Estimating Commercial Land-Use Conversion: Case Study of Athens-Clarke County, Georgia Arthur C. Nelson, PhD, FAICP Presidential Professor and Director of Metropolitan Research University of Utah Grace Bjarnson University of Utah The authors gratefully acknowledge assistance in research leading to this paper provided by Nicole Sitko and Kelly A. Beavers of the Metropolitan Institute at Virginia Tech January 2010 Page 1
Introduction Investment in urban areas rise and fall, then rise again as new buildings age, deteriorate, become ripe for conversion, and make way for new development usually at a higher intensity. One of the challenges facing planners is predicting when commercial properties may become ripe for conversion to other uses. Despite the presence of theory on when properties conceptually ripen for conversion (for a seminal work see Bourne 1967) and texts on how to evaluate the financial feasibility of commercial properties under different scenarios (see Geltner, Miller, Clayton and Eichholtz 2006), the planning literature is generally not helpful. This article for Practicing Planner presents an approach planners may use to estimate when commercial structures may become ripe for conversion within planning horizons. It uses a case study of Athens-Clarke County, Georgia to illustrate the concept and its application. The article begins with a review of growth trends facing Athens-Clarke County (a consolidated city-county), the analytic approach used to estimate ripeness for conversion of commercial properties along commercial corridors, application of the method to those corridors, and planning implications for the city-county. Lessons can be generalized. Athens- Clark County Growth Trends Athens-Clark County just like most urban areas in the United States will see growth in their population and job market. Projections for the area suggest that between 2007 and 2020 Athens- Clark County s jobs will increase by over 21,000, with almost 8,000 of these new jobs being within the commercial sector. The main question addressed in the study was whether or not this future growth in commercial jobs would require the city-county to increase its zoned supply of commercial land during that same time period. The critical process of identifying those parcels that may be ripe for redevelopment by 2020 is described below. Method Knowing when structural depreciation combined with sustained economic growth leads to specific structures becoming replaceable is a key to planning especially for transportation and utilities. As structures are replaced, new ones are built presumably achieving the highest and best use of the site. Normally, this means new structures use land more intensively than the ones they replace. How can we estimate when a structure becomes ripe for redevelopment? Conceptually, every structure wears out and needs to be replaced. The aging process is called "depreciation". It comes in three forms. Depreciation through economic obsolescence occurs when the function for which a structure as built is no longer suitable for its initial intent, and the structure is simply no longer functional. Steel manufacturing plants come to mind. Depreciation through functional obsolescence occurs when the structure is no longer needed for its initial use but could be rehabilitated for another use; converting warehouses into residential lofts comes to mind. Mostly, however, we deal with physical depreciation, reflecting the wear and tear on structures leading eventually to their replacement. (See (see Geltner, Miller, Claton and Eichholtz 2006). The study is limited to nonresidential structures for several reasons. First, they are replaced faster than residential structures. Second, they tend to be on corridors that are more suitable for higher intensity redevelopment than residential parcels. Third, nonresidential parcels are usually larger and more easily combined with other nonresidential parcels for redevelopment than residential ones. Fourth, it is probably easier, politically, to redevelopment nonresidential areas than residential ones. Page 2
9 10 11 12 13 14 15 16 17 18 19 20 Units of Value Each nonresidential structure has its own rate of depreciation. The rate for each structure varies by natural wear and tear, and by urban land inflation. Structure depreciation is estimated by numerous sources; we use Marshall and Swift's Valuation Service (2007). Although hundreds of depreciation schedules were provided, the county assessor culled the list to identify and make use of those schedules that most accurately compared to properties in Athens-Clarke County Knowing exactly when a structure is ripe for redevelopment is open to debate. For our purposes, we used a simple model that assumed when the land value exceeded the depreciated structure value placed on that land the parcel was ripe for redevelopment. Normally, as structures depreciate land appreciates. Consider a structure with a 20-year useful life on a parcel of land worth 20 percent of the total value, and that land appreciates by a constant (uncompounded) one percent point annually. The structure becomes ripe for redevelopment in about 13 years. Even without land appreciation, the structure becomes ripe for redevelopment in 16 years. (See figure 1.) 120 100 80 60 40 Building Value Constant Land Value Inflated Land Value 20 0 0 12 3 45 6 78 Structure Age Figure 1. Plot of ripeness for redevelopment of a 20-year structure with no land appreciation and with constant (non-compounded) appreciation at one percent annually Page 3
We estimated the year of ripeness for conversion for each parcel as follows: 1. We defined all structures as ripe for redevelopment when land value exceeds structure value. 2. We did not assume inflation or land value appreciation. This provided a conservative estimate of potential commercial redevelopment within the specified time frame. 3. Using assessor depreciation schedules which were based on Marshall and Swift s Valuation Service, we estimated the year when every commercial-oriented structure within the county would become ripe for redevelopment. 4. We combined parcels ripe for redevelopment cumulative from 2007 (the base year of the study) to 2010 and 2020. Analysis The method was applied to the five principal commercial corridors in Athens-Clarke County (see figure 2). Initial mapping of parcels ripe for conversion by 2010 and 2020 was ground-truthed by staff of the Athens-Clarke County planning office. Figure 3 shows a close-up of how we mapped the Business corridor commercial parcels ripe for redevelopment by 2010 and by 2020. Table 1 provides an overall summary of all five focus areas. Table 2 summarizes the analysis for each focus area over the period 2007-2020 while Table 3 does the same for the period 2010-2020. We then compared the supply of those parcels ripe for redevelopment by 2010 and 2020 to the demand for growth-related commercial development. For this, we first estimate the demand for space-consuming jobs each year, using the technique developed by Nelson (2004a), reported in Table 4. Page 4
Figure 2. Index map of commercial corridor focus areas. Page 5
Figure 3. Detail of Business Corridor focus area. Page 6
Table 1 Overall Summary Total 2007-2010 2011-2020 2007-2020 Acres 1,280 492 1,772 Square Feet of Improvements 14,202,050 4,528,694 18,730,744 Improvement Value ($) 236,379,170 133,668,324 370,047,494 Land Value ($) 277,835,827 98,974,006 376,809,833 Improvement to Land Value Ratio 0.85 1.35 0.98 FAR 0.25 0.21 0.24 *Parcels included for assessment in this study were those with commercial, employment, and industrial zoning classifications only. Table 2 Projected to be feasible for redevelopment, 2007-2010 Focus Area Acres SF of Improvement Improvement Value Land Value No. of Parcels Improvement to Land Value Ratio Business 486.2 10,615,834 134,001,079 115,008,959 405 1.17 0.50 Downtown 207.4 2,019,071 60437434 108,975,695 108 0.55 0.22 Northeast 188.3 164,825 5,269,191 10,067,554 34 0.52 0.02 Southeast 287.3 940,860 29,017,236 38,693,106 110 0.75 0.08 Employment 110.6 461,460 7,654,230 5,090,513 27 1.50 0.10 Total 1279.7 14,202,050 236,379,170 277,835,827 684 0.85 0.25 FAR Table 3 Projected to be feasible for redevelopment, 2011-2020 Focus Area Acres SF of Improvement Improvement Value Land Value No. of Parcels Improvement to Land Value Ratio Business 101.3 927,887 36,038,422 24,188,939 42 1.49 0.21 Downtown 79.8 2,399,659 59,891,196 41,568,938 91 1.44 0.69 Northeast 72.1 386,323 8,743,140 6,067,225 27 1.44 0.12 Southeast 80.2 591,570 24,040,134 17,766,114 41 1.35 0.17 Employment 158.4 223,255 4,955,432 9,382,790 40 0.53 0.03 Total 491.9 4,528,694 133,668,324 98,974,006 241 1.35 0.21 FAR Page 7
Table 4 Space Consuming Jobs each Year Year Jobs 2007 80,820 2008 82,203 2009 83,587 2010 84,970 2011 86,350 2012 87,730 2013 89,110 2014 90,490 2015 91,870 2016 93,246 2017 94,622 2018 95,998 2019 97,374 2020 98,750 Growth 17,930 Source: Estimated by authors. Assessor records indicate that the 80,820 commercially-related jobs occupying space occupied about 39,427,375 square feet of space, or about 488 square feet per job. This compares favorably with Nelson s (2004) analysis of space consumption nationally. For planning purposes, each commercially-oriented job is assumed to consume about 500 square feet of space. Table 5 uses this estimate to project commercial space needs. Much of the existing commercial space will be replaced over time. Nelson (2004b) estimates that commercial space is replaced about every 25 years with many retail spaces replaced in half that time but more durable office space twice that. Table 5 estimates commercial space that may need to be replaced over the period 2007 to 2020. In all, Table 5 shows that Athens-Clarke County may need to build about 31.6 million square feet of commercial space between 2007 and 2020. Of this space, 9.0 million is estimated to be needed to support job growth while 22.7 million square feet will be replaced. Assuming a conservative cost of $90 per square foot of space, the value of this construction is estimated at about $2.8 billion (in 2007 dollars). Converting square feet of space needed to acres of land needed to be zoned for commercial development entails two steps. First, the current floor area ratio needs to be estimated to gauge current conditions. Second, reasoned estimates of FARs for the future need to be determined. Page 8
In 2007, assessor data from Athens-Clarke County indicate about 39.4 million square feet occupies about 3,771 acres of land. This converts to a floor area ratio (FAR) of: 39,427,375 square feet (3,771 acres @ 43,560 square feet per acre) = 0.24. Table 5 Estimated Commercial Space Construction Needs, 2007-2020 Year Total Space 2007 39,427,375 Growth- Related Square Feet Replaced Square Feet Total Square Feet Constructed 2008 40,119,042 691,667 1,577,095 2,268,762 2009 40,810,708 691,667 1,604,762 2,296,428 2010 41,502,375 691,667 1,632,428 2,324,095 2011 42,192,375 690,000 1,660,095 2,350,095 2012 42,882,375 690,000 1,687,695 2,377,695 2013 43,572,375 690,000 1,715,295 2,405,295 2014 44,262,375 690,000 1,742,895 2,432,895 2015 44,952,375 690,000 1,770,495 2,460,495 2016 45,640,375 688,000 1,798,095 2,486,095 2017 46,328,375 688,000 1,825,615 2,513,615 2018 47,016,375 688,000 1,853,135 2,541,135 2019 47,704,375 688,000 1,880,655 2,568,655 2020 48,392,375 688,000 1,908,175 2,596,175 Total 8,965,000 22,656,435 31,621,435 Source: Athens-Clarke County Assessor for space in 2007, authors for other estimates. Table 6 estimates the land area needed to meet projected space needs if FAR policies continue at the current average or are modified to 0.25, 0.30, 0.35, and 0.40. Suggested FAR figures are estimated at or below 0.40 to ensure that parking schemes do not require decked parking structures. Table 5 shows that a city-county wide FAR of 0.30 or higher would be sufficient to meet projected commercial land use needs. This assumes all existing commercial development is redeveloped to at least that FAR, which is unlikely. Page 9
Table 6 Commercial Land Area needed based on Different FAR Targets Year Total Projected Space Needs Current FAR Average Acres Needed at Target FAR Policy of 0.24 0.25 0.30 0.35 0.40 2007 39,427,375 3,771 2008 40,119,042 3,837 3,684 3,070 2,631 2,303 2009 40,810,708 3,903 3,748 3,123 2,677 2,342 2010 41,502,375 3,969 3,811 3,176 2,722 2,382 2011 42,192,375 4,035 3,874 3,229 2,767 2,422 2012 42,882,375 4,101 3,938 3,281 2,813 2,461 2013 43,572,375 4,167 4,001 3,334 2,858 2,501 2014 44,262,375 4,233 4,064 3,387 2,903 2,540 2015 44,952,375 4,299 4,128 3,440 2,948 2,580 2016 45,640,375 4,365 4,191 3,493 2,994 2,619 2017 46,328,375 4,431 4,254 3,545 3,039 2,659 2018 47,016,375 4,497 4,317 3,598 3,084 2,698 2019 47,704,375 4,563 4,381 3,650 3,129 2,738 2020 48,392,375 4,628 4,444 3,703 3,174 2,777 Source: Space and land area in acres for 2007 from Athens-Clarke County Assessor, calculations by authors. We then assess the redevelopment potential of five focus areas. It shows that roughly 1,770 acres are likely to be redeveloped over the period 2007 through 2020. If the FAR of the redeveloped sites is increased from its current average of 0.24 by 50% to 0.36, the net change in FAR may be more than sufficient to meet future commercial development needs, estimated at 9.0 million square feet. This is illustrated below: (0.12 FAR change) x (1,770 acres @ 43,560 square feet/acre) = 9.3 million square feet This finding suggests that Athens-Clarke County need not consider expanding the supply of commercial land at least until the next plan update process. The study found that by raising the FAR of new development and redevelopment to between 0.35 and 0.40 thereby raising the existing FAR modestly from 0.24 to about 0.30, the current zoned supply of commercial land in Athens-Clarke County may be sufficient to meet current and projected commercial development needs to 2020. This excludes currently vacant industrial land that may be converted to commercial uses, or more rapid redevelopment of commercial sites than the study estimates. Further, no more land should be considered for a change to its future land use designation to allow for commercial. The assessment is based on the foregoing analysis plus these additional considerations: Page 10
More than 4,000 acres of other land zoned for nonresidential and nonagricultural land uses provides additional supply for unforeseeable, large-scale development. The 0.35 FAR threshold applied to redevelopment prospects presented in this assessment is lower than the 0.40 FAR Athens-Clarke County already applies to targeted commercial/mixed-use areas. The analysis excludes consideration of the use of decked, tuck-under, or other forms of parking that can raise FAR levels. The analysis does not consider the extent to which pending Federal law and/or market forces will lead to small automobile sizes and thus small parking stall footprints than can also raise FAR thresholds. Any study which assesses future redevelopment should also suggest that future proposals to expand the supply of commercial or other development to meet specific, unforeseen needs should be considered. These studies are only intended to provide greater clarity on future land use needs by taking into account redevelopment within the area. The Athens-Clark County study encourages periodic review of redevelopment characteristics to guide future decisions about the supply of projected commercial or other land use needs for the community. Planning Implications Broader implications for planning generally are suggested. As a rule of thumb, the analysis found that when the value of land approaches or exceeds the value of physical improvements approaches, a commercial property becomes ripe for conversion (see also Knaap 2001.) Second, that conversion is usually the removal and reconstruction of the physical improvements. Unless they have historical significance or are unusually durable constructed, it is unlikely that many commercial structures would be rehabilitated to serve any use, commercial or otherwise. The reason is that commercial structures are usually built to serve a specific function during a short-term (10- to 20-year) investment horizon (see Geltner and Miller 2000) so, by design, they are not built durably. Third, as commercial areas ripen for conversion they will likely become areas of disinvestment, rising vacancy rates, and lower rents. If an area is growing and/or if new investment is steered into existing commercial areas (through planning, redevelopment policy, natural barriers, or a combination) the older commercial structures will give way to newer ones. The cost of demolition and rebuilding combined with the probable economics of more expensive land along existing commercial corridors requires that new structures boost their economic productivity levels. This implies that less intensive disinvested commercial areas will be replaced by more intensive land use areas with higher FARs. Finally, as land use intensities rise there may also be opportunities to mix land uses, especially adding residential development. This kind of transition from a commercial use to a multi-use area may be aided through the investment of alternative public transportation modes along current commercial corridors. Given its small population base, Athens-Clarke County is anticipating adding bus service along the corridors, and improving pedestrian and bicycle options. In larger urban areas, bus rapid transit, trolleys, and light rail may be additional options. It seems that the future economic vitality of America s metropolitan areas is tied to the Page 11
Page 12 redevelopment of existing commercial corridors. Facilitating these transitions may be up to planners. Being able to anticipate today when corridors may become ripe for conversion is the first critical step in this process. As planners use the redevelopment principles described above they will be able to work together with policy makers to create mechanisms to encourage wise conversion when the opportunities arise, rather than impede them by simply not knowing when the time has come to reshape them. References Bourne, Larry S. 1967. Private Redevelopment of the Central City: Spatial Processes of Structural Change in the City of Toronto. The University of Toronto, Department of Geography (Toronto). Geltner, David M. Norman G. Miller, Jim Clayton and Piet Eichholtz 2006. Commercial Real Estate Analysis and Investment, second edition. Southwestern Publishing (Oklahoma City OK). Knaap, Gerrit J, Ed. 2001. Land Market Monitoring for Smart Urban Growth. Lincoln Institute of Land Policy (Cambridge MA) Marshall and Swift. 2007. Valuation Service. (Los Angeles CA) Nelson, Arthur C. 2004a. Planners Estimating Guide. American Planning Association (Chicago IL). Nelson, Arthur C. 2004b. Toward a New Metropolis: The Opportunity to Rebuild America. Brookings Institute Metropolitan Policy Program, Discussion Paper.