This is why I think Lean Urbanism is so important.
These are the big forces that I see swirling around the US economy:
  • Under production of all apartments over the last 10 years, and along with that a shortfall of apartments in walkable urbanism.
  • A shortage of skilled construction labor for the next 10 years, even with significant immigration reform.
  • A significant increase in demand for apartments in walkable urbanism (Nelson).
In my experience, there is currently significantly more equity capital available than there are good deals to put that capital to work in.  The reason there are not a lot of good deals at the scale I think is critical to walkable urbanism, is that there are not enough small developer/builders producing them.  There are lots of big "dinosaur" developers and not enough small, locally focused developer/builders "squirrels"   https://rjohnthebad.wordpress.com/2015/03/08/dinosaurs-and-squirels/
I do not anticipate a land rush of financiers and developers looking for chances to do small apartment buildings in projects with less than 50 units in walkable urbanism or in distressed neighborhoods.  They are dinosaurs and need way more than 50 units to be able to operate. The most significant barrier to entry is to be able to operate at a small scale in a local context.  Existing outfits with business models that require lots of units cannot get that done.  They don't have a reason to reinvent themselves as squirrels.