More on "University Village" project

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My post expressing skepticism at the 26-story, 1,700 resident University Village proposal for Ann Arbor's South University corridor has gotten a decent number of hits from this thread in the UrbanPlanet.org forums. One pseudonymous commenter completely misses my point:

So the person's objections about this project has to do with the large number of housing units it will provide in a soft housing market? From what I know even in a housing market like this there is still high demand for units near college campuses. If the developers didn't believe they could fill these buildings they wouldn't propose something at such a scale.

First of all, my objection to the project is not particularly an objection, nor is it specific to this project. What I'm concerned about is the general trend of a large quantity of campus-oriented housing being built all at once - along with a large quantity of general housing being built downtown at the same time . . . all in the worst housing market in 25 years. This particular project is 50% bigger than Bursley, UMich's largest on-campus dorm, and this is on top of the 3 other student-oriented projects underway. Even setting aside the large number of rental units already sitting vacant around town.

The problem, to repeat myself, is that the current glut of development underway in downtown Ann Arbor is probably too much new capacity all at once. Projects are going to fail. Some before they are built, and some after they are built, and the no-growthers in town are going to hold up the failures as evidence that new development in Ann Arbor is unwise, and use them as leverage for blocking future projects. The problem is that Ann Arbor's recent history of downtown development has happened in surges, rather than gradually over time, and public policy has accentuated the surges by damping gradual, incremental development, leading to pent up demand. The problem is that the current surge, when it shakes out and projects fail, will only serve to feed a future surge.

This piece of the response is partially true, but not enough so to be a rebuttal of my point: "If the developers didn't believe they could fill these buildings they wouldn't propose something at such a scale." Yes, true. The developers (and, even more importantly, their bankers) have to to believe that it's possible to fill this development. And they may be right. But real estate development is an inherently risky investment - developers, after all, typically look for a 20% return on investment, based on the natural risk involved, while 10% is typically thought of as a "good" investment, and anything better than 5% or 6% is decent. The mere fact that a developer believes a project is worth trying is not evidence that the project is a guaranteed success, or that the demand definitely exists.

I referred in my earlier post to "the blind pipeline". Sure, at the time a developer starts looking at a project, there's demand in the marketplace. How about three months later, when they've negotiated purchase options? How about three months after that, when they've got site plans, architectural, and engineering plans ready to go? How about three months after that, when they get city approval for the project? (Yes, that's awfully optimistic for Ann Arbor.) How many other projects have gone through those same steps, referencing the same observed market demand? The first two steps of that process are "blind", in that, until your competitors have submitted plans for public review, you don't know who else is competing for your market share. And, even if you know what else has been proposed, it becomes a game of capitalist chicken - can you bring your product to market first? Will your product appeal to a market niche that theirs doesn't? Will your product provide better value? If you believe the answer to those questions is "yes", you'll move forward - and maybe they will too. If the market demand can support 100 new housing units, and 10 developers each respond to this demand simultaneously, that looks like 900 units of oversupply to me - not, "well, the developers know best, or they wouldn't do it!"

In the particular case of University Village, I'm not sure there's a huge amount of danger. By the time the project is approved, the developers won't have to wait long before the two North Quads are finished and occupied, at which point they'll be able to see how well this "newdorm" product does in the market, and how much demand they think is left, before actually pulling the trigger and starting the project. Of course, in the meantime, the businesses whose spaces have been optioned have already been looking for other homes, and may move out before the developers decide that it won't work, leaving a space that neither hosts a new development nor the vital business that was already there.

And this, pseudonymous boys and girls of UrbanPlanet.org, is what I object to: Ann Arbor's policy of stockpiling demand for 20 years, to the point where this kind of cataclysmic development (in the sense of Jane Jacobs' "cataclysmic money") busts out all at once all over town, leading to projects not getting built while also displacing businesses anyways, stoking the fires of no-growth opposition and causing the cycle to repeat itself.

All I want is a policy that allows nice, straightforward, gradual change. Is that too much to ask?

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The commenter is obviously

The commenter is obviously clueless. Oversupply and undersupply have characterized housing markets for a century in the US, even when there wasn't a bubble per se. People who study dynamic systems will tell you that any system in which there is a time lag between actions (like noticing demand for housing) and feedback (like opening new housing) is susceptible to oscillation. The longer the lag, the greater the susceptibility.

Inertia

More than just playing real-estate chicken, I think there's an issue of inertia. Market research->Propose Project->Get Investors->Initial Design->City Approval. That's not just a major financial commitment. It's a huge _psychological_ commitment and no one is stepping back and saying "maybe we should reevaluate the market..look at all these other projects".

My guess is that a lot of developers still haven't come around to the idea that things aren't getting better anytime soon. Five years ago, the most bull-headed developers were the ones raking in the cash and that's still the mentality. Evolution hasn't weeded out the losers yet. They're telling themselves that "well, we saw we'd get that 15-20% ROI on this, and things have slowed down X amount, so we should still be OK" rather than looking at this with a modicum of common sense.

I know I wouldn't build here right now. I see a huge difference even in how my little $600/mo efficiency w/in walking distance of downtown is renting out. Last year, it went in 2 days. We had at least 10 people call. They were about 40/60 students to working people. This year, same apartment, it's been listed for 1.5 months, for $550 rather than $600, and we've had 7 or 8 calls in all that time. All of them students. Seems like non-students are finding ample cheap housing now, while they weren't a year ago. That's giving the students a lot more to choose from. Or maybe I need a bigger sample size.

Psychological

Yes, I certainly think the psychological side of things helps projects that don't make sense get built. Like my neighbors, who prepared to sell their house to move across state for a job, then didn't take the job - but put their house up for sale anyways, "because we'd gotten so used to the idea".

Besides, there are the occasional reports that the rental market is doing better than in the past - because foreclosures, etc, are pushing people out of the ownership market. Is that a trend I'd want to hang a major rental housing development project on? Not at all. (But then, I'm not a developer, and maybe this is why.)

Student housing "recession-proof"

The Ann Arbor News today responds to my concerns, in the article, Builders make a bet on UM students, saying, "area developers say the college student housing market in a city like Ann Arbor is close to being recession-proof."

They cite 5 private student-oriented developments with a capacity of 3,830 residents, in addition to the U's new North Quad, with 460, while U enrollment has gone up 2,011 in 4 years. So that's 8+ years of new capacity coming online in the next two. The developers say they're not planning for enrollment increases so much as providing a better product that will lure students in. Right. Because, in this economy, college students really want to pay for individual bathrooms and granite countertops.