by Michele Newbern Gillis
What’s the recipe for success of downtown’s residential?
Commercial Real Estate Women of Jacksonville invited several developers to speak on the topic at their monthly luncheon held at the Omni Hotel in downtown Jacksonville last month.
The panel included Mike Balanky of Chase Properties, who is developing the Deerwood Lake in Tinseltown and San Marco Place on the Southbank; Mike Langton, president of Langton Associates and LB Jax Development who developed the W.A. Knight building and has future projects on the horizon including redeveloping the old Barnett Bank building; and Jim Citrano, managing director of CB Richard Ellis and past Downtown Development Authority.
“I think to answer that (the recipe for success) you have to go back to the history of downtown,” said Citrano. “There was a period of time after the 1960’s when most downtowns experienced a decline. Jacksonville’s was exacerbated by the fact that through bank mergers in the 1970’s and 1980’s we lost several headquarter companies. If you can recall, we used to do our business in bank circles. Barnett Bank, First Union, Jacksonville National and Stockton Whatley and Davin were the institutional backbones of Jacksonville and were located in the downtown. With the change, the growth of the beach, suburbs, J. Turner Butler clearly providing an access, Jacksonville moved to suburbia.”
He said that happened at the same time the institutions were broken up and the big headquarters left town.
“Then we were down to three: Winn-Dixie, CSX and Fidelity,” he said. “There was a time when we had more headquarter activity than any other city. Times will change and, if you look at the whole country, cities have changed and there has been an out flight to the suburbs.”
Downtown’s role has changed from a business center to a cultural and residential center and with that comes certain demands for reuse of existing buildings and the infrastructure that is already in place.
He said the workforce downtown is still over 65,000.
“But, Jacksonville traditionally died at 5 p.m., so in order to keep the tax base vibrant, we needed something like residential that created nightlife experience,” said Citrano. “We have certainly have tried to build, with the public in mind, those things needed to give us a 24-hour city.”
Citrano said the risk/reward ratio in developing something that has never been done before in this community is huge.
“It’s too big to ask one person to take all that risk by themselves,” said Citrano. “Therefore the public purpose is incentives to encourage that development. Even with the incentives and the people getting the incentives having a little bit of leverage, it’s still real tough. This isn’t unique to Jacksonville; we do have our own peculiarities. But, it certainly is unique to downtowns everywhere as we go through our transition. What we are trying to do with incentives is to make it where developers can come in, make a profit and continue to build so the market will follow.”
Citrano said incentives make it easier for developers to take a chance on downtown.
Balanky commented that knowing what the market will embrace is another challenge developers face. Also, he said even if they come up with an idea that they think will work, if the banks don’t like it, they won’t finance it.
“When one says no, they all say no,” said Balanky. “So, you have to create a situation that may be much richer than you need it to be just to satisfy those lenders.”
Langton concurred with Balanky by saying when he did his W.A. Knight Building project he was turned down by eight banks.
“But, times are changing,” said Langton. “On the Barnett Bank project, I have a number of banks that are very much interested in securing the loan.
“The problem with the reuse of historic buildings is that once you finish the building, they are not worth the money you have in them. You can’t secure the rent to support the cost that you have in them. You have to have what Jim said, which is some sort of an incentive package. Without the city’s willingness to do that, we are in trouble.”
Langton noted that the new mayor, John Peyton, has decided that he wants to continue to put incentives into downtown and wants to make downtown projects happen, agrees with goal of 10,000 units downtown and is in favor of the adaptive reuse of historic buildings.
“Those are all good signals to me,” said Langton. “A fear that is common with new things is ‘What if they don’t work?’ That phenomenon is not uncommon with residential in our downtown area.”
The developers said starting small is probably the best way to go. It helps test the market and helps lead developers in the right direction as the future moves on.
“You have to get to a point of critical mass,” said Langton. “Rooftops bring restaurants and retail. So, if you get enough roofs in downtown, the restaurants, shops and maybe a grocery store will come into the heart of downtown.”
Langton explained that with most condominium projects the lenders require at least 50 percent pre-sale and that success of apartments is just a shot in the dark.
“11 E. has been very successful at 127 units, Roosevelt [The Carlington] is going to be 100 units and I’m going to do 130 units in the Barnett Bank building,” said Langton. “That’s kind of where the numbers need to be.”
Citrano said that he doesn’t agree that small size equals success. He said his take is that developers need to minimize risk, therefore start with a smaller size.
“11 E. and The Carlington are two of the most heavily subsidized projects during my term on the DDA,” said Citrano. “In order to get market rate, which we wanted, we wanted to get affordable apartment units, we had to totally subsidize a high risk loan. There was a market demand for that. What we have in there as tenants and residents are wage earners as opposed to real wealthy luxury tenants.”
Balanky cited that land costs also drive the size of new projects. He said that a developer may only want to build 90 units because that’s what they think the market will handle, but because of the land cost they may be forced to build 140 units to get the return to make it work.
“In Jacksonville, land prices have gone absolutely crazy,” said Balanky. “You pay a lot more for condominium land than you do for single family land because there is a density issue there. So one thing that creates the size issue is the land values.”
As a final note during the forum discussion, the question was raised as to what types of people are moving downtown: locals or relocators?
“Seventy-five percent of our original renters were from out of the city,” said Langton. “They moved here from Washington, Baltimore and New York City. They had urban living experience, so they weren’t pioneers.”
Balanky said he had a different experience on the Southbank.
“Seventy-five percent of our residents were local,” said Balanky. “A lot of them are downsizing. We have a lot of executives and retirees, people who are empty nesters who travel a lot and want to be able to lock the door and not worry about anything. We haven’t had any families with children at all.”
Another question was raised as to purchase versUs rental units.
Langton noted that a requirement of redeveloping historical building is that in order to get the Federal Historic Tax Credits, the units must be rental for five years.
“We are kind of forced to do it, but we need rental properties in the downtown,” said Langton. “And we need a greater number of them. I think we need a good mix of condominium and rental units.”
Their future after that will depend on the market.