ARES Urbanexus Update #175
Office
The future of where people work
Urban planner, professor, and author Bill Fulton recently posted about his conversation with urban planner, real estate investor, and developer Lisa Picard. They discussed three reasons why Lisa believes cities and business districts will bounce back even in the post-COVID world.
For Bill, two of Lisa’s reasons are not surprising: (1) these places feed, entertain, and restore us, and (2) they support meaningful human collaboration. However, Lisa’s third reason was a bit of a shocker for Bill. According to Lisa, cities and business districts integrate seamlessly with agentic processes and artificial intelligence (AI) technologies.
Agentic processes refer to the ways in which individuals or AI systems take initiative, make decisions, and act independently to achieve goals. In psychology, human agency involves self-regulation, intentionality, and the ability to influence one's environment. In AI and automation, agentic workflows allow AI agents to adapt, learn, and make decisions without constant human supervision
Learn more here.
Land development
Elevating women in land development
In July 2023, Erica Sinner founded Ladies in Land in Houston. The organization brings together women in land-related roles spanning acquisition, infrastructure, construction, development, planning, engineering, architecture, and law. Events and activities include expert-led lunch-and-learns and executive coaching.
In addition to Houston, the organization now has chapters in Dallas, Austin, San Antonio, Nashville, Orlando, Raleigh, Atlanta, and Jacksonville. A 10th chapter kicks off in Charlotte with an inaugural event on June 12.
Meanwhile, a new partnership with BUILDER’s parent company, Zonda, provides Ladies in Land members with access to Zonda’s educational certification program. Zonda will also be the exclusive executive sponsor of Ladies in Land within the residential real estate and analytics sector.
Learn more here.
Taser-maker Axon triggers a NIMBY backlash in its hometown
Patrick Sisson explains that the Arizona security tech firm wants to build a new headquarters in the greater Phoenix area. However, their plan to develop 1,875 units of housing on the site has sparked a battle with the municipality.
Founded and based in Scottsdale, Arizona, Axon wanted to stay in its birthplace when it announced plans to build a new headquarters there last fall. Plans for a 400,000-square-foot campus include a futuristic, sci-fi-inspired office building that Chief Executive Officer Rick Smith said recalled “bringing Captain James T. Kirk’s phaser to life.”
Nearby residents raised concerns about density, traffic, and proximity to established neighborhoods. Axon made refinements to address these issues, including:
Reduced building heights near residential areas.
Improved landscaping to provide additional privacy.
Removed a previously proposed traffic roundabout.
Increased setbacks to minimize the visual impact of larger buildings.
Despite these refinements, the project has sparked months of rancor and debate, including zoning disputes, a signature drive to put the project to a referendum, and ultimately, the passage of state-level legislation that preempted local laws. The major sticking point: Along with offices, manufacturing space, and a hotel, Axon wants to build 1,875 units of housing.
Building multifamily housing in Scottsdale can be a formidable challenge. The city northeast of Phoenix is a sprawling landscape of gated housing complexes and heavily irrigated golf communities, home to well-off retirees, fans of Frank Lloyd Wright’s Taliesin West and seekers of sunny, suburban-style living. The median home price in most neighborhoods is more than $1 million, and the average rent, $3,200 a month, is more than twice that of neighboring Phoenix. Local voters have pushed back against recent efforts to add apartments, increase density, and ease housing costs in one of the fastest-growing cities in the US.
Learn more here.
The revised site plan for the Axon headquarters and adjacent housing.
Retail
Retail in San Francisco
In downtown San Francisco, “For Lease” signs mark storefronts along Market Street and around Union Square. Major retailers, including Nordstrom, Bloomingdale's, Target, Saks Fifth Avenue, Gucci, and Ross Dress for Less, have abandoned the area. Whole Foods, Old Navy, Anthropologie, Abercrombie & Fitch, H&M, Forever 21, and Uniqlo have also left.
But while downtown languishes, nearby Hayes Valley is thriving. The area feels like a real community, which is how it survived the brutal aftermath of COVID-19. The groups of friends sitting outside drinking coffee, the green spaces, and the vibrant, modern boutiques ultimately kept the neighborhood’s spirit alive.
For more perspective on this contrast, see SFGATE reporter Ariana Bindman’s article here.
Vacant storefronts along Market Street in San Francisco
Folks hang out near Juice Shop at the corner of Octavia and Hayes at Patricia's Green in Hayes Valley in San Francisco
Patricia’s Green in the Hayes Valley area of San Francisco.
Residential
U.S. cities where renters need $100k have doubled since 2020
A report from Zillow highlights America’s decline in rental affordability. Renters in eight major cities now need to earn six-figure salaries to afford housing comfortably. This is double the number of Cities from five years ago.
Nationwide, the annual income required to afford a typical rental has surged to more than $80,000, up from $60,000 in 2020. The increase reflects a 28.7% spike in apartment rents and a staggering 42.9% jump in single-family home rents over that same period. In contrast, the median U.S. household income has only risen by 22.5%, now sitting at approximately $82,000 -- widening the affordability gap for millions of renters.
Renters earning the national median income are now spending just under the critical affordability threshold of 30% of income on housing, with 29.6% going toward rent. But in eight expensive metro areas -- San Jose, New York, Boston, San Diego, San Francisco, Los Angeles, Miami, and Riverside, CA - renters need to earn over $100,000 annually to stay below that threshold.
Learn more here.
Skybridge houses in Seattle
A peculiar architectural feature has spread throughout Seattle. On a single lot, you’ll see three houses, one somewhat bigger than the others, and between the big one and a smaller one is a walkway. Sometimes it’s on the ground floor, and sometimes it’s through the air — in other words, a skybridge.
On paper, what you’re looking at is a single-family home and two accessory dwelling units, an arrangement locally known as a 3-pack. These compounds popped up after Seattle eased building restrictions on A.D.U.s in 2019, as part of the city’s efforts to increase housing density and drive down prices. A.D.U.s are built on land that would not otherwise be developed — often, what would be a house’s backyard — and tend to cost less than conventional single-family homes.
In 2019, the city removed the owner-occupancy and parking requirements and raised the number of A.D.U.s allowed per lot to two — but on lots containing two A.D.U.s, one had to be attached to the primary house. Developers, rather than individual homeowners, drove the next phase of A.D.U. construction, creating three-unit compounds to make the most of these unusual rules. And that’s when creative architects began to use skybridges to make the required connection for the second A.D.U.
Learn more here.
Trevor Johnson at a desk in a skybridge that attaches his home to an A.D. U.
Master-planned communities
Pershing Square invests in Howard Hughes Holdings
Pershing Square Capital Management, a New York City-based hedge fund founded and operated by Bill Ackman, has acquired 9 million shares of newly issued common stock of real estate giant The Howard Hughes Holdings Inc. (NYSE: HHH) in a deal valued at roughly $900 million.
Pershing Square’s investment enables HHH to become a diversified holding company by acquiring controlling stakes in high-quality, public and private operating companies while continuing to invest in and grow the company’s core real estate development and master-planned communities business.
Through its Dallas-based REIT and subsidiary, The Howard Hughes Corp., HHH has developed numerous large-scale, master-planned communities throughout the United States. These developments include Downtown Columbia in Maryland, The Woodlands in greater Houston (also home to HHH’s headquarters office), Summerlin in Las Vegas, Ward Village in Honolulu and Teravalis in the greater Phoenix area.
Learn more here.
Finance
A $1.5 billion refinancing
The owner of The Wharf on D.C.'s Southwest waterfront locked in one the largest commercial real estate refinancing deals in D.C. history.
PSP Investments lined up the $1.15 billion refinancing less than two months after buying out the joint venture partnership that developed the mixed-use project, Hoffman & Associates and Madison Marquette. The loan consolidates debt from the project's first and second phases, including an $847 million financing through a syndicate of lenders including Goldman Sachs, Starwood Capital Group, Mack Real Estate Group and Pentagon Federal Credit Union.
Fitch Ratings posted a rating action commentary on Friday ahead of the loan being bundled and sold as a larger commercial mortgage-backed security. That transaction is slated to close June 26, per Fitch. In addition to refinancing existing debt, the deal also includes funding a $27 million "free rent/gap rent reserve," an $18.7 million "tenant improvement/leasing commission reserve," and $14.8 million in closing costs, per Fitch.
The refinancing deal comes just weeks after D.C. officials paid off $198 million in bonds used to finance infrastructure for the project, including the new sea wall, 15 years before the bonds were set to mature.
Learn more here.
Metropolitan and regional trends
Oklahoma City
In 1995, a white nationalist’s bomb tore through the local federal building, killing 168 people. Since then, the city’s residents have been determined to be known for something other than the terrorist attack.
More than $3 billion of taxpayer-funded capital investments since the bombing have brought business, culture, and people back to a once-desolate city center. A basketball arena was one of the city’s first projects. Later ones include the kind of projects that might attract high earners, such as a streetcar system and a civil rights centre.
As a result, Oklahoma City now looks like a place where professionals want to sip matcha lattes. The city’s low costs and taxes are also significant draws. Its fortunes used to rise and fall with the price of oil, but aerospace and bioscience businesses have added fresh blood and ballast to the economy.
Learn more here.
Downtown Los Angeles
A major mixed-use development designed by Frank Gehry introduced housing across from the architect’s Walt Disney Concert Hall. But retail has been slow to follow.
Early in 2018, architect Frank Gehry unveiled his firm’s final design for a complex in downtown Los Angeles that, after nearly two decades of planning and financing delays, was finally — finally — on the verge of breaking ground. The plan for the Grand LA included a hotel, residential tower, movie theater, and a mix of dining and retail spaces, promising to bring life to a neighborhood that is largely institutional and replace a dire, open-air parking structure that had occupied the site for half a century.
But almost three years after the Grand LA opened to the public, in 2022, that “place” has yet to be fully realized. While some components have gotten off to a promising start, the development has struggled to draw permanent tenants to the most visible part of the complex: the more than 164,000 square feet of street-level commercial space.
The complex’s hotel, the Conrad, a high-end hotel by Hilton, has been successful, with an average occupancy rate of 69% (exceeding the national hotel occupancy rate of 63%, as measured by the data analytics firm CoStar). And the hotel’s restaurant, San Laurel, by award-winning Spanish chef José Andrés, draws a busy mix of tourists and locals. The residential tower, the Grand by Gehry — which includes 347 luxury rentals and 89 affordable units — is more than 95% leased.
To enliven the retail areas, the property has had to turn to temporary programming. In 2023, in an attempt to draw artsy visitors who arrive to visit The Broad museum and the Museum of Contemporary Art, Los Angeles (MOCA) down the block, the Grand LA staged a pair of art pop-ups. By early 2024, the pop-ups had disappeared, and the storefronts were once again empty. It seemed as if Los Angeles had replaced a dilapidated parking structure with a starchitect-designed dead mall.
That is changing — albeit slowly. New tenants have been announced for 2025, marking a strategic rethinking of what exactly the Grand LA will be and who it will serve. Later this year, a downtown outpost of Emmanuel Dossetti’s popular Santa Monica bistro, Massilia, is slated to open in a prominent street-level storefront on the northern end of the complex. Taking the space above them will be another restaurant by Andrés, a steakhouse concept called Bazaar Meat. In the works is a branch of Blk Dot Coffee.
New leases, however, represent only a fraction of the Grand LA’s commercial space. More than 60% of its retail spaces remain empty. Certainly, a significant portion of this has to do with external circumstances that are beyond the project's control. The Grand LA broke ground in 2019, but by the time it was completed in 2022, downtown Los Angeles had undergone significant changes due to the impact of COVID-19. Government workers in the nearby Civic Center have not yet fully returned to the office, and some essential functions have transitioned online, which has impacted area retail. In the fourth quarter of 2019, before the pandemic hit, the retail vacancy rate in downtown Los Angeles was 5.9%, according to one of the regular market reports published by the DTLA Alliance; by the last quarter of 2024, that rate had climbed to 8.9%.
Learn more here
