3 reasons why mixed-use projects in Jacksonville struggle to attract equity

[thelakelander]

We should realize that people can invest their money anywhere. A quote from the linked article:

"One said, 'I'd rather be the 10th deal in some submarket in Austin, Texas, than the only deal in Downtown Jacksonville.'

The fact that the developer of East San Marco finds it challenging to secure an equity partner for his project came as no surprise to Alex Coley, the principal of Hallmark Partners Inc., who faced similar headwinds in finding an equity partner for 220 Riverside, the apartment-and-retail development under construction on Riverside Avenue.

The proposed East San Marco project at the corner of Hendricks Avenue and Atlantic Boulevard is slated to include apartments, a Publix Supermarkets Inc. grocery store and some small-shop retail space. The project's developer, John Carey, confirmed to the Business Journal he hasn't had as much interest from equity partners as he anticipated.

Here's why — no matter how sexy the project — securing equity is still a challenge for mixed-use, urban projects in Jacksonville.

http://www.bizjournals.com/jacksonville/news/2014/03/18/risky-business-3-reasons-why-mixed-use-real-estate.html

[John P]

Lakelander, what is going to change this problem. Having more succesful mixed use projects I guess? Like a chicken or egg situation?

[thelakelander]

We're where places like Nashville and Charlotte were at 20 years ago.  That's how far we've fallen behind some of our sunbelt peers on accommodating the changing marketplace.

Having more mixed use projects in general, will help for starters. Right now, our zoning code is one that allows a strip mall to virtually get approved overnight, while it takes an act of Congress to get similar mixed use projects through.  From a public policy standpoint, we can modify policy and invest in infrastructure that encourages more mixed-use, both small and large.  Yet, this means not finding ways to weaken initiatives like the mobility plan and fee that help drive us in that direction. Nevertheless, at the end of the day, it's a copy cat world so we'll need a number of successful projects.  The 200 Riversides, East San Marcos and Brooklyn Riversides of today, will help that cause in the long run.

[simms3]

Some snippets that fall in line with what I've been saying all along:

"Every single one of them said, 'What a cool project, there's great market dynamics, it's a great spot. But I'm just not going to be able to sell Jacksonville to my board,'" Coley said.

Coley was able to convince Nashville-based MAA, a publicly traded apartment real estate investment trust, to look at his project in that light in part through a Jacksonville connection: The REIT's chief operating officer, Tom Grimes, is a Jacksonville native.
"Tom Grimes enabled us to find a partner there that could see the vision and believe in it," Coley said.

Where are the local developers and local backers?  Nashville and Charlotte have much deeper pools of experienced local developers changing the face of their own hometowns using equity from real estate investors that they know from their local golfclub or in local business.  This is simply not so much the case here in Jax.  I have called them "hometown heroes" in the past.

"Every single one of them said, 'What a cool project, there's great market dynamics, it's a great spot. But I'm just not going to be able to sell Jacksonville to my board,'" Coley said. "One said, 'I'd rather be the 10th deal in some submarket in Austin, Texas, than the only deal in Downtown Jacksonville.'

...

If East San Marco and 220 Riverside are successful — meaning they lease up and their investors make money — the situation should be easier for the next project down the line, since equity investors will be enticed to bet on similar projects.

I believe I'm on record stating that I didn't think that multifamily deal next to 220 Riverside would even get off the ground until 220 Riverside leased up, based on this experience.  None of this is shocking or new.  Going back to the idea of "boards" or "investment committees", which are present with any PE/hedge fund/publicly traded real estate investor with size and experience, I don't run into any folks in such firms, whether on the professional side (acquisitions guys, asset management guys, fund management guys) or the c-level side (often the guys that comprise an IC) that are from Jacksonville.  The city is literally not on the map.  It will take the city making waves economically somehow for it to get on people's real estate radars (something Austin has done with its very large tech presence and subsequent tech boom).

[thelakelander]

^Brooklyn Riverside (next door to 220 Riverside) broke ground about 2 months ago. However, one can probably argue that it's not mixed-use in the same sense that 220 is. The few blocks closer to Park Street are strictly residential, while the commercial component (Shoppes on Riverside) is a typical strip mall that just happens to be located next door. Both also are being built be separate groups.

[simms3]

I guess they have started...



I agree it's not mixed-use, but what's said in this Bizjournal article doesn't only apply to "mixed-use" projects.  Urban core projects in general, hence the quote about preferring to be the 10th guy in line in an Austin submarket than the first or second guy in Jacksonville.

[IrvAdams]

OK, so we've established we are quite a bit behind in this competition. How do we start making up the gap? Advertisement? Streamlining the process? Financial and tax incentives? All of these?

[tufsu1]

I agree it's not mixed-use, but what's said in this Bizjournal article doesn't only apply to "mixed-use" projects.  Urban core projects in general, hence the quote about preferring to be the 10th guy in line in an Austin submarket than the first or second guy in Jacksonville.

the quote was 10th deal in an Austin submarket than the only deal in downtown Jacksonville.  I think the key for the San Marco project is making clear that it isn't in downtown.

[simms3]

The only submarket where investors are lining up is the SS, and for multifamily.

If we are talking "infill" (whether that be type III construction of multifamily such as 220 Riverside, or a brick and timber office/retail development or a high rise), then for all intents and purposes San Marco will always be "downtown" Jax.  Jacksonville has very limited land for infill, all basically within a mile of what we call downtown, so by default to the outside world it is all a part of the very small "downtown" Jax submarket.

There's less chance to categorize small submarkets and talk about real "high street" opportunities in small small markets such as Jax.  San Marco is basically like Brooklyn is basically like Northbank/Southbank in the eyes of developers.  No one area is a "star" until there is a deep pool of deals and a lot happening in one particular area.

[spuwho]

The only submarket where investors are lining up is the SS, and for multifamily.

If we are talking "infill" (whether that be type III construction of multifamily such as 220 Riverside, or a brick and timber office/retail development or a high rise), then for all intents and purposes San Marco will always be "downtown" Jax.  Jacksonville has very limited land for infill, all basically within a mile of what we call downtown, so by default to the outside world it is all a part of the very small "downtown" Jax submarket.

There's less chance to categorize small submarkets and talk about real "high street" opportunities in small small markets such as Jax.  San Marco is basically like Brooklyn is basically like Northbank/Southbank in the eyes of developers.  No one area is a "star" until there is a deep pool of deals and a lot happening in one particular area.

Hedge Funds/REITs etc. are risk adverse. Why would they take a risk on being first in Jacksonville, when the return is almost as good in the 10th spot in Austin. Some people who know the area will take the risks because they know what they are working with. But with no comps for the Argus nerds to calculate, like Simms says, we are an relatively unknown pimple on the butt of the world.

[thelakelander]

Stuff like this is why some see it better to be the 10th project in a place like Austin instead of the guinea pig in DT Jax.  It's a challenge we'll have to overcome.

Owner of 11E and The Carling wants another deferral of payments on city loans

The owner of two prominent Downtown residential towers is seeking relief on more than $33 million in loans it owes the city, less than a year after similar help expired.
The Vestcor Cos. is asking to pay only interest on loans for The Carling, and interest and half the principal of what it owes for 11E. Both adjustments would be for three years and are supported by Downtown Investment Authority CEO Aundra Wallace.

Vestcor CEO John Rood said Thursday morning the principal deferments would allow the company to build its reserves to invest back into the residential and commercial spaces.

The deferments coupled with the strengthening economy and an anticipated 3 percent rise in rental income would allow Vestcor to return to making normal payments.

Rood said the company has invested more than $5 million in the properties.

"We are not asking for money," he said. "We are not asking for a handout."

Meanwhile, the city has been subsidizing the loans with taxpayer dollars, including a combined $3.4 million in the current fiscal year.

The Downtown Investment Authority will weigh in on the issue Friday with a resolution that cites a "depressed real estate" market as a reason for the need. Wallace has been individually meeting with some board members the past couple of days to explain the situation.

Both buildings have occupancy rates above 90 percent, according to a memo Wallace sent to board members. But the lack of commercial tenants in the mixed-use buildings combined with the diminished price-per-square- foot rent doesn't allow Vestcor to cover its obligation.

full article: http://www.jaxdailyrecord.com/showstory.php?Story_id=542507

[fsquid]

the low rents per square foot is what Simms has been saying for 4 years.

[simms3]

Stuff like this is why some see it better to be the 10th project in a place like Austin instead of the guinea pig in DT Jax.  It's a challenge we'll have to overcome.

I do think that projects like 11 East and the Carling fall in a different bucket than the Strand (which was just bought by Crescent Heights) or 220 Riverside (being funded by a public REIT) and most renters in Jax who would consider living in one of these communities probably wouldn't consider an older building (and the renter pool for a flashy new apartment is undoubtedly much higher than the pool for a cool old loft downtown).  In that sense, I think that issues belying historic preservations, including but not limited to low rents psf, are driven by forces that don't necessarily impact new developments around town.

Most developers/investors around the country aren't interested in doing or buying historic buildings in little Sunbelt cities.  So assuming that a few more 220 Riversides happen over time and are successful, it would conceivably be easy for investors to separate problems dogging 11 East from successes/issues that affect the new developments.

And because 220 Riverside does little to help the "core"/downtown as we consider it, and is really not much different in effect, scale, appearance, or function than a wrapped resi project on the SS, I think the city needs to step up and continue to "extend" Vestcor's loans and make it clear that they will be a good partner for other repositioning/adaptive reuse projects in the immediate downtown core.

[simms3]

the low rents per square foot is what Simms has been saying for 4 years.

I think it's all relative to product and market.  Crescent Heights just bought the Strand, which indicates to me that they see a strong return there and rent growth.  Really rent growth is more important than bottom line rents, however, I don't see how in-place rents justify high rise construction (which is different from Crescent picking up Strand at a low $180K/door basis).  I don't think Crescent would necessarily build a new high rise, for instance, because rents aren't there to justify the cost to deliver that kind of product.  Obviously, given low land costs in the market and low costs of construction, rents are here to justify the mostly wood frame/tilt-wall garage wrapped product, but nobody knows how deep the market for these "top of the market" rents is.

I think the big worry with the historic stuff is the low rents, the uncertainties with city preservation funding, national uncertainties with historic tax credits (new issue), and the clearly small pool of renters in Jax who want this product (hence the lack of rent growth characteristic of other product/submarkets around town and trends happening nationally).

What is Vestcor's exit?  They're going to continue to beg the city for loan mods, they're going to continue to suffer commercial vacancy since there is nothing going on downtown that would provide a demand for a tenant (if only there were more Strands and 11 Easts in concentration on the Northbank, as well as more office workers), and they're going to continue to float at stabilized occupancy with very little rent growth.  That's not a story that allows them to sell, and nobody no matter how long the funding mechanism's horizon allows for can underwrite a deal without an exit.  So that's why nothing else will get done on the historic front for a while...   

[tufsu1]

I would also submit that the rental rates at the Carling & 11E are sufficiently high enough.  The problem has been the inability to lease (and generate income) on any of the retail/office spaces in either building.

That said, there is traction on retail/restaurant openings in the area...including one in 11E.