Will CodeNEXT Spur Redevelopment in Austin?

Today’s blog post is Will CodeNext Spur Redevelopment in Austin guest post is by Leigh Budlong, founder of Zonability. You can connect with her on LinkedIn or email her at [email protected]

Austin continues to be one of the leading US real estate markets, as evidenced by its Top 5 ranking in the PWC Emerging Trends in Real Estate 2018 report.  New mid-rise buildings are popping up where there was just a small building, roads are under construction throughout the city and the downtown skyline is on the rise.

Proposed “CodeNEXT” changes, the name the city has given its re-writing of the zoning for the City, are in a hot debate with the second draft currently in review. Given Austin’s popularity with new companies, residents, and real estate development, is CodeNEXT going to be the catalyst for even more change? This piece strives to put the proposed CodeNEXT in context by analyzing an area I dubbed “The Triangle” (for its shape).

Real estate investment and development basics pertaining to this analysis:

  • Real estate and real property reflect the existing structures, land, and contracts associated with the parcel. While real estate is “immovable” is it “re-doable.”
  • A parcel is an identifiable piece of land – with or without improvements – that can be bought and sold with title assurances. The assurance part of the equation is essential to understand when thinking about investing and developing.
  • Restrictions can be public or private and are “invisible” except on paper. Private restrictions include deed restrictions. A prime example of a public restriction is city zoning.
  • Zoning is an ordinance set by a specific city. The general intention behind zoning is to create rules that enhance public safety, quality of life, and property values.
  • A district is an area defined by either a government agency or quasi-government agency that grants them authority. The reason this is key for real estate investment and development is a property can be subject to multiple districts.
  • A zoning district can be expressed as having “base” or “primary” controls and also be subject to “overlay” or “secondary” zoning controls. In Austin, the average parcel has 3.5 layers of zoning districts. CodeNEXT is attempting to reduce the number but there will still be some overlay zoning.
  • Property rights are given to the parcel – the dirt – through zoning whether that is public, private or both. There are instances where an existing structure is less valuable than the dirt; this is an economic concept about what contributes to value.

The Triangle: A Use Case

This interesting shaped block has frontage on Burnet Road, an area with plenty of marketed “redevelopment opportunities.” The question is will CodeNEXT make it a truly “hot” area to focus on for development like when the City of Austin rezoned Rainey Street from residential to central business district (CBD) zoning?

 

 

 

 

 

 

Here are some images, courtesy of Google Street.

I also added notes on a zonability map which uses “blue” to show commercial zoning.

The Triangle and CodeNEXT

Under the proposed September draft (of CodeNEXT), all of the parcels in the Triangle would have a single district called Main Street 3A, or MS3A for short. Zoning is known for its vibrant use of letter/numbers! The glaring differences between current and proposed zoning:

More height allowed under the new plan – 3 stories now vs. 5 stories
Larger buildings allowed under the new plan – greater land coverage ratios

By my rough estimate, the current structures are less than 20% of the size compared to what could be there under CodeNEXT.

So will the boost in potential be the catalyst to spur redevelopment? While “up zoning” may create the economies of scale needed for a mid-rise to pencil out, there are still other considerations in the game of real estate. This is a short list (certainly not exhaustive) of such aspects to consider:

  • For starters, how do the existing rents compare to rents for new construction?
  • Is it better to “add-on” or “tear down?”
  • What are current and projected construction costs?
  • How great is demand for new construction in the immediate area?
  • What is the supply of new construction coming on line in the immediate area?
  • Would there be a premium to buy out any existing leases?

The Triangle location is a mix of Community and Neighborhood Centers given the high volume of traffic on Burnett Road relative to Hancock Drive.

Austin, TX 2017 Retail Annual Report

Element Community Retail Neighborhood Retail
Rents $24.80 $21.00
Vacancy 5% 6%
Expenses Triple Net Triple Net
Going in Cap Rate 6.5% 6.5%
Direction – Year Over Year
Asking rent Up Up
Going in Cap Rates Down Down

“Despite a relatively tight market, developers are being very selective about new and speculative construction, and we expect this market to remain strong.”

– Integra Realty Resources – Austin

In Summary, the Triangle Analysis Reflects

  • CodeNEXT may create new opportunities for real estate development but whether or not it is a catalyst to spurn redevelopment is only one piece of the puzzle.
  • Individual considerations will impact the timing for when owners decide to sell or transform their properties.
  • Even if a property doesn’t get redeveloped, owners seeing redevelopment and thinking about their property’s position may spring for upgrades to their buildings out of concern of “not keeping up” or just to make their properties look better.

The upward direction of commercial rents and downward vacancy rates combined with Austin’s low unemployment and increased population have spurred new construction – without CodeNEXT. Once this major subject is finally settled, I suspect the decision to develop or not will be influenced by the real estate and business cycle. We may have to wait to see just how influential CodeNEXT is – or isn’t – on what gets built and where.