The Proposed Southpoint Development
The applicant, Collett and Associates,
seeks to develop a parcel on Iowa Street through an amendment to Horizon 2020,
annexation of land and rezoning of the land. The proposal, Southpoint, calls
for development of: About 460,000 square feet of retail in a first phase;
80,000 square feet for a 100-room hotel; and probably about 70,000 square of
additional square feet of retail in a second phase (14 parcels at 5,000 square
feet per parcel). The development will
contain a total of over 600,000 square feet of commercial space.
This project is large; when fully built it
will be the equivalent of 40 percent of our downtown. It will expand the supply of space on South
Iowa by about 30 percent. At this scale
it has the potential to have a significant negative impact on other retail
shopping districts in Lawrence, including the downtown.
Additional
Hotel Space:
The issue:
Can the community absorb additional hotel space without threatening
existing and future taxpayer investment in hotels?
The taxpayers of Lawrence are heavily invested
in hotels. The taxpayers invested about $11
million in the Oread Hotel. The
taxpayers are investing about $10 million in the 9th and New
Hampshire project with a significant portion of that amount serving the new hotel.
Lawrence has zoned multiple parcels for additional
hotel space. Hotel zoning was approved
in the North Mass development. Hotel
zoning was approved in the latest revision of the Bauer Farms development.
Lawrence is about to begin a process that
may lead to a new conference center.
This center will probably include additional hotel space, and this hotel
and conference center will probably include a significant taxpayer contribution.
The Southpoint proposal includes a hotel. The staff report is silent on the hotel issue. It is unknown whether or not the city can
absorb an additional hotel without threatening its already large investment in
hotels.
The City made the hotel investments without
careful study of the city’s capacity to absorb new hotel space. The City is about to embark on such a study
to guide it to a better decision on the conference center.
Zoning for additional hotel space may hurt
an already saturated market. Zoning for
additional hotel space may threaten existing taxpayer investment.
Recommendation on the hotel component: Do not approve additional hotel space until the
absorption study is complete and it is clear that additional hotel space will
not threaten existing, and possibly future, taxpayer investment.
Additional
Retail Space:
The Issue: Can the Lawrence retail market
absorb the proposed space without significant negative impact upon existing
retail districts?
The Economics of Retail Markets: In a well-balanced market, the supply should
grow in proportion with growth in demand.
The economics of retail real estate are
well established. Demand for retail
space is what determines the value of retail space, the number of jobs it will
produce and the sales tax revenues that it will generate. The supply of retail space does not drive
these outcomes. There are many false beliefs that building real estate grows
the economy. It does not. Growth in the economy is a function of growth
in the aggregate income of the households within the community because income
sets the amount of spending that a market will experience. More stores do not create more spending;
rather, only more income to the households in the community can drive growth in
the economy. As a result, more stores do
not create more spending, more sales taxes, more retail jobs or more value of
all retail buildings. If too many stores
are added to a market, the stores vie for the finite amount of spending,
driving down the revenue per square foot, hurting all stores.
Retail Demand: The best proxy for demand in a market is the local
retail sales tax revenues. They show the
actual spending in the market reflecting changes in income, the community’s
pull factor and the use of on-line shopping.
The City’s retail market study shows that
inflation adjusted retail sales taxes have been flat from 2000 to 2012. They actually declined very slightly at -.012
percent per year over the last twelve years.
However, there has been negligible growth from 1995 to 2014 at +0.40
percent per year. Thus, for a long period of time, retail spending in real terms
has not grown for about 20 years. See
the table below.
Table: Lawrence Retail Supply
and Demand Conditions 1995 to 2012
|
Inflation
|
||
|
Adjusted
|
Commercial
|
|
|
Sales
|
Square
|
|
|
Year
|
Taxes
|
Feet
|
|
2012
|
$
13,593,996
|
9,105,151
|
|
2000
|
$
13,797,066
|
5,299,404
|
|
1995
|
$
12,695,769
|
4,372,183
|
|
Demand
Annualized Growth Rate
|
||
|
0.40%
|
1995 to 2012
|
|
|
-0.12%
|
2000 to 2012
|
|
|
Supply
Annualized Growth Rate
|
||
|
4.4%
|
1995 to 2012
|
|
|
4.6%
|
2000 to 2012
|
|
Source: City of Lawrence 2012 Retail Market Report
Demand Conclusion: The city’s capacity to support growth in its
supply of retail space is non-existent.
With no growth in retail spending, the city has no capacity to support
additional retail space at this time.
The developer is only seeking to capture a share of that spending for
the proposed development, taking this demand, and possibly some of the vendors,
away from existing shopping districts.
Retail Supply: The stock of retail space has
grown dramatically since 1995, which is the last time there seemed to be a
balance between the supply of and the demand for retail space. From 1995 to 2012, the stock grew by 4.8
million square feet. This growth translates
into a rate of growth of 4.4 percent per year.
The City has approved an
additional 1.2 million square feet at 6th Street and the SLT,
Fairfield Farms, North Mass and 31st and Ousdahl Streets.
Supply
conclusion: The supply of retail space is
growing rapidly with much more approved for development.
Implications: The supply of retail space is growing rapidly
while the retail spending is flat. This
means that the revenues per square foot are falling. Reduced revenues lowers property values in
existing shopping centers, including the downtown. Reduced revenues threaten the ability of
attract investment to older existing properties. This is especially threatening to historic
properties such as in our downtown.
If we expect to maintain the condition of
our existing shopping centers, and especially if we want out downtown to
continue to thrive, the space needs to attract sufficient revenue per square
foot to drive sufficient lease rates that attract investment.
Staff report: The staff report on the proposed development
concludes that because the vacancy rate has not become terribly bad, that the retail
market will not be hurt by this development.
Vacancy is one of
many measures of market health, but vacancy is one of the weaker indicators of
market health. The notion is that if a
market is overbuilt, the vacancy rate will rise proportionately. This is not true. Property owners will fill their
space, even if it means granting rent concessions to attract occupants. Even with a rent concession that takes rents
below costs, the property owner will lose less with a rent concession than with
an empty property.
The staff should
expand its analysis to examine the revenues coming into each market segment
(defined both spatially and by type of vendor).
It is clear from the staff report that the market is suffering from
declining revenues per square foot over a long period of time, which leads to
poor maintenance and reduced investment in existing properties, both of which
are harmful to a retail market.
The Caplan Report: The market analysis provided by the developer
contains multiple errors. Probably the
most severe is the assumption that sales will rise 4.1 percent per year when
they have not even been keeping up with inflation for a long period of time.
The Caplan report uses the argument that the
proposed development will improve the Pull Factor of the entire retail market. The report claims that the community will
benefit from new spending attracted to the local market. This can be a valid claim in a tourist market
or a market with very special tenants that they become a destination shopping
location not found in the region nor having any close substitutes elsewhere in
the region.
This notion of attracting new spending into
the community is simply not plausible with the proposed project. The vendors
will not attract shoppers that are not already here. The vendors listed in the development
proposal are not unique to the Kansas City-Lawrence-Topeka region. Thus, shoppers from Johnson County will not
drive here for these vendors; they already have them in Johnson County. Shoppers from Shawnee County will not drive
here for these vendors; they already have them, or have very close substitutes,
in Topeka.
The best option to improve the pull factor
in Lawrence is to enhance the one unique, destination shopping district that we
have, Downtown Lawrence.
Recommendation:
Someday, this site on South Iowa Street may
be an appropriate site for additional retail space and even hotel space on the
scale proposed. That day is not even in sight.
- Retail spending remains flat while the supply has grown too quickly.
- We want to enhance, not degrade, the condition of our shopping centers and especially our downtown.
- We do not want to jeopardize our current and future hotel investments.
Lawrence should tell the developer that this proposal is
premature and cannot be approved at this time.
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