De-Development Nightmare Haunts CA Biz
By WAYNE LUSVARDI
As Halloween approaches, de-development haunts California:
* In the city of Tulare, the city council is not just shelving the downtown master plan for the future. It is officially rescinding it.
* In Pasadena’s downtown Paseo Colorado Mall, anchor tenants are rumored to not be renewing leases after only 10 years of redevelopment, inclusionary housing and “smart growth.”
* In the city of Ventura, a world-famous photographer and merchants are up in arms about the imposition of downtown parking meters that may be diverting shoppers to the Internet and businesses into the black-market economy.
Across California, redevelopment has turned into a horror story — and is being replaced by “de-development.” Although cities still fall back on the redevelopment model, albeit now without tax-increment financing and revenue bonds, it is de-development that may rescue small businesses while depriving revenue-hungry cities of taxes.
Much of the problem is that cities never planned for de-development. They never thought of unplanned obsolescence. And they have few ways to regulate a black-market economy driven underground by burdensome taxes, fees and regulations in a down economy.
Without a government-manufactured Real Estate Bubble, it appears that redevelopment and “Smart Growth” don’t work.
Don’t be surprised if, in a deflating economy, de-development might reduce a community’s addiction to luxury public goods and services. The recession has already forced Gov. Jerry Brown to halt redevelopment statewide, including the taking by eminent domain of Mom and Pop businesses that an economic recovery depends on.
In the city of Tulare, the city council voted to rescind land-use plans for the Pine Avenue Corridor. Those plans called for the development of office and residential space with an “early California” style. But, as cities are finding in California, absent the Real Estate Bubble, there is no demand for such development.
Tulare also is deferring plans for developing the Santa Fe Trail pathway as now economically infeasible.
The inflated retail and apartment rents and condo sales prices previously generated by the Real Estate Bubble are gone. So redevelopment — and inclusionary housing policies for such developments — no longer pencil out.
The Tulare County Redevelopment Agency has an “inclusionary housing” requirement that the city of Tulare would likely have had to comply with had it continued with its plans to develop the Pine Avenue Corridor and the Santa Fe Trail pathway.
A not-well-advertised aspect of inclusionary housing programs is that they artificially inflate apartment rents or condo sales prices. Inclusionary housing typically works by mandating that one unit out of every five units in new construction housing projects must be dedicated for “low and moderate income” occupants. The way each inclusionary unit is financed is to impose a 25 percent premium on the four other market-rate units.
This premium often does not retard apartment leasing or condo sales when there is an up market from an economic bubble.
But in a down market, such as we are currently experiencing, there is thin-to-no-demand for above-market rate housing and prices. So rents and condo prices drop about 45 percent. Which is much more than the 20 percent drop in older apartment and condo units.
Moreover, new lending rules make it tougher to puff up appraisals to cover the premium in inclusionary housing developments. Inclusionary housing is structured in such a fashion that it institutionalizes the rigging of appraisals at over-market prices. And you thought that greedy bankers, not government, created the Mortgage Meltdown? Think again.
Pasadena’s Redevelopment Lite and De-industrialization
Many people who watch the New Year’s Day Rose Parade on television may recall that it proceeds down Colorado Boulevard in Pasadena. Not usually shown on the cameras is the 10-year-old Paseo Colorado Mall a few blocks away. It is an outdoor mixed-use mall with retail space on the first and second floors, a theater, a grocery store and 400 loft-style apartment homes stacked above the mall. It is located across from the Pasadena Civic Auditorium and the newly expanded Convention Center. Major retail anchor stores include Macy’s and an upscale Gelson’s Market geared to high-end shoppers. The Mall and Convention Center are part of the downtown redevelopment project area.
The Paseo was originally built as in indoor mall in the 1980’s. But in 2001 it was converted into an outdoor mixed retail-residential use mall in an attempt to create an “urban village” following the architectural trend of Smart Growth championed by Pasadena architect Stefanos Polyzoides. If there was an ideological “Mecca” for smart-growth, it was Pasadena.
On October 2 it was reported that the Pasadena Paseo Mall is anticipating some lease non-renewals by major retail anchor stores and plans to replace them with a new hotel and higher-end retail tenants. Although not mentioned, it was rumored that Gelson’s Market — which has a $1 per year lease — and Macy’s may be leaving the Paseo. Macy’s already has another store in Pasadena.
In other words, there no longer is any economic feasibility for building residential apartments or condos with redevelopment subsidies or inclusionary housing shakedowns from renters and buyers in Smart Growth projects. A block away from the Paseo is the Terra Bella condominium project of 28 luxury condos starting at $895,000, which appears not to have had a buyer yet. Terra Bella is a dinosaur of the Real Estate Bubble.
Former apartment dwellers in the Paseo have told this writer that they now live nearby in older apartment housing for about half the rent. And several former small retail tenants of the mall have conspicuously found new space in older buildings nearby with more affordable rents. Redevelopment has priced many apartment dwellers and retailers out of the inflated rents in the mall.
Also a block away is empty ground-floor retail space with vacant condos built about three years ago. The empty retail space once housed the Salt Shaker restaurant, a local family-owned eatery that provided modestly priced food to just about every social class level of Pasadena. What Pasadena obviously needs during the Recession is another restaurant like Shaker’s — instead of more upscale restaurants, trendy bakeries and empty retail space.
But redevelopment and Smart Growth policies have driven all that away from downtown.
About two years ago, the city loaned funds to a non-profit agency for a land-purchase loan for a restaurant business incubator. The deal has been highly heralded in public relations puff pieces in the local newspapers. But there never has been any mention of the project starting any viable restaurants — except perhaps for mobile “roach coach” diners. Meanwhile restaurants continue to fold in Pasadena.
Inclusionary Housing — Exclusionary Industrialization
Long ago, redevelopment inadvertently drove hard industries out of Pasadena because retail land uses generate more taxes. In recent years the value of the U.S. dollar had dropped to the point that industry might be attracted to return from China or Mexico, or even other states. But cities like Pasadena have zoned out industrial uses in favor of upscale retail and inflated apartments and condos on pricey commercial land — all under the ideology of redevelopment and Smart Growth.
Pasadena needs a re-industrialization policy. But this would mean industry built on available land — an ideological shift that the city’s elites are not prepared to consider. In the cocoon-like worldview of redevelopment, it is believed that no significant retail development, affordable housing or industrial growth can occur without redevelopment. Government affordable housing only reflects about 5 percent of the affordable housing stock in Pasadena.
Pasadena has had a lot of streets re-paved with federal stimulus monies that mainly went to unions. But it conspicuously has several closed auto dealerships along its famed Rose Parade route.
Feel Good Bag Ban Will Drive Business Elsewhere
Large retailers and the Pasadena Chamber of Commerce have not resisted a proposed ban on the use of plastic bags by retailers because unions control the city council and even the Chamber of Commerce. In the old days, Pasadena merchants would have been able exert their power to get their city council to resist such silly ordinances as a ban on plastic bags and a 10 cent tax on paper bags. But with the unions controlling both local government and the business associations in Pasadena, there is no use fighting such laws. Feel-good green policies drive people to shop in other cities — or on the Internet.
Instead of more upscale hotels, luxury retail stores and eateries, what Pasadena needs is de-development: a return to the family owned small businesses that serve the bulk of the community.
What small business needs is not redevelopment but obsolescence — old buildings in good locations that have affordable rents. But redevelopment has pushed much of that out of existence in the best downtown locations. Most of the big retail discount stores — such as Home Depot, Costco, Walmart and Super King — are located in nearby cities, not Pasadena. So many Pasadenans shop there instead.
While Tulare has chosen to roll back its over-ambitious redevelopment plans, Pasadena continues with “redevelopment lite,” hoping that the feel-good banning of plastic bags and taxing paper bag use somehow will be less wasteful — no matter if customers are driven to the Internet or discount stores in other cities to escape the hassle tax.
Ventura Parking Meters Resisted
In the city of Ventura on the coast of California, David Pu’u, a world famous photographer, is leading the resistance against the city’s newly installed parking meters in its downtown district. Pu’u gave the city $10,000 worth of images of the Ventura beach, ocean and historical downtown to put on city marquees and billboards to promote the city. Now those images have been replaced with signs informing citizens that parking meters are installed along commercial zoned streets.
Pu’u has put a bunch of photos of the marquees with retail buildings in the background with real estate signs saying “vacancy” to make his case that imposing parking meters isn’t helping struggling downtown merchants.
Driving Businesses Underground
In a trend surely to come to a place like Ventura, small business is being driven underground. It’s happening to those who provide services — such as auto repair, massage therapists, exercise trainers, hair stylists and others. They are giving up the high-rent, city-inflated utility costs and business taxes and opting to “go mobile” and deliver their services to the home of the customer.
It’s happening in other states, too. In Broward County, Florida this trend is apparently growing. As more businesses go underground, those who stick with the bricks-and-mortars model of business will bear more of an increasing share of taxes and permit fees. Sales taxes will be subverted as well.
Underground merchants take real estate, permit fees, high green municipal utility costs, high occupational safety regulatory costs, onerous inspections, bans on plastic shopping bags, and the hassle of parking meters out of their business plan altogether.
Cities that have extensive redevelopment plan areas have inflated the price and hassle of downtown small retail businesses to the point that customers are driven to shop at large discount stores outside the city or on the Internet. In some cases, small businesses may already have been driven into the underground economy. But so much of the immigrant communities have been allowed to have cash economies, and so many lower-income workers do not pay income taxes, how is government going to enforce taxation on underground businesses?
Rise of De-Development
Urbanologist Joel Kotkin has written about “the demise of luxury cities.” In California this means the decline of luxury redevelopment that has inflated the price of property rents and business overhead costs.
Businesses are now looking to move out of malls and find older, affordable building space on corner locations wherever possible. Upscale apartment renters are fleeing overpriced luxury downtown housing for nearby older, affordable living space.
Cities that resisted redevelopment may have avoided diverting property taxes from their schools. Ironically, they may have older building stock to retain small businesses with modest rents that can provide affordable goods and services to their community without having to go underground.
In a Bubble Economy, new and luxurious is good. In a Troubled Economy, old and obsolescent is good if it is available and hasn’t been bulldozed, regulated out of existence or driven underground.
May 23, 2013