Developer questions financial returns of town centers

A senior vice president of a real estate financing and development firm, Faison Enterprises, recently criticized the financial returns of new urban town centers. Frank Herring, who is based in Winter Park, Florida, says town centers cost 30 percent more than conventional shopping centers, yet the retail tenants pay the same rent. “And developers are the ones picking up the difference,” he says. Structured parking is a cost challenge, Herring notes. New urban town centers may be popular with the public and municipalities, “but they are extremely challenging for the developers and retail tenants,” he says. Developers are getting returns of 6 percent when they expect 8 or 9 percent, Herring said in a press release. He did not return calls from New Urban News for further comment. One of the most experienced retail developers in New Urbanism, Mark Falcone of Continuum Partners, disputes Herring’s view. Falcone told New Urban News that town centers are not formulaic. “If you try to use the same formula for all projects, chances are that you will run into brick walls,” he says. Continuum’s strategy is to create land value by enhancing the quality of the neighborhood. “There is a premium to be paid while building that value,” he says. “It takes a while to establish the value, but it can be realized in a reasonable period of time.” Once the value is established, residential and commercial tenants will pay a premium to be part of a neighborhood of their choice, Falcone says. If the developer is creative, a town center with a sense of place can be established without paying a high premium, Falcone notes. Continuum’s Bradburn in Westminster, Colorado, includes a main street and town center as well as residential neighborhoods. The first block of the main street was built with single-story buildings served by surface parking lots at the rear of the buildings and the construction outlay was “completely comparable with costs for a conventional strip shopping center,” Falcone says. The main street helped to establish a sense of place and value that later justified higher quality, multistory buildings, now underway. Other markets allow for the construction of higher-quality buildings with structured parking right off the bat, Falcone says. Examples includes Continuum’s 16 Market Square in downtown Denver, which opened in 2001 and sold in 2005 for the highest per square foot price of any building in Denver to date. The 254,000 sq. ft. building, including 183,000 sq. ft. of office space and 25,000 sq. ft. of retail, sold for $60 million. The building cost $55 million when it was completed in 2001, but that included 25 condominiums with a total of 46,000 square feet that were sold immediately, reducing the cost of the retail and office portions of the building to $40 million, Falcone says. Continuum earned a 24.2 percent return, Falcone says