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Living Downtown: High costs, low returns plus parking issues and red tape plague developers

Sunday, December 31, 2000

By Dan Fitzpatrick, Post-Gazette Staff Writer

Kevin Luczkow recently left his $650-a-month apartment in Whitehall for a $1,200-a-month place Downtown, along Penn Avenue.

Sure, it's more expensive. But, "I can walk to this place from my office in three minutes," said Luczkow, a 27-year-old project manager for Turner Construction Co. From a two-bedroom, two-bathroom apartment that overlooks the Cultural District, Luczkow now is only a block or two from the Benedum Center, Heinz Hall and the O'Reilly Theater. He has 12-foot ceilings, valet parking and a rooftop deck.

"I don't have to deal with any aggravation," he said. Luczkow's experience is still rare, though.

In a city where some 130,000 people work Downtown, only 3,210 people live there, according to population estimates produced by Claritas Inc. Not counting the Strip District and the North Shore, there are only 1,700 units of housing Downtown, 369 of which are federally subsidized. Of the 15 PG Benchmarks cities surveyed by the Post-Gazette, Pittsburgh has the second- smallest number of people living Downtown, both in total numbers and as a percentage of the larger metro area population.

Most people in Pittsburgh agree that more housing is what Downtown needs to become vibrant again. Not only would new residents turn the Golden Triangle into more of a 24-hour-a-day attraction, but they would provide the demand for new shops, restaurants, parking garages and movie theaters.

But few people have figured out how to make Downtown housing work, financially.

"It is very frustrating," said Carol Brown, president of the Pittsburgh Cultural Trust.

To put it simply, Downtown housing is still too expensive to build, buy or rent. Not everyone is willing to pay $1,200 a month to live Downtown, as Luczkow did. Yet, many developers are forced to charge that much to break even on their investments. They have to grapple with high building acquisition costs, a small Downtown without many vacant parcels, stringent code requirements and competition from good, affordable housing in city neighborhoods.

For developers willing to deal with those challenges, the trick is to fill the gap between the amount it takes to finance new loft projects and the amount of income each project generates.

Those gaps often reach millions.

"You are not seeing an explosion in housing because there is no money in this," said developer Eve Picker, who has struggled with two small Downtown housing projects in the last four years.

Struggling to make it work

Picker, the first person to finish a loft project Downtown, is hunkered over her computer in a Starbucks coffee shop. She is scrolling through a spreadsheet, playing with the numbers and trying to explain how to make money on a Downtown loft project.

"This is insane, isn't it?" she asked.

For her two projects Downtown, Picker had to get wildly creative to bring costs down. She decided not to put aside any money for marketing, and not to hire any brokers who might charge leasing commissions.

She took out her bank loans a little at a time, hoping to pay less in interest. She was her own general contractor on one of her buildings, to avoid paying a general contractor's fee. She hired an attorney who works by himself. She sold tax credits, she got a loan from the previous owner of one of her buildings and she eked out an elevator restoration loan arranged by the Trust.

"I have learned how to make every dollar count," Picker said.

Unlike her larger competitors, Picker rarely takes a developer's fee for herself. She did it only once Downtown, during the redevelopment of the Bruno Building on Liberty Avenue.

It was $10,000.

That building now is 100 percent occupied. The other, at 429 First Ave., has one vacancy on the first floor. At that building, she charges rents of $2,000. Yet, her cash flow last year was only $1,000.

Picker hears the complaints about the costs of Downtown housing, and it is frustrating to her.

"People are screaming at you because rents are so high," said Picker, who rents as low as $1,250. "I would love to do all affordable housing, but I can't do it with the rents I have to charge."

For new housing Downtown, most developers are able to get away with rents of $1.25 per square foot. For a 1,000-square-foot apartment, that means $1,250 a month. For developers to do these projects without subsidies, rents need to go higher than $1.90 per square foot. For the same 1,000-square-foot apartment, that means $1,900.

But Pittsburghers are not ready for those prices yet .

"It's a tough puzzle," said Kevin Keane, senior vice president for Lincoln Property Co., the developer of a 232-unit apartment complex called Lincoln at North Shore.

Although not Downtown -- which is essentially the Golden Triangle in the definition used in this story -- the Lincoln complex east of the Ninth Street Bridge is one of the few recent projects able to push rents higher. When built in the late 1990s, Lincoln charged average rents of $1.10 per square foot, or $880 for an average-sized apartment. Today, the average rent is $1.50 per square foot, or $1,200 for an average-sized apartment.

For a waterfront view, some renters pay as much as $1,500.

Even with those rents, though, Lincoln needed help.

For its project on the North Side, Lincoln received a $5.6 million loan from the Pittsburgh Development Fund. Earlier this year, when Lincoln proposed a $21 million apartment project Downtown, it offered to fund two-thirds of the costs.

The rest, Keane said, would have to come from public sources.

Getting help

Can Downtown housing happen without help from the city?

"No, it is not possible," Keane said. "It can't be done."

Some developers have asked the city to be more aggressive in helping loft conversions.

Pittsburgh, though, has been slow to react.

"I share their frustration," Tom Cox, Mayor Tom Murphy's chief aide, said two years ago. "We wish we were further along, but we have been focusing on retail, and we probably have not been able to focus on housing in the way we should because we're trying to get other things done."

One of those things was MarketPlace at Fifth and Forbes, a $522 million proposal to replace more than 60 buildings Downtown with new shops and restaurants. One complaint about the ill-fated project was that it lacked a focus on Downtown housing. So Murphy announced a plan to build up to 260 apartments on top of the new shops and restaurants.

In that case, the city was quick to offer help. As much as $6.5 million of the $21 million in construction costs would have come from public sources.

With such an offer, Pittsburgh joins cities such as Minneapolis, Denver, Seattle and Cleveland. All have used incentives and subsidies to urge the growth of residential development Downtown.

Denver's developers started building lofts in the 1980s, when the acquisition costs on Downtown buildings were still low. Some of the first secondary mortgages came from federal Community Development Block Grants, which are distributed each year to cities around the country.

Now, Denver is at a point where the publicly funded mortgages are no longer necessary, said Denver loft developer Dana Crawford.

"People say, well, is the loft movement over?" Crawford said. "Well, I don't think so. They are just selling like hot cakes."

But Dan McCarthy, an urban development manager in Milwaukee, said if developers expect a subsidy on every deal, "You build a false market."

Milwaukee is one of the best performing PG Benchmarks cities on the issue of Downtown housing. In terms of metro area population, Milwaukee is the smallest of the 15 cities. But its Downtown population of 10,289 exceeds larger places such as St. Louis, Cleveland, Phoenix and Cincinnati.

Milwaukee was able to do that without offering a lot of help to developers, McCarthy said.

"We have said 'no' to a number of requests for public assistance because we saw they were paying too much for the property and we were not willing to condone that."

What a city does not want, McCarthy said, is a "false market."

But developers are pushing the city of Pittsburgh to do more.

Earlier this year, the city responded by passing a tax abatement program exempting new Downtown housing from portions of property tax increases for 10 years. It works on a sliding scale. The first year, 100 percent of the increase is abated. By the 10th year, the abatement is down to 10 percent.

"This isn't the end-all program," said Dennis Davin, housing director for the Urban Redevelopment Authority. "But we think it is something that will really help make these things work."

Davin is looking for other funding sources, but he is reluctant to take away any money from city neighborhoods to fund Downtown housing.

Foundations are one possibility.

Without more subsidies, though, smaller developers such as Picker claim they will not be able to build larger projects.

"It's really a huge risk, and it requires a total commitment to the idea that you are going to do housing Downtown."

"Why would you do it?"

Losing patience

Some developers are giving up on Downtown housing altogether.

One such person is Joedda Sampson.

"I feel like I paved a lot of ground," Sampson said. "I am not willing to pay the dues again."

A few years ago, Sampson completed a loft project in the Strip District, selling the 34 units for $130,000-$1 million. But it is hardly a cash cow. "I feel like I really spent some major energy to accomplish what I did in the Strip," Sampson said. While it was "gratifying to be able to complete it, it is far from gratifying financially."

Sampson turned two years ago to Downtown. She tried to put together a 6-unit loft project on Liberty Avenue, above a coffee shop.

But it never worked.

"What tipped the scale was the inability to acquire city parking," she said . "While city officials say, yes, this is what we want to happen, I have not found anyone bending over backwards trying to make a project work for me. The burden has definitely fallen on the developer to be the super sleuth to see what you can get."

Parking is a big issue for loft developers.

In Downtown Pittsburgh, it is difficult to provide spaces for new residents. Without parking, developers have to lower rents, making it even more difficult to make money.

Pittsburgh Parking Authority director Ralph Horgan does not remember having any conversations with Sampson about parking near her proposed lofts on Liberty Avenue. Her concerns, he said, should be alleviated by a new Parking Authority program that allows residents of new housing Downtown to lease space in any Parking Authority garage for $100 per month.

Thirty-five people currently use that program, Horgan said.

But Sampson has larger concerns.

She wants to see the city get more serious about Downtown housing. She is calling for a new task force to examine the issue and make it a priority.

"It is far from happening," she said. "Until that does happen, I think there is a lot of talk and people are saying the right things. The reality of people having solid answers for developers is not happening."

"Let's walk that talk," she said.

Gaining ground

The city's next big push for new housing will be Liberty Avenue, once home to Downtown's red-light district.

With help from Picker, the URA is trying to identify a number of smaller buildings that can be renovated into housing of 7-8 units. Picker already has an agreement of sale for 905 Liberty Ave.

"What we are trying to avoid is prices continuing to be jacked up above fair market value in these areas," Davin said. "We want to develop these as quickly as possible. We think the market is ripe right now."

Penn Avenue is another potential hot spot.

Oxford Development Co . is building 123 apartments in a building once occupied by General Nutrition Cos. The building is owned by Regional Industrial Development Corp. Across the street, developer Bill Gatti is filling 25 apartments he carved from an old printing factory at 900 Penn Ave.

At Fort Duquesne Boulevard and Seventh Street, the Pittsburgh Cultural Trust is asking developers to think about a new development that could include housing. One person who has expressed interest is Dan Summers, a developer who wants to build a $90 million, 20-story residential tower on the site.

But, "he is not the only developer who is interested," said Brown, the Trust's president.

Another person hoping to participate in Downtown housing is Alice Murray, an urban housing consultant from Dallas.

With a local investor, Murray is looking at two buildings in the Cultural District and the center of the Golden Triangle. The investor, who Murray declined to identify, has asked her to analyze both buildings and tie them up with options. One could be converted to 60 apartments, she said. The other could be converted to 175 apartments.

But Murray is running into some of the same problems shared by Sampson, Picker or any other developer trying to do work in Downtown Pittsburgh.

High acquisition costs, she said, are the biggest problem. Her goal normally is to buy buildings for about $10 per square foot, so she can save money on the front end of the project. The two buildings in Pittsburgh, though, won't go for less than $35 per square foot, she said.

"It just becomes really difficult," she said.

All of these problems are making it difficult for people to stay optimistic about Downtown housing.

Two years ago, the city planning department predicted that Pittsburgh could support 300 units of Downtown housing per year for the next 10 years. This year, though, Davin revised those numbers while pitching his tax-abatement plan to local taxing bodies. He predicted demand for 150-200 units per year.

"We would love it to be 300," he said. "What is realistic, we don't know."

But the Trust's Brown said, "I am more optimistic now than I was four to five years ago. I do think we will look more like other cities in the next 10 years."

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