Last week I led the Small Scale Developers Forum for the Urban Land Institute in Austin, TX. Our fifth gathering, the program is gaining gravitas as part of a continuing series for entrepreneurial developers. Over 40 developers from 12 states and two countries gathered to discuss the challenges and opportunities of working at the fine grained, small scale level of development in cities across the country. Loaded with case study presentations, a preview of some fascinating work by the National Trust’s Preservation Green Lab, a capital markets review and panel discussion on the challenges and opportunities for small scale developers, the day and half program was another big success for this fertile area of discussion.
This year’s theme ‘Small Firm | Big Impact’ was selected to recognize the positive impact many small scale, passionate and mission driven developers are having on the fabric and character of their communities. My opening presentation combined many themes from previous research, but highlights the increasing nexus of ‘urban acupuncture’ and vitality, livability, and resilience of emerging neighborhoods.
It was located in Austin, based on past attendee interest. Unlike previous programs which have gone to established cities with robust cores, Austin was chosen because its current vibe and evolving sense of place is the result of innovative, creative and driven entrepreneurs changing the landscape of what was once just another adolescent emerging urban center. And with an extra day to tour the edges of the city, I liked what I saw.
Case studies by Lorenzo Perez of Venue Projects, Jeff Johnston of Cathartes Private Investments, and Anthony Sciela and Ryan Diepenbrock of PSW Real Estate were inspiring to see, especially, considering how they are navigating the daunting challenge of ‘developing small’ in a world dominated by big institutional players. To underscore the disconnect of big and small, Bret Wilkerson – Managing Director at Hawkeye Partners shared the following factoid during our capital markets review:
‘The top 10 asset advisors control over 50% of available institutional equity for real estate. And when the filter is increased to the top 25 asset advisors, the institutional equity under their control increases to 75%.’
This fact led to numerous discussions of how small scale developers can succeed when so much capital is focused on big deals.
I highlighted the notion that capital is seeking ‘efficient vs. effective’ deployment, meaning what’s the fastest way to get allocations to work, vs. how to ensure that allocations create the greatest overall return – both using financial and community vitality metrics?
Its no secret that the amount of underwriting and management may not be much different between a $10 million deal and a $100 million deal, so in the interest of getting all that money to work, the advisors always default to the big projects. There are other factors at play (such as a sponsor’s track record, the strength of the developer to provide the necessary financial controls and reporting to meet the fiduciary responsibilities of the advisor), but a lot of the decision boils down to ease of deployment. And this is not a good thing for what is increasingly being proven to make a difference at the community resilience and character level – small scale, fine grained development.
Mike Powe, Senior Researcher with the National Trust for Historic Preservation’s Green Lab (PGL), presented some groundbreaking research that underscored this is as more than just an altruistic perspective. PGL is mixing old urbanism intuition with contemporary big data analysis, and Mike presented their research to ‘demonstrate the critical contributions of older, smaller buildings and “blockscapes” in fostering socially, economically, and culturally vibrant urban neighborhoods’.
This work will inform targeted policies and development strategies that capitalize on cities’ existing built assets, and support lively neighborhoods full of social and economic opportunity.
To prove the thesis, the Green Lab analyzed factors including building and parcel size, building age diversity, cell phone activity, characteristics of businesses, and other data points to determine how urban grain and character impacted factors such as business start-up activity, minority business activity, employees per SF, nightlife and vitality, and diversity of residents. Their research will be released in a few weeks under the title of “Older, Smaller, Better: Measuring how the character of buildings and blocks influences urban vitality,”* and should do for the discussion of small scale, fine grained development what Walk Score has done for real estate proximity.
After 36 hours in Austin, I came away with increased enthusiasm that we are on to something big by going small. The gap in size between where the capital markets want to go, and where impact is being made is not to be overlooked. But as we get better data, enabled by new ways of looking at true value creation, capital will do what they always do – follow the innovators.