Urban Corridors Task Force August 30 Work Session Record

In Attendance UCTF Members: Virgil Clarkson Lacey Andy Ryder Lacey Doug Mah Olympia Stephen Buxbaum Olympia Pete Kmet Tumwater Ed Hildreth Tumwater, Intercity Transit Authority Sandra Romero Thurston County Mike Laverty North Thurston Public Schools Doug DeForest TPB Business Representative Rene Sunde TPB Business Representative Jackie Barrett Sharar TPB Citizen Representative Mike Beehler TPB Citizen Representative Private Sector Panel Members: David Brubaker Redevelopment Consultants, LLC Steve Cooper Orca Construction Tim Dowling West Coast Bank Tom Fitzsimmons Lorig Associates Mark Furman Heritage Bank Mark Kitabayashi Windermere Realty Glenn Wells Vine Street Group Terry Wilson Greene Realty Market Sector Analysis Consultants: Michael Hodgins BERK Consulting Erik Rundell BERK Consulting Suzanne Britsch New Home Trends Deanna Sihon New Home Trends Moderator: John Doan Tumwater Others: Roger Horn Olympia Planning Commission James Reddick Olympia Planning Commission Richard Wolf Olympia Planning Commission Tom Muller Olympia Planning Commission Jeanne Marie Thomas Olympia Planning Commission Amy Tousley Olympia Planning Commission Tom Oliva Tumwater City Council Debbie Sullivan Tumwater Planning Commission Terry Kirkpatrick Tumwater Planning Commission Sally Nash Tumwater Planning Commission Jessica Moore Tumwater Planning Commission Bill Mandeville Tumwater Planning Commission Jennifer Kinney Olympia Planning Department Stacy Ray Olympia Planning Department Amy Buckler Olympia Planning Department Todd Stamm Olympia Planning Department

Sophie Stimson Olympia Public Works Department Suresh Bhagavan Tumwater Planning Department Mike Harbour Intercity Transit Dennis Bloom Intercity Transit Michael Cade Thurston Economic Development Council Jason Robertson J Robertson and Company Michael Van Gelder WA State Department of General Administration Lon Wyrick Thurston Regional Planning Council Karen Parkhurst Thurston Regional Planning Council Veena Tabbutt Thurston Regional Planning Council Michael Ambrogi Thurston Regional Planning Council Fred Evander Thurston Regional Planning Council Jailyn Brown Thurston Regional Planning Council Kathy McCormick Thurston Regional Planning Council Thera Black Thurston Regional Planning Council

Work Session Record John Doan moderated the evening discussion. He welcomed attendees by noting that the great places, the great downtowns, the great communities that people enjoy here and elsewhere were built with the help of the private sector and developers. He described the evenings work session as an opportunity to hear from the private sector about considerations and opportunities to create successful partnerships to help achieve adopted corridor visions. Introductions were made all around. Urban Corridors Task Force (UCTF) Chair Pete Kmet welcomed everyone and provided an overview of the UCTF work. He noted that achieving infill and redevelopment of city centers and corridors is a key goal of adopted comp plans under the Growth Management Act. Revitalizing these areas to provide more housing will also strengthen existing business districts and support transit corridors. Unfortunately, most growth has been locating outside of these corridors and even outside the cities, in the growth areas. In the early 2000s the region saw the lowest share of growth on corridors since passage of the Growth Management Act. An earlier policy maker focus was on fostering more growth in urban areas. The focus of UCTF has been on the corridors linking that urban area. Chair Kmet explained why the Task Force is focused on corridors. While the Task Force identified lots of corridors serving different functions, its primary focus has been on the Capitol Boulevard/ Capitol Way / Martin Way corridor. UCTF members consulted with a wide variety of public agencies and looked at regulatory and financial tools available to encourage infill and redevelopment. Getting development to locate on these corridors has environmental and financial benefit to local communities. This is also where transportation can work most efficiently. This is why it makes sense to focus here. Chair Kmet pointed out that there is only so much money to invest in infrastructure and growth. That is why a strategic approach is needed to attract the kind of growth envisioned for the corridor. He added that when the economy recovers, as it will one day, the region needs to be poised and ready to take advantage of opportunities at that time. In regard to the panel, Chair Kmet observed that it represents a lot of depth of experience in this community and beyond. He advised that this work session is a safe environment in which to talk about the kind of changes needed so that communities can better achieve the corridor vision. Government cannot change many things, but it does have control over much of its regulatory environment. This is an opportunity to explore how, within the limited resources available to community, they can facilitate redevelopment and partner with private sector to help make develop occur.

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Mr. Doan reflected on the challenges that led to the need for this work session. If you zone it they will come is an adage that doesnt work. There needs to be a market for what it is that cities want to occur. It takes more than just a good plan. It is important to understand how much demand there is for different kinds of uses. That is why its useful to look at assumptions and market factors that drive commercial and housing demand. He introduced the two consultant teams that are developing market analyses for Thurston Regional Planning Council (TRPC). Michael Hodgins and Erik Rundell are with BERK Consulting and are working on a commercial market analysis. Suzanne Britsch and Deanna Sihon are with New Home Trends and are developing a housing market analysis. BERK Presentation [both presentations can be found on-line at http://www.trpc.org/regionalplanning/landuse/Pages/UCTFMembershipandMeetings.aspx ] Michael Hodgins presented a presentation from BERK. He explained that they are very early in the study process. The presentation was intended to provide an overview of the study purpose, how it relates to other efforts underway, and to provide some early insights. He advised that the final product is due late in the year. Mr. Hodgins explained that TRPC commissioned BERK to look at commercial markets from a longer term perspective as opposed to a traditional market study focused on the near term. This work will ultimately feed into a series of planning products. The analysis is evaluating some of the underlying drivers for commercial development in Thurston county that affect the scale, density and location of investments. There are three questions to answer in this study: 1. What are the underlying drivers of commercial market growth in Thurston County? What have the location trends been? They will look at case studies of recent developments to understand why things have been the way theyve been. 2. What can we learn from experiences elsewhere? This includes communities in the Puget Sound and elsewhere. What can we learn from other places that have gone through the transition to more dense, more focused development. What were the triggers? What was happening on the market side? What was happening on the policy side that may have encouraged some of those transitions? 3. What can the public sector do to influence these big demand drivers? Mr. Hodgins reiterated that this is not a typical market study because it is taking a long term view. The intent is to develop a clear understanding of the underlying drivers behind commercial growth in this region and how public policy can shape and inform some of those longer-term trends. Jobs drive commercial development. So where will long-term job growth come from? It comes primarily from three sources: a) Local economy base, of which a big piece is state and local government. b) Population growth which generates retail and service sector growth. c) Central Puget Sound proximity creates opportunities to tap into that market growth. He referenced charts illustrating a combination of employment and population growth, and Thurston Countys share of that growth within the six-county Puget Sound region. Thurston County has seen an increasing share of both population and employment within that region. This is framework within which to think about future commercial development. Mr. Hodgins noted that underlying land value is a big factor in determining where growth locates. Land value is an indication of where there is a demand for growth and development activity. In those locations, the land value is bid up. Land value is high in the Seattle / central Puget Sound core. Land value diminishes further south into Thurston County. When looking at the demand for commercial development, where it wants to locate, there are a lot of places that can be built. He emphasized that there is a lot of competition for development dollars for the kind of development desired in this region in terms of scale, density, quality, and urban form.

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He explained that land value is a function of demand for a particular use and the availability of suitable properties. The more attractive a place is to various markets, the more they will bid up the rents per square foot, which in turn increases the value of the land. Conversely, if land is really expensive due to a scarcity of suitable properties, then people will bid up those locations. If land is abundant or there is little or no locational demand for those areas, then the value of the land will be low. Mr. Hodgins noted that developers generally wont build at high densities unless they need to. This is a consideration in an urbanizing area that has generally been low density in the past and is now trying to become higher density or more urban. Higher density development is more expensive to build, and parking becomes a more costly factor. So rents have to be higher to offset those costs, and the market has to be willing and able to support those higher rents in order for that more urban type of development to be economically feasible. Structured parking is particularly expensive to build and requires that the market be willing to pay the rents per square foot necessary to cover those costs. He explained some of the work underway. They have evaluated pre-2000 and post-2000 development patterns in the region to understand the drivers that have influenced past development. While much of the regions high value land is located within the corridor, most of the corridor land values are low. BERK has looked at development activity before and after 2000 for three the market sectors: retail, office, industrial warehousing. Since 2000, much of the development has been pushing out from the corridor and core activity centers in search of cheaper land. The next steps in this analysis will entail evaluation of existing land capacity. How much growth can be absorbed by existing vacancies before there is pressure for more development? They will also identify projects that are good examples of what is desired and the economic drivers that influenced those projects. They will also look for good examples elsewhere to see what can be learned from those places and the catalysts that triggered those transformations. Finally, they will evaluate the tools in the economic development toolkit that local agencies can use to stimulate the kind of commercial development wanted over the next 20-30 years. When looking at those examples of other communities, effort will be made to find examples where the urban form and scale aligns with the vision for this region; that will serve as a surrogate for the quality of development envisioned here. Mixed use or mixes of uses is another factor in selecting those examples.

New Home Trends Presentation Suzanne Britsch explained that they are first looking at the big housing picture presented by Thurston County and Pierce County as a whole. They will then break that analysis down specifically to the corridors. The goal is to assess the market potential for high quality redevelopment and infill. This entails understanding opportunities and challenges, and understanding the drivers for that kind of housing product today, and in the next 20-30 years. Between 2010 2040 there is potential demand for an additional 64,000 new dwelling units in Thurston County and 122,000 in Pierce County. The presentation is focused just on Thurston County. The big question is - What types of dwelling units will be needed in 20-30 years? Ms. Britsch noted that the dwelling units will be built. Just because there is not a lot of job growth right now doesnt mean that demand for homes will not increase. She noted that of the various key drivers for future demand, demographics is key. People need different housing types at different stages of life, and the county is aging rapidly. Aging boomers will be very influential as their housing needs change over the next 20-30 years. Todays housing will not meet tomorrows needs. Ms. Britsch presented demographic data to make her point. She noted that the regions population will be very different in the future than it is today. Over 25% of the population will be over 65 in 20 years one in

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four people, most of whom will not want or be able to maintain a traditional single family home on a suburban lot. When looking at the activity corridors, they will look at the capacity of existing housing to meet those future needs and then evaluate the gaps that must be made up somehow to meet the different demands of those future demographic groups. This includes renter and owner occupied units, single-family and townhome or condominium units, and housing targeted to the different needs of seniors. The change in housing type desired by those 65 and over is the most compelling. Whereas today only about 10% of people 65 or over are looking for a different housing product, within the next ten years that is expected to increase to 50% of people 65 or over looking to downsize or move into a senior-specific housing type. That is a staggering number when thinking about what that means in terms of housing products currently available. Ms. Britsch showed images of a range of different housing types for which there will be a demand in the future, describing the differences in density, construction type, and associated parking. These are some of the key factors in determining construction cost and then the rents or purchase price that will be required to make these feasible. She explained the need to understand the changing demographics and how that in turn will change the housing market. Its important for cities, planners, and developers to understand these changes and know what the market will be and how this will influence the kind of housing products that will be sought. Who will be the buyers, who will be the tenants, and what will they be looking for? What are the amenities theyll be looking for in the neighborhoods theyll find attractive? For many this will be walkability, safety, access to different modes of transportation, and amenities like parks. People who choose an urban lifestyle want a mix of amenities. Whereas the trend over the last 30-40 years was a move to the suburbs, the trend over the next 30 years will be an increasing move back into urban areas. Already, realtors are using tools like Walk Score to help buyers evaluate the quality of the neighborhoods they are considering because walkability is a key factor in neighborhood desirability. Financing of developments affects what is built or purchased. She explained the history of the condominium market. Ms. Britsch suggested that due to past markets and the financial situation, few condominiums will be built over the next ten years. By the time they finally reenter the development portfolio in 10 years or so there is likely to be significant pent up demand due to the pace of changing demographics. Ms. Britsch observed that the more jurisdictions understand the demographics and market for housing, the easier it is for them to understand what the builders are trying to do and then, the easier it is for developers to work with them. In many places today, mitigation fees are more expensive than the price of the land. Builders cant reconcile the cost of land, cost of construction, mitigation fees, and still end up with an affordable product that can be offered in that market. Another factor driving the type of housing that is built is parking. Structured parking is expensive to build ($30,000 - $50,000 per stall). The more transport choices available, the less parking is needed. While zoning is a useful tool, zoning everything at a high density doesnt work. Not everyone wants to live in high density neighborhoods. Zoning needs to provide for a range of densities. Ms. Britsch noted the value of understanding the different needs of a local market and making sure that zoning accommodates those needs appropriately even as they change over time. Ms. Britsch noted that one of the biggest obstacles to achieving urban density residential activity is neighborhood Opposition. She cautioned against talking about growth in terms of the total increase over the next 30 years. It frightens people they feel like this will happen overnight and destroy the character of their community and so are naturally opposed to it. It is important to talk about future growth in more reasonable terms that reflect the gradual transition that will occur over time.

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Data sheets will be available from TRPC with the demographics and housing demand discussed during the presentation. Mr. Doan solicited questions from the audience. Since 25% of the people in Thurston County will be over 65 in 20 years, it would seem that the area in the vicinity of the hospital would be an attractive place for people to live in the future. Are factors like this considered when evaluating the demand for future housing and where that demand might best be located? Yes, that is a factor when considering the amenities and housing that will be needed over the next 20-30 years. New modular homes have the capacity to be increased or decreased in size as housing needs change over time. How will they be considered in the housing study? Those will be considered as part of the demand for single family detached housing. How do the market analyses account for changing patterns within the market that may represent the new normal? How confident can we be that past historical trends are accurate projections of what the future will be? In part this is accounted for by looking at a long historical period and not just the last 3-5 years. In addition, when it comes to housing it is necessary to consider changing demographics and how that will affect future demand. Right now there are shifts happening in the demand for housing that are not being met because of the economic downturn, which is creating a pent-up demand that will have a ripple effect throughout the market when it resumes. Pent up demand is based not just on the last few years of economic development, it is also based on demographic changes. It is important to take current economic conditions into consideration when thinking about the future, with the high rate of foreclosures that have to be absorbed, the tendency for young adults to move back home because they cant find jobs that provide living wages these are factors that will require time to work their way through the market once the economy turns around. Recessions are cyclical they come and they go. That is why it is important to take the long view historically (typically ten years) and the long view in regards to future demographic changes to get a better sense of what the market demand will be in the future.

This same question about the relevance of historical trends was posed to the team from BERK. Mr. Hodgins responded that long range projections that go out beyond what we know requires an understanding of the key drivers underlying commercial development that influence where it locates and the scale it takes. From a planning perspective then, it is appropriate to look at population and employment estimates as a driver. But from a policy perspective, there is an opportunity to look at factors that influence where that development occurs, that concentrate it in different ways than is occurring now in order to fit with the vision the community wants to achieve. It is this policy perspective that is informing the commercial market analysis to identify those drivers government can influence to realize the kind of development desired. What can the public sector do to promote those developments? Conditions change constantly. That is one reason why this isnt a typical market study. If it were, BERK would be looking at the next year or two. The purpose of this study is to inform the conversation over the long haul, to help cities effectively influence the scale, location, and type of commercial development that will occur? In addition to walkability, what other transportation factors influence the demand for different housing products? We have a good bus system. Are you looking at light rail, and other things like that? Were putting into the report what it is that people are looking for rapid transit is one of them, though the demand for rapid transit is somewhat age dependent. Where does row housing fit into the housing market? Why dont we see it here?

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Townhouses are a lot like single-family attached housing, and are similar to row housing on the east coast. It is not a condominium. Thurston County has very few single-family attached housing for sale. Horizon Pointe has probably the most examples, and they have been a very popular owner-occupied housing product. What is the effect of JBLM on the housing market here? How are you considering this in your analysis? Also, how does their housing per diem factor into the market demand and costs of housing? Thurston County has been one of the few bright spots that New Home Trends has looked at over the last few years during the economic downtown, and that is due in large measure to the military and proximity to JBLM. The military does not publicly project any major forecasted increase in personnel over the next few years, and we are at a high point in terms of the existing military population being home from oversees, so we are at a peak. While we cant predict how many more will locate here over the next several years, we do take into consideration where they will locate. They live within a 30 minute drive from the base.

Mr. Doan thanked the two consultant teams for their presentations and noted that everyone will be looking forward to their final reports when they are available late this year. He then turned to Tom Fitzsimmons and asked for a brief Financing 101 overview. He noted that Mr. Fitzsimmons has been helping Tumwater with its brewery visioning process. Mr. Fitzsimmons explained that it is important to understand who the partners are in a development project, the role that each partner plays, and how financing fits into that. The partners are: The business entrepreneur who is typically labeled as the developer. The bank, which provides the financing. The development team which includes contractors, architects, engineers, consultants. The Market which influences demand, expectations, price points, etc. The Equity Partners, the term for the investors who actually put money into the development as an investment. This may be the developer, a real estate investment trust (REIT), insurance companies or mutual funds, banks whoever is putting a financial stake into the development. The Community as evidenced by a) the regulations, b) the culture of the community and the expectations placed on development and attitudes toward development, and c) the willingness of the community to invest in development. These are the players. Mr. Fitzsimmons noted that government the people in the meeting room tonight have their hands on the throttle of the Community, which is the thrust of this meeting. In explaining the role of financing, Mr. Fitzsimmons pointed out that the bank is willing to put money into a development under certain terms. Five years ago, they would finance up to 80% of the value of the development similar to that of a typical home mortgage. Since the collapse of the economy, developers are lucky to get a 60% loan to value ratio. It is a product of the current economy, and whether that is the new normal remains to be seen. Banks are much more risk averse than they used to be. Banks are a major player and their rules are changing. Theyre also getting smarter about where they invest. In todays climate they are pretty focused in areas that are low risk, areas that will be easy to lease up. Outside of those areas it is difficult to get bank financing. Equity partners want a return on their investment. The first three years are the riskiest in any development investment. Early money in is the riskiest so they get the highest return. Often investors change out after the first three years after the risk is lower and net operating expenses level out. Preferred returns go to those investors who come in early. Lower returns go to investors like insurance companies who come in later, who are more risk averse but are in for the longer term and want a stable return. The economics of a development depend on:

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The cost of the land The cost of financing. The expectations of those who invest. The cost of the development, its construction cost. The rent structure.

This last rent structure is a huge challenge to this community. Mid-rise to high-rise development generates $2.30 - $2.80 per square foot in rent in Seattle and Bellevue. In this community, the average rental rate is $0.85 - $1.10 per square foot. So the income to a development is the rental rate less the cost of construction. Interest rates are the same between here and Seattle. The expectations of investors are the same between here and Seattle. The only factor that can be changed is the type of development the look and feel and quality of the construction and the way it occupies the land, such as structured parking versus surface parking. Fortunately land is cheaper here than in Seattle, but it is still difficult to make anything more than 2 to 3 stories pencil out. Land is utilized differently here than in a high rent market like Seattle. Mr. Fitzsimmons explained that all of this is why it will be difficult to make urban development in core areas with high quality construction and amenities pencil out in this market. Creating beautiful places with structured parking will be difficult not impossible but it will take hard work. The dial will have to be turned differently here than elsewhere if it is to be achieved, and The Community has a big hand whether it will work here. Mr. Doan invited other panel members to add to the finance overview. Mark Furman noted that the term skin in the game means something completely different today than it did five years ago. Communities have to be more active investors in their own community development if they want this type of high quality, expensive development here. David Brubaker added that when thinking about community culture, its important to remember that just as all elected officials are not the same, not all developers are the same. In this environment, when the community dial is such an important factor in whether or not the project will pencil out, theres a need to find ways in which the community can change its attitude about developers and how jurisdictions work with developers. Developers have to make a profit; its what they do for a living. He noted that theres nothing evil in making a profit though there are some in this community who do believe it is evil. Community agencies and governments need to find new ways to partner with developers. It needs to be a realistic partnership. He observed that when public private partnerships fail it is most often due to unrealistic expectations of one partner from the other one. For example, it is unrealistic of the private sector to expect a city to take a financial risk that theyre not prepared to do. And cities should not expect developers to not try to make a profit. That is why it is important to structure public-private agreements very carefully, so that they have a realistic chance of succeeding. Mr. Brubaker suggested that its time to talk about some new ways of twisting that community dial to make it possible for development to take place. For example, the way state deals its excess property to local governments. There may be a policy that says they need to get fair market value for that property. But maybe they dont need to. Maybe they can transfer that property to the city or the county at less than market value so that the local entity as a partner in a public-private partnership can offer the property as a way of subsidizing a desired development project, to get an important project done recognizing that this is a secondary market that cannot command the rents that Seattle can. One of the few things government can influence is the cost of land.

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Tim Dowling explained that this recession is consumer driven, which sets it apart from many previous recessions. Its important to understand that lending, insurance and other policies over the last 10-12 years made homeowners of some people who could not afford homes. It also inflated home values and people took that inflated value out in the form of home equity loans. Those same lending practices no longer exist, which will affect the way we think about home ownership as we come out of this recession and home values rise at a much lower rate. Why did all these banks implode? Banks expanded due to the availability of home equity. Banks are equity lenders. When the market was hot, everyone leveraged themselves up. Then as home values plummeted the equity of both homeowners and banks evaporated. When looking at home loans in this area, as many as 30% of home owners are upside down on their equity, meaning they owe more in mortgage than their homes are currently worth. This has a huge impact not just on homeowners, but on the banks themselves and their ability to invest in development. The equity is not coming back, and probably wont for at least 5 to 10 years. This creates a drag on lending, a drag on consumer spending, and slows the economic recovery. Mr. Brubaker observed that there are other factors driving development patterns. The office market is the biggest commercial market in Olympia (and Lacey, too). Construction of the Olympia City Hall emptied five buildings that were commercially leased. The State recently opened its new IT building and will be moving more and more workers over to that building, creating more vacancies in commercially leased buildings. Under the best of economic circumstances, this would be a difficult time to build and open a new office building when the two largest users of commercial office space are consolidating into new owner-occupied buildings. It will be some time before the market absorbs all of that empty office space. Mr. Doan asked the panel how an area like Capitol Boulevard, which developed over 100 years but which is now showing signs of decline, can transition when there are so many areas of greenfield development nearby. How does the financing and investment scenario change when we think about redevelopment versus new development. Steve Cooper pointed out that financing will come back. Banks will lend money again. But it may not come back as it was before. The present discounted value of future flows of income will determine what the value of property, and investments will assume a reasonable risk. He suggested that this conversation was a little like putting the cart before the horse, though. The Task Force wants to know how developers are going to finance their projects. But they should instead be asking what their own role is in community development. How can government make the playing field level? His analogy is that governments role is to create the Safeco Field, not to play the football game. He noted that it is still cheaper to build further out from the urban area than it is to build downtown or on the corridor. Restructuring that misalignment of costs and fees should be a priority. Impact fees need to be structured so that there is an incentive to develop in the core area, and the costs as people build out further out should increase. The challenge the Task Force is trying to resolve goes far beyond Olympia taking care of its problems, Lacey taking care of its problems, and Tumwater taking care of its own. If developers go just outside the urban growth boundary into the county, they can develop a lot cheaper. A regional approach should be motivated to get more consistency in policies and fee structures so that everyone is pulling in the same direction. Another potential area for improvement would be for jurisdictions to simply adopt common terms. Mr. Cooper observed that a developer needs a dictionary just to know the different terms different cities apply to the same thing. If jurisdictions want these corridors to work, the community has to invest in them to create the playing field that allows developers to compete against low cost development on the fringe or in the rural areas. If there is no profit to be made by the developer, the banks arent interested in loaning. Risk is the biggest factor that will undermine corridor plans. Whatever government can do to make the project more viable, reduce the risk, will help. This includes infrastructure, reasonable processes, predictable permitting.

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Mark Kitabayashi noted that one thing jurisdictions can do to stimulate corridor housing is to incentivize more than regulate. There are many more regulations than incentives right now. What government cant change are demographics. The United States is growing, and its growing older. This is going to happen regardless of the economy. People will look for different housing as they get older. Thats what communities should be planning for. And the focus should be on how to create market rate housing in the corridor. Not subsidized housing, and not high end. West Bay condo projects sold for half a million dollars. But theyre not really urban because people still have to drive to go anywhere. People who want an urban lifestyle dont expect to have to drive all the time. They shouldnt need a car to live on a downtown corridor. Its hard to attract business downtown if there are no people living there. But people dont want to live there if the businesses arent there to support them. Its a chicken and the egg conundrum. That should be a priority to look at. Mr. Kitabayashi added that whether desired or not, Thurston County is becoming a bedroom community to the cities up north. Fort Lewis reinforces this. He noted, though, that for the first time in many years, houses in south Pierce County are less expensive than those in Thurston County. He advised jurisdictions to have a clear vision of where we want to go, though recognize that outside forces are causing changes beyond our control. Glenn Wells noted that one of the leading economic indicators is property values. When looking at the BERK maps it is evident that property values downtown are higher than most other places in the County, but that is also where some of the regions largest concentrations of subsidized housing are concentrated. What is the communitys will about how development should occur? It has been apparent over the last two years that many in the community do not want development to occur on the land with the highest property values, which is along the waterfront. Thats the first logical place for investment to occur, but community opposition creates too much risk. Taking away that development opportunity delays the ability to realize development elsewhere in the corridor because those are lower value, higher risk properties for the type of mixed-use product desired in this area. This opposition to downtown development on high amenity properties must be overcome before any significant redevelopment can occur. Mr. Wells explained that what happened in the development community over the last few years was the perfect storm. The market collapse affected the banks, which affected the appraisers. At the same time, cities were implementing 80% increases in mitigation fees. Construction and materials kept going up. So the cost of construction went up, fees went up, but the market collapsed. He suggested that it will be some years before the issues work their way through the system and investing resumes. There are projects that can be done now, and they are moving. But there arent many. The most attractive locations in terms of investment opportunity are near the water, which are also the most controversial in this community, so that risk may offset any opportunity. Mr. Doan asked the panel members to identify factors that would lead them to or away from investing in the corridors. Mr. Dowling responded that in order to understand how the development process works, as a community we need to be asking ourselves, where is that development going to go first? Lacey Gateway is probably the best investment opportunity in the region at this time, with the greatest return on investment potential. Those better investment opportunities have to be absorbed first before the cities will see much in the way of the riskier, lower return investments on the corridor. That is true even in the best of investment times. Mr. Fitzsimmons started from the big picture perspective. Historically speaking, construction of single family homes outnumber multi-family homes by a two-to-one margin. If this pattern continues into the future, construction of 60,000 new dwelling units will result in, at best, 20,000-25,000 multi-family units. So what incentives will this community put into place to get those new multi-family dwelling units located along this urban corridor? He applauded the Task Force for its wisdom in narrowing the regions focus to

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a single priority corridor, noting that those units dispersed throughout the metropolitan area corridors will have little beneficial effect. He advised that further focus is needed, though. Retrofitting the corridor will require all three jurisdictions having the political will to identify no more than three or four nodes total and then establish public-private partnerships to attract investment into those areas. Those nodes must be designed to act as magnets to capture as many of those 25,000 dwelling units as possible over the next 30 years. As they do so, they become places, places that act as magnets for further urban investments. Places where people can walk to shop, where they have a sense of community and social interaction. Mr. Fitzsimmons added that is not all the developers responsibility to create these places. Its a partnership between the public and development community to find and fund the investments needed to make these select nodes magnets for housing, jobs, stores, entertainment. It is not something that happens by itself. It happens with tremendous exertion and leadership. He pointed out that anything that has ever happened of significance in this community happened because Lacey, Olympia, and Tumwater got together around a table and figured out how to make it happen. Competition between the three cities wont cut it if this corridor vision is to be realized. Mr. Kitabayashi noted that virtually any residential investment on the corridor will be development, not redevelopment. There may be some old buildings downtown that can be converted to housing, but it will cost more than to build new housing. Most people prefer new homes, further exacerbating the challenge of redevelopment. What will be key to attracting people to live on the corridor will be creating a walkable corridor that is what people want if theyre buying an urban lifestyle. Communities have to start with investing in the infrastructure and public space to create a walkable environment in order to attract that type of investment. He agreed with Mr. Fitzsimmons point about the need for collaboration. The three cities have to work together. And they have to focus on a small number of nodes, not the whole corridor. The single corridor is better than multiple corridors. But even the single corridor is too big. The cities have to focus on a small number of locations to get the critical mass of activities that create a sense of place and that are needed to support a walkable urban environment. Terry Wilson explained that every house will sell at some point the price will get low enough, pressure will build due to population growth, it will sell eventually. The same is not true with commercial property. A commercial property that sits vacant will be harder and harder to sell, and it becomes a liability. It becomes a liability not just for the bank or property owner paying taxes and insurance on it, it becomes a liability to the community because it starts depressing the other buildings nearby. Why are so many businesses moving to Littlerock Road? Because the commercial perception is that Littlerock Road is where things are happening, that Littlerock Road is the place to be. It is where the customers are. Capitol Boulevard doesnt feel vibrant. He suggested that there is potential to work with a developer who will build on Capitol Boulevard, despite the risk posed by the vacancies, perhaps by helping to subsidize the rent to bring people in to that building when it is built. Mr. Furman said that its possible to find properties on the corridor where a developer can make four to six units pencil out. But when cities start talking about larger numbers of dwelling units double digits it gets harder because the type of construction changes and it is much more expensive. He encouraged cities to explore innovative partnerships whereby the city donates some land for housing to make it possible for the kind of housing product desired downtown to pencil out. He reiterated that he is not talking about subsidized housing, but market rate with $1,100 - $1,300 per month rents that create a different kind of synergy downtown and make it possible to support a small retail business on the first floor. He cautioned that redevelopment in downtown will always face environmental issues. If downtown development is desired, what can jurisdictions do to reduce the risk developers will face with those properties. These environmental issues can kill an otherwise good project. He agreed with the earlier point about concentrating efforts. The jurisdictions need to find just a couple of places to focus significant efforts not the whole corridor.

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Mr. Brubaker explained how risk killed a downtown housing project he was involved with recently. This was a project where the city had subsidized the purchase and acquisition of the land with the developer. That project is still not built, despite being designed and permitted. The developer went to 36 different lenders to get a construction loan and couldnt get one. It was for a seven story building with 126 new apartments, retail on the ground floor and structured parking built in. It penciled out, and still would. But from the investment standpoint of a lender, it was still too risky because of the loan to value ratio. Reasonable efforts on the part of cities to help reduce that risk somehow should be a priority, at least until a few of these projects get off the ground and prove the market to the investors. Perhaps several local banks could partner to create a local investment pool that lessens the risk to any one bank and adjusts the loan to value ratio accordingly. It isnt just cost that needs to be lowered, but also the risk. Mr. Cooper advised that all of this will take a lot of community effort, whether that is stepping in with a margin of guarantee that is perhaps paid by a developers fee or helping aggregate parcels or rethinking how impact fees are calculated and applied. Whatever the strategies are, cities have to start working on them now, and get out of the status quo box if they are serious about corridor development. The old way of doing business will not get the results cities are looking for. Mr. Doan opened the floor up for questions and discussion. Andy Ryder observed that the market has eliminated the casual investor. Before, land values were too high to make investments practical. Now the land prices have dropped, but too much equity is needed to get a loan. So only the large developers can afford to do projects anymore. Panel members concurred. Theres no doubt that the last two years has changed the playing field. It was explained that in the past, mortgage brokers were able to package the loans and ship them off, and someone would buy them. Thats not so easy any more. In the near term, cities should assume that easy access to loans will not occur. What are needed are jobs. Jobs will make people more confident and give them money to spend. The challenge is that the market is running counter to the game changing direction the cities are trying to take. In the near term developers must squeeze every penny out of a project while costs are going up and lending is tight. That drives development away from the very corridors in which cities need to create magnets for future investment and into the lower-cost, outlying areas. Cities will have to actively pursue changes in the near term so that the longer-term market changes. Theres a sense of urgency for cities to figure out how to create a good development climate in this corridor now so that when the economic climate changes it is a natural place a better place to invest than where the land is cheaper. The Hands On Childrens Museum is a driver of people, which in turn is a driver of development. This is an example of what cities can do to create synergy. Hands On Childrens museum attracted over 100,000 people per year in its old location, and will likely attract much more in its new location. That gets the attention of developers. Doug DeForest asked which comes first, residential or commercial development? He said it used to be residential, followed by commercial. Is that still true? Panel members said that in general, that same trend is still there. Housing values went down first, and commercial followed. The recovery itself will also probably start in the residential. Once more, it gets back to the consumer. If consumers are confident they may not go out and buy a new house but they may go buy something else. And if they buy more then its easier for the business owner to pay his rent. The big impact on commercial properties will be primarily on the C properties. As the market declines, the A properties will lower their rents which starts hitting the range of rent for C properties. This in turn makes it much harder for those C properties to get and keep tenants. Natural selection then takes over.

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It is in a market like this that C properties get acquired to be redeveloped later when the market turns around. An impact on new businesses is that today growth pays mitigation fees. Older developments did not have to pay these fees and so they can be more competitive with rents than new developments. When impact fees are assessed it is important to be cognizant of the potential implications. For example, with the previous downtown Olympia housing project, the developer was told to pay significant school impact fees. When asked how many school children live downtown, the school district indicated only one child. That fee was charged by the school district, not the city. The city has no control over what a school district charges in the way of fees. In this case, Olympia supported the developer in his petition to the school board to get the fee for downtown development reduced. However, two months later the city council passed an increase in parks impact fees that offset the reduction in school fees. Cities have to look at the regulatory side as a cost factor, and how it impacts development. Ed Hildreth challenged the panel to identify good news. He also asked them to identify things that government has done right in their perspective. Mr. Wells noted that Washington State is a prosperous state. The Puget Sound corridor is projected to get about a million new people over the next 12-15 years. Washington is likely to recover much quicker than most other states. In terms of things done well, he noted that Olympia where he does most of his business - has good staff who work hard within the constraints of their own rules to assist developers. They are frequently hamstrung by their own regulations. Mr. Fitzsimmons noted that in terms of good news, there will be 50,000 new jobs, 170,000 new people, and new dwelling units and buildings for that growth in the future. There are a lot of communities across this state and the country that have no prospects for growth; some are even seeing a decline. In terms of what government can do right, cities should be looking at how to direct that growth to locate more efficiently. This community has a rich history in working with these concepts and ideas, and establishing a basis for progressive direction. The comparative communities that will be looked at in the market study Shoreline, Renton, Bellingham, others have many tens of thousands or hundreds of thousands of people. That is roughly the same size at this metropolitan area, but they are each one city that is able to unilaterally decide how to deal with these issues. This metropolitan area is roughly the same population but is made up of three cities. So a challenge and this has been done in the past is to act as one so that this region really can compete with the Rentons and Shorelines of the world to make this vision happen as opposed to each going it alone and stretching so thin that no one succeeds. In terms of good news, Mr. Kitabayashi pointed out that people will still be buying and selling houses. Also, Thurston County has fewer finished lots to be absorbed they have to be absorbed before new ones will be built. As far as jurisdictions go, he supported discussions underway about creating a metropolitan parks district, which would be good. He also offered his kudos to Olympia for its Transportation Benefit District, which it enacted very quickly. Transfer of development rights is another good concept being considered. Key will be for all the jurisdictions to come together and act as one. Dont focus on the differences, focus on the commonalities. Many good strides have been taken in last few years. He encouraged jurisdictions to build on that and keep up the momentum. Mr. Dowling pointed out that buying into a down market such as this is an opportunity to create generational wealth. Mr. Furman observed that this region has a lot of natural resources it can build upon. He expressed uncertainty whether jurisdictions have really impacted potential projects in the last few years. The community dial is tuned in such a way now that only a few voices are being heard. He feels that a lot more voices are not being heard. It may not be possible for any in the work session to change that, but it

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is a factor that will continue to influence what does and does not get built, and where. Downtown waterfront is the best opportunity in terms of market and amenities, but unless the community dial is adjusted differently it wont happen. Mr. Brubaker observed that the renovated Percival Landing is great! That is one of the bright lights in the whole region. He noted that al jurisdictions do a pretty good job of targeting their limited investments in an effort to attract development. He also noted that jurisdiction staff are great to work with. What is needed is just a little more creativity to target sites for new development where the public sector can aggregate small lots into a single parcel large enough to work with. These communities are doing the best they can with the tools they have they just need to find some new tools. He advised the cities to not slack off now because the times are tough this is when they really need to be creative. Mr. Cooper observed that the market hasnt been as horrible here as it has been elsewhere. The bad economy does create the need for these kinds of meetings. From a developers standpoint, a lenders standpoint, it is nice to have people on the public sector side looking at the good aspects of development. People often criticize growth until the economy slows down, when they suddenly people realize growth has benefits they want to encourage. If the community can get past the political hurdles and past focusing on individual developers, and focus instead on the bigger picture about how development contributes to a community and the benefits it brings, it will be good. Mr. Doan reflected on the need for growth importance of growth to drive a city and keep its social fabric intact. He noted that Detroit has lost more than half its population in the last 40 years. He encouraged people to look at satellite images of Detroit in Google Earth. Entire blocks of Detroit are completely vacant. Neighborhoods are gone. Stephen Buxbaum explained that Washington has unfortunate limitations in terms of what the public sector can do with the private sector in terms of stimulating development. One of the few tools cities have that offers promise is the Community Reinvestment Act, and its application on commercial properties that are under-performing to foster a new generation of vibrant development using the public sectors municipal corporate powers. He noted that this is one of the reasons why he is interested in the redevelopment potential along the corridor. He encouraged the BERK study to look not just at property values but also the age of properties along the corridor. He would like to identify where there are nodes or clusters along the corridor where government can step in under the Community Redevelopment Act and appropriately target non-performing commercial properties. Government can help aggregate properties in partnership with the private sector to achieve community goals. He advised that he was greatly heartened by what he has heard tonight from the private sector and possible opportunities for public-private partnership. Mr. Doan introduced the closing segment of the agenda. He asked everyone to identify one idea, one concept that most resonated with them from the evenings discussion. The microphone was passed around the room and the ideas captured in bullet form as parting insights: Talking Wall Notes Parting Insights Use a variety of tools, use them wisely, and target them to specific needs A clear vision is needed so developers know where we want to go Call them something other than nodes! Better understand the community dial Look at how demographic changes are going to change the rules Government needs skin in the game to get what it wants Its a new day when this many in the room, and no challenges to idea of growth Focus on commonalities, not differences Work together to prioritize and champion an winnable development project Be strategic when making infrastructure investments for nodes Bad times for private sector may be opportune times for public sector Dont give up on this process working together we can make a change for the better

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Growth is it can be a strong asset The three cities ought to get together The three cities ought to get together so they can have more transit service Jobs come first jobs create opportunities Incentivize, dont regulate No net loss on housing Continue this process think outside the box New challenges require new tools Crisis creates opportunities This is bigger than any one jurisdiction regional stewardship and leadership is where its at Take action to guide growth this is not a time for the status quo Three nodes are better than one Focus on corridor nodes and they will become magnets for growth Growth is an asset Think creatively and act systematically If its ugly, people wont locate there Cities should work together as a team to attract growth Move community dial to find partnerships that work Watch the demographic changes Support job and wealth creation Focus on the corridor Growth must pay for itself Keep working together Create places where people want to be We need breakthrough partnerships public / private and public / public Development and regulation needs flexibility Pay attention to your culture Commit funds to the corridors Think of growth as an asset in all the decisions we make Listen to each other, again and again Create a level playing field for impact fees Be patient Projects require partnerships Partners make for significant opportunities Teamwork will get it done Foster partnership and leadership with county and three cities in this time of crisis Underwrite costs of development This may be most opportune time to invest in community Partner together on something significant Long term invest and share risk; short term think creatively about housing Protect the assets we have

Chair Kmet offered closing remarks. There is a community out there that doesnt necessarily like development, even on the corridors. It will take a lot of courage to follow through on this and make it happen, and it will take long term commitment. If were going to try to facilitate redevelopment of the corridors and I really think its essential to the future of our community, in terms of the social fabric but also financially for our communities we have to have the backbone to follow through and make this stuff happen. Its not going to be popular with everybody out there. We have to recognize that and be prepared to stick with it. We have to think of ways to talk about this in different terms and help educate the community on what were trying to accomplish and why and what is needed to make it happen. The meeting adjourned at 9:00 p.m.

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