Mailbag, Part 2!
My answers to three excellent reader/listener questions
Q1 – “Peter: Why did the city of Minneapolis use stone imported from Europe rather than Kasota stone on the new public service center?”
You are not going to like this, but the short answer is “cost.” I asked one of the architects who led the project, and he told me this:
The design architects preferred Jura Limestone, which is warm without being yellow or orange and has more subtlety in variation and graining. By comparison, Kasota Limestone (aka Mankato Stone) seems plain and sometimes garish…especially when a very orange vein is used. It also has less surface interest (generally) when cut…like Indiana Limestone, which is valued for its uniformity and neutral color. He also added this opinion:
“Ironically—although in our backyard—the cost to quarry, cut, crate, and deliver Kasota Stone from about 80 miles away was greater than the cost to do the same plus travel time in a shipping container across the Atlantic from Jura, Germany, over 4500 miles away. That was all that was needed to make the decision. But the carbon cost of the extraordinary global travel distances is not reasonable, just because we can do it for less money. Sustainability is an imperative we have yet to take seriously, and I am more and more interested in the sense of place that can be contingent on sustainable practice.”
Q2 – “Peter, why does St. Paul have the Saint Paul Port Authority, which seems to do a lot, and Minneapolis has no port authority?”
I love this kind of question because I have an unhealthy obsession with special-purpose governments, public authorities, and even more specifically, port authorities, as evidenced by episode E26, What is a Public Authority: General-Purpose Government, Special-District Government, and Public Authorities. And I’m going to augment this question by bringing the Bloomington Port Authority into the mix, which I think will make the answer even more interesting.
Public Authorities: First, authorities are independent units of government that are led by appointed officials, that do not tax, and that have the power to hire staff, acquire property, enter into contracts, and issue debt to finance capital projects that can generate the revenue required to repay the debt. Cities use authorities to finance projects with a public purpose, using off-balance-sheet debt to skirt the city’s own debt limit. The state enabling legislation that creates authorities is typically brief—three or four sentences—which leaves lots of room for broad interpretation when it comes to purpose, mission, and allowable activities. This means that as times change, authorities are amazingly resilient at adapting to new circumstances – and continuing to wield their powers.
Port Authorities: Port authorities offer a great example of this adaptability. There used to be about 130 ports in the US, and then in the late 1950s, the shipping container was invented, making cargo handling easier, faster, and cheaper by replacing labor (longshoremen/stevedores) with capital (cranes). Container ports, however, required large, rectangular land areas, as compared to the old finger piers and warehouses on the urban waterfront. Cities that saw the future and had the land built new container ports, and today, about ten major container ports on the East, West, and Gulf coasts handle almost all of the shipping in the US. Further, since containers can be put on trains and trucks, shipping traffic evaporated from the other 120 or so ports in the country as shipping grew on both railroads and highways, as the rails-to-rubber movement boomed. But many port authorities remain in business, having transformed themselves into urban redevelopment agencies, remaining ports “in name only.” The Saint Paul Port Authority (SPPA) is a great example, for while it still operates four marine terminals and makes a few dollars from barging operations on the Mississippi River, its primary business is acquiring and cleaning up brownfield sites and developing light industrial assembly and warehouse buildings that they lease to companies that, in turn, create workforce jobs. The banner on the SPPAs’ website says it all: “From Brownfields to Industrial Centers: Light Industry Jobs, Poverty Busters.”
Minneapolis never had an independent port authority like Saint Paul’s, but instead, it had the independent Minneapolis Community Development Authority, or MCDA, which served many of the same purposes. In 2003, the MCDA was merged into the City government and became a part of what is now known as the Community Planning and Economic Development department, or CPED. The MCDA’s powers, including conduit financing to developers, are still used, and CPED staff run the programs, which are primarily focused on affordable housing, small business grants, and neighborhood “Great Streets” revitalization. Although it is less independent now, CPED performs a function similar to that of the SPPA in Saint Paul, just in different program areas, with the powers of the MCDA, but working from behind the scenes.
Operating and Conduit Authorities: Let me make one last but important distinction. There are two basic types of authorities: “operating” and “conduit.” The first type, operating, runs a big operation—it has staff, payroll, facilities, infrastructure, and it issues debt (borrows money) to pay for capital improvements and projects, like the SPPA. The second type—conduit—exists only to issue tax-exempt debt to support private-sector development initiatives. This is where the Bloomington Port Authority comes in. The BPA is a department within the city, and it exists for one primary purpose: to promote development in the South Loop District, the area where the Mall of America is located. It does so by issuing TIF bonds, the proceeds of which are used to make public improvements—roads, transit, and parking facilities, and other infrastructure—in support of private development projects. The city then collects taxes, a share or ‘increment” of which is used to make the regular bond payments. In 1992, the BPA issued $186M in TIF bonds in support of the construction of the $650M total project cost of Phase I of the Mall, another $34M in 2015 for Phase II ($325M TPC), and it is expected to issue $160M more in 2026 in support of the “Mystery Cove” indoor waterpark currently being developed by the mall’s owners ($432M TPC). Meanwhile, the BPA and the city do not own or operate much of anything in terms of facilities or infrastructure, and have a small administrative staff. They operate as a pass-through, which is why they are called a conduit authority. Here is one way to think about it: Years ago, when I was working in Philadelphia city government, I was trying to figure out what the Philadelphia Authority for Industrial Development (PAID) was (other than an issuer of massive amounts of tax-exempt debt). After a circular conversation with a guy at an agency called the Philadelphia Industrial Development Corporation (PIDC, it’s different), who explained to me that PAID was run under contract by PIDC, he became exasperated and said, “Look, Peter, PAID is just a letter that lives in the desk drawer of the Executive Director of PIDC.”
Q3 – Peter, In American real estate, there is a frightening black swan event unfolding in slow motion - office buildings across the country are now worth about 1/2 of what they were 10 years ago. How do you see this situation unfolding? For cities, bankers, investors, tenants?
Thanks for this excellent question, about which I have strong, if not necessarily correct opinions! My views on this are driven by my own experience as a young architect during the spec office boom of the 1980s, which I discuss in episode E43, Boom and Bust: A Career, As Viewed Through Three Market Cycles. Here is what I think is going to happen - and some of it has already:
Generally, Work from home is here to stay, even if it is moderated a bit by some return-to-office policies. The benefits of technology and flexibility will be too hard to overcome, so there is no going back to Monday-Friday, 9-5 offices and 2019 levels of occupancy. Since we already had surplus office space back then, that surplus has only grown from what is called “cyclical vacancy” (for example, 10%-20%, averaging around 15% over a market cycle) to “structural vacancy” (like 30%, 50%, 70%, and 90%), which means a lot of vacant space on top of typical cyclical vacancy. In other words, there will be few good reasons to build a new office building anywhere for a long time, and many existing office buildings will take a long time to fill back up, get converted to housing or other uses, or be demolished to make way for new development.
Investors: Many of the investors who own office buildings are going to lose their equity, and some already have. They will sell their buildings at greatly reduced prices—if they can work things out with the bank—and be glad to be rid of property that cannot generate enough income to pay the mortgage and cover other liabilities.
Tenants: Tenants will have the pick of location, building quality, and space. Most will downsize to smaller spaces in higher-quality buildings that are centrally located near transit and amenities. The use of space will shift towards relatively larger and fancier front office areas and smaller shared work areas for the staff who do come in some of the time, using shared or very small workstations.
Bankers: Banks are at risk of not being able to recover their depositors’ funds, which are guaranteed by the federal government. (See Boom and Bust, E43) We can only hope for a long game of “extend and pretend,” and that when loans come due (many commercial office loans have a ten-year term, based on a 30-year amortization), banks work with owners, rather than allowing them to default. Banks do not want to take back or foreclose on buildings because they are not in the real estate business, so they have an incentive to work with the owners. Let’s hope to avoid a full-blown crisis similar to what occurred in 1989-91 and 2007-09. So far, so good, but who knows?
Cities: Cities and states will have to find new ways to support and even subsidize the conversion of office buildings to housing, from code changes (windowless bedrooms, anyone?) to flexibility in permitting and the fast-tracking of other processes to reduce cost and time to market. We have two supply-demand problems in the US: an excess supply of office space and a high demand for housing, particularly of affordable housing, due to an extreme shortage. As one developer I know would say, “Gee, I think I see an opportunity here.” The challenge will be matching any new uses to a broad array of building types in terms of age, architectural style, floorplate size, and general convertibility, and some buildings may languish and ultimately be demolished for land value and new development. Either way, the era of the concentrated Central Business District (CBD) has come to an end, and the future for downtowns is as sustainable, 24/7, mixed-use urban neighborhoods, with office, retail, services (doggy day care), hospitality, arts & culture, and sports facilities; all types of housing, both rental and ownership, from low-to-high income and supportive to senior living; healthcare, including hospitals, clinics, outpatient procedure centers, and pharmacies; and educational facilities from daycare to K-12 and even higher ed campuses. I think our cities will be stronger in the end, but I think it’s going to be a decades-long, bumpy ride.
Challenge Question
One reflective urbanist and old friend who has just retired had a question for me that he thought might be interesting for readers/listeners, so here it is:
Looking back on your career (from any point -early, mid, late, post…), how do you feel about it all? What were your big decisions and choices? How have things worked out? Do you have any regrets?”
When I asked my friend what his own answer to the question was, he said,
“I decided that I wanted to focus on senior living rather than rising up in a big firm. I don’t regret not chasing the money, and I did what made me feel good about myself.”
How about you? What have been your big decisions and choices? How have things worked out for you? Do you have any regrets? Send me your answers, and maybe this will be a subject for a future episode!
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