In a 2020 TED Talk, University of Paris Professor, Carlos Moreno discussed the importance of a 15-minute city. Moreno’s TED Talk comes in response to what has become many urbanists’ defining plague for modern U.S. cities: urban sprawl.² The trend of mass migration from urban cores to suburban outskirts represents the abandonment of denser “downtown living” for spread out “cul-de-sac style” neighborhoods and houses. As a result, urban areas lose their backbone of human capital, impacting local infrastructure, businesses, social spaces, and city place-making. Moreno asserts that the “essence of […] the urban experience” should be access to work, housing, food, health, education, culture, and leisure. Moreover, Moreno outlines the guiding principles of the 15-minute city: ecology, proximity, solidarity, and participation. Phrased simply, the “live, work, play neighborhood” has become the defining terminology used by many of the place makers and developers of the neighborhoods and cities that aim to achieve this concept, one of which is a West Chicago neighborhood presently known as Fulton Market District.

The district lies directly west of the Chicago River and of Chicago’s central business district: “the loop.” The original use of the Fulton Market neighborhood was for Chicago’s meatpacking district. With a longstanding industrial identity, Chicagoans rarely considered the area a viable place to live or frequent. However, since the turn of the century, the former meatpacking district has transformed into a highly robust area with the same offerings as many of Chicago’s long-established neighborhoods. Now with many multifamily, hospitality, office, and retail offerings, and more on the way, Fulton Market continues to draw in an abundance of new residents and patrons. As a result, tenants like McDonald’s and Google have relocated to the Chicago neighborhood for their global and Midwest HQs, respectively. In doing so, whether intentionally or unintentionally, this neighborhood has become one of Chicago’s premier live, work, and play locations, and thus, well aligned with the themes of the 15-minute city. Some developers believe this was no accident.

Shapack Partners, the firm considered one of the first to begin acquiring land in the former meatpacking district, has maintained the goal of making Fulton Market a live, work, play neighborhood since they began developing there. The CEO and founder of Shapack Partners, Jeff Shapack, saw an opportunity in the Fulton Market neighborhood in the early 2000s. At the time, Fulton Market was known as the meatpacking district of the West Loop. At this stage, Shapack and other local developers recognized three advantageous driving features of the area:

(1) Fulton Market is directly adjacent to Chicago’s central business district (The Loop). This would offer downtown workers and residents an alternative neighborhood to reside.
(2) The development climate was positive toward new development. Zoned primarily as an industrial and manufacturing area, few people lived in Fulton Market, meaning there was little concern for displacement or opposition from local residents. Additionally, with many of the meatpacking and industrial businesses being wholesalers, the neighborhood contributed little to the city’s bottom line in sales tax.
(3) Fulton Market was well positioned within Chicago’s transit system. The neighborhood is directly north of Chicago’s Union Station and has multiple major subway lines with stops in Fulton Market. By identifying and demonstrating these characteristics, Shapack and the other stakeholders in Fulton Market were able to minimize potential issues with community and municipal acceptance of their concept.

Success of Fulton Market

Since developers began to target the neighborhood in the early 2000s, Fulton Market has been consistently cited as one of the fastest-growing neighborhoods in the U.S.³ This is evident in Fulton Market’s population growth, asset/land value appreciation, tenants, and land usage.

Population

The “Fulton Market Innovation District” plan was adopted by the City of Chicago in 2014. Thus, for the purpose of this research, it is necessary to consider the surrounding and underlying neighborhoods and communities in the Fulton Market scope. The nearby neighborhoods on the Westside of Chicago and the overarching area surrounding Fulton Market is known as the “Near West Side.” Between 2010 and 2017, the Near West Side population grew by more than 14%, while the City of Chicago grew by only 1%.⁴

Census tract 2801 covers a significant portion of the core of Fulton Market. With a population of 4,872 and 7,421 in 2010 and 2020, respectively, tract 2801 grew in population by 52%. The voting districts of the encompassing general Fulton Market grew by similar margins, with the population expanding from 4,617 to 6,940 in the same period. All the while, the Chicago metropolitan statistical area grew by only 2%.

Land & Asset Value

Between 2014 and 2020, 43 projects valued at 14 billion USD received approval in the Fulton Market District.⁴ Since the turn of the century and throughout this period, land and asset values have grown rapidly. For example, 914-26 W. Fulton sold for $1.55 million in 2000 and then $14.5 million in 2016. The site is now home to Fulton Market’s “Time Out Market”, a popular food hall with 18 eateries, three bars, a demo kitchen, and a rooftop terrace. Additionally, 811 W. Fulton, a 64,877 square foot mixed-use building, was purchased for $2.63 million in 2014 and sold for $50.3 million in 2019.

Overall, asset and land values have increased significantly over the last decade. As evident in Figure 2, Fulton Market’s average acquisition price has quadrupled from 2019 to 2021, while the average cost per square foot has more than doubled in the same period of time. Since developers began moving into the former meatpacking district around 2010, competition for the land has grown steadily. The 2014 implementation of the Fulton Market Innovation District bolstered this competition. Since then, prominent Chicago and U.S. developers and investors have pushed to get in on the action in the neighborhood. In addition to Shapack Partners, other major neighborhood developers, and investors include, but are not limited to, Sterling Bay, Walton Street Capital, Crow Holdings, Related Companies, and Fulton St Companies.

Tenants

Since developers began bringing in the necessary commercial space, major tenants across all asset classes began moving in to take advantage of the fast-growing neighborhood. On the office side, with HQ tenants like Dyson and McDonald’s joining Fulton Market between 2017 and 2018, the neighborhood has recently welcomed new occupants like Google (2019) for their U.S. headquarters and Oreo-maker: Mondelez (2020) for their global headquarters. Additionally, WeWork, the coworking office rental company, has opened 3 Chicago offices in Fulton Market since 2014. Shifting to hospitality, between 2014 and 2020, Fulton Market developers added 1,702 hotel keys. Of those additions, major brands include globally recognized hotels and private clubs: Soho House, Nobu, London-based hotel: The Hoxton, and The Ambassador. Lastly, on the retail end, major global and national brands have opened up shops and distribution centers in Fulton Market in the last decade. These include, but are not limited to, Apple Inc., Lululemon Athletica, Specialized, Allbirds, Warby Parker, Whole Foods, Trader Joes, and Guinness. The furthest distance between the offerings mentioned above is 0.75 miles. To bolster much of the retail and restaurant tenancy, firms are shifting their focus to bring more residential offerings to the area. Most recently, Related Midwest aims for a June 2023 opening of what will become the tallest building in Fulton Market, “The Row Fulton Market”, a 43-story 300 unit residential building.

Usage

None of the development and eventual growth could have been achieved without municipal approval and changes in land use. As mentioned, Fulton Market was originally Chicago’s meatpacking and industrial district. Therefore, industrial and manufacturing use comprised much of the zoning classification of the area. In 2014, after developers had already begun buying up and developing some of the land, Chicago’s Department of Planning and Development began its land use plan analysis of the neighborhood’s historic and cultural importance in conjunction with the opportunities of the neighborhood (location, development climate, and transit orientation).

As a result, the land-use allowances and development climate shifted in favor of the growth and historical preservation of the Fulton Market. “Based on the recommendations in that plan, the City designated a landmark district to preserve the historic assets at the core of the [Fulton Market Innovation District], [and] updated the zoning code to remove the Planned Manufacturing District within the FMID to allow for a variety of commercial uses.”⁴

Fulton Market as a 15-Minute Neighborhood

Since implementing the FMID, the City of Chicago has approved over 50 neighborhood projects, with more on the way. Between 2010-2020, the population in the neighborhood has roughly doubled, with the majority of residents being young professionals between the ages of 20-34. Moreover, most households are single, while 36.6% are families. In roughly the same time frame, about 58% of “Near West Side” residents used public transit, bikes, or walked to work. Moreover, from 2018 to 2019, the primary transit station in Fulton Market, the Morgan station, saw a 5.6% increase in ridership.⁴

The idea behind the 15-minute city is to reduce reliance on cars and enable more efficient use of urban resources, such as land and energy. This is achieved by positioning essential services, such as schools, health centers, grocery stores, and other everyday services across each neighborhood, making them easily and quickly accessible to the majority of the neighborhood residents. In the case of Fulton Market, employment growing in conjunction with the population as an apparent result of the neighborhood firms, coupled with the majority of residents not requiring a car to get to work, is evidence of a “live, work, play” environment. Examining these changes in keeping with one another indicates the successful implementation of Fulton Market as a 15-Minute City.

Key evidence lies not only with what happened in the neighborhood, but also with what is happening outside of it. Just north of where the Fulton Market Innovation District ends, according to the Chicago Department of Planning and Development, Shapack partners has achieved approval for its master-planned development “North of Milwaukee Avenue” (NOMA). This 3.25-acre master plan would bring in a new hotel, 1,500 residential units, and more commercial space for dining and retail.⁵ This indicates that the neighborhood has become so attractive to prospective residents that the bordering areas need to offer the capacity to take in the overflow from Fulton Market. Of course, this will likely not be the only major planned development in, or just outside of, Fulton Market in the foreseeable future. The overall success of Fulton Market and the FMID will likely continue to grow for several years.

Reference List

[1] Johnson, D.L. (2002). Origin of the Neighbourhood Unit. Planning Perspectives, 17, 227 – 245.

[2] Moreno, C. (2020). The 15-Minute City. Carlos Moreno: The 15-minute city | TED Talk. Retrieved November 2022, from https://www.ted.com/talks/carlos_moreno_the_15_minute_city?language=en

[3] Cushman & Wakefield (2019, October 11). Fulton market in Chicago named to top 20 “cool streets” in North America. Cushman & Wakefield. Retrieved from https://www.cushmanwakefield.com/en/united-states/news/2019/10/chi-fulton-market-named-to-top-20-cool-streets-in-north-america

[4] FMID. City of Chicago : Fulton Market Innovation District. (2020, October). Retrieved from https://www.chicago.gov/city/en/depts/dcd/supp_info/fulton-randolph-market-land-use-plan.html

[5] Crawford, J. (2022, July 16). New details emerge for Shapack’s “Noma” masterplan in river west. Chicago YIMBY. Retrieved December 2022, from https://chicagoyimby.com/2022/07/new-details-emerge-for-shapacks-noma-development-around-former-salvation-army-building-in-west-town.html

Bureau, U. S. C. (n.d.). P1 Total Population. Explore census data. Retrieved from https://data.census.gov/table?q=population&g=1400000US17031280100%2C17031280400_1600000US1780060_310XX00US16980_860XX00US60607%2C60642%2C60661&tid=DECENNIALSF12010.P1

Bubny, P. (2022, May 2). Shapack venture acquires Salvation Army campus in River West . Connect CRE. Retrieved November 2022, from https://www.connectcre.com/stories/shapack-venture-acquires-salvation-army-campus-in-river-west/

Cook County: Clerk’s recordings system. Property Records Search | Clerk’s Recordings System. (n.d.). Retrieved December 2022, from https://crs.cookcountyclerkil.gov/Search/ResultByPin?id1=17084250090000

          https://crs.cookcountyclerkil.gov/Document/Detail?dId=MzgxMTkzMDY1&hId=NDdiMTQ1YmEyZTM2ODlmNzU2ZTE0MzgzNTNlMGFkNjZhMzg3ZmFhMWYxMGM0NzQ1Nzc2YTg4MjUwNmUzNjhlNw2

          https://crs.cookcountyclerkil.gov/Document/Detail?dId=MzAxNTI1ODg1&hId=OTMyOWMzMjM3Njg1YTJkOGE4MDA4MWFkMzZlMjY5N2YwYTZiODRkMzI5MDM4N2FjMWE1MTc3YTJmMzg4YWY3MQ2

          https://crs.cookcountyclerkil.gov/Document/Detail?dId=MzExOTc3NTM1&hId=OGZiMjY1ZGI0YzQ4YjlmZmIxODAyNTBkYTI0OTI4NDQ0YzM4NDUwZmQ2YWE4ZGJmMzQwMDdmMmQwOWI0YWIxZQ2

Crg, Shapack move forward on $441m Chicago mixed-use project. Commercial Property Executive. (2022, June 9). Retrieved November 2022, from https://www.commercialsearch.com/news/crg-shapack-move-forward-on-441m-chicago-mixed-use-project/

Dilakian, S. (2022, August 15). Shapack cashes in as Trammell Crow drops $100m. The Real Deal Chicago. Retrieved November 2022, from https://therealdeal.com/chicago/2022/08/15/shapack-cashes-in-as-trammell-crow-drops-100m-in-fulton-market/

Ecker, D. (2019, September 19). A record-setting sale in Fulton Market. Crain’s Chicago Business. Retrieved November 2022, from https://www.chicagobusiness.com/commercial-real-estate/record-setting-sale-fulton-market

F. Gaglione, C. Gargiulo, F. Zucaro, C. Cottrill Urban accessibility in a 15-minute city: a measure in the city of Naples, Italy Transport. Res. Procedia, 60 (2022), pp. 378-385

Nakesha Newsome. (n.d.). The Just 15 Minute City. https://jstor.org/stable/community.30959499

Ori, R. (2016, April 13). Fulton Market Lands another London Hotel Brand. Crain’s Chicago Business. Retrieved from https://www.chicagobusiness.com/article/20160413/CRED03/160419950/hoxton-plans-hotel-in-chicago-s-fulton-market-district

Rebong, K. (2019, June 3). Fulton Market Development: Shapack partners: 224 north ada. The Real Deal Chicago. Retrieved from https://therealdeal.com/chicago/2018/09/18/shapack-partners-expands-in-fulton-market-picks-up-warehouse-in-west-half-of-district/

Map of United Arab Emirates

Sharjah is one of the seven emirates in the UAE, located just east of the emirate of Dubai.  As the third largest emirate in the UAE, Sharjah is a significant industrial and cultural hub for the country, producing $35bn of GDP.  The emirate flaunts an array of exceptional tourist destinations focusing on the theme of culture, history, and education.  Under the vision of H.H. Sheikh Dr. Sultan Bin Mohammed Al-Qasimi and Sheikha Bodour Bint Sultan Al Qasimi and the stewardship of Mr. Al Sarkal, Sharjah was crowned as the ‘Capital of Islamic Culture’ and a ‘Unique and Distinguished Tourist Destination’.  Furthermore, the emirate was also given prestigious recognition as the ‘Cultural Capital of the Arab World’ by UNESCO.

In the early planning and ideation phases of Sharjah, the municipality had to brainstorm ways to utilize real estate as means of economic diversification and transformation.  The emirates’ geographical location presents both an opportunity and a challenge, as Shurooq had to produce developments that offer unique tourist experiences that complement Dubai’s and leverage other emirates’ products.  Not only that, but Shurooq had to also produce real estate investment opportunities that are unique from that of the other emirates and plan for a city that will become a source of pride for the people of Sharjah.

Shurooq developed a three-pronged real estate development strategy to meet the aforementioned goals and constraints.  The strategies are (1) target niche offerings, (2) build transformative icons and (3) increase product breadth.  Additionally, real estate developments under all these three strategies are selected with authenticity and sustainability in mind.

Under strategy (1), Mr. Al Sarkal shared with us how Shurooq revitalizes and reimagines existing assets and ideates differentiated hospitality and tourism offerings.  Some key examples include the Heart of Sharjah and Moon Retreat.  Both developments were previously underleveraged sites that transformed into unique cultural and eco-destinations.  These developments leverage existing assets and hence are noted to be less capital-intensive and generate outsized direct and indirect returns.  The Kalba Eco-Tourism Project is another destination that were saved and preserved to provide new sustainable experiences for visitors to indulge in the natural offerings of Sharjah.

Al Bait Sharjah, a sustainable luxury resort located in the Heart of Sharjah

The House of Wisdom in Sharjah is an iconic monument that redefines the concept of a library and a cultural center.  The monument was built under strategy (2), to build transformative icons, and aims to promote and ease access to knowledge.  Built to create a space that evokes a feeling of belonging, the development provides a wide variety of amenities including cafés, galleries, book collections, event spaces, and more.

House of Wisdom

Finally, under strategy (3), Mr. Al Sarkal also discussed with us various projects he undertook to increase the product breadth offerings of Sharjah.  One notable project was the Maryam Island, an ongoing AED 4.5 billion (US$1.2 billion) mixed-use development located in Downtown Sharjah.  The goal of Maryam Island was to create an upscale but affordable regenerative real estate development.  The 460,000 square meter site will include components such as waterfront residential units, retail outlets, 4- & 5-star hotels, and beach access for its occupants.

Maryam Island

Sharjah successfully attracted more than $220 billion of foreign investments in 2020.  This flow of investments was made possible by the previously mentioned strategies and policies, such as the real estate-backed economic free zones.  Dubai was noted to be a pioneer of the free zone model, which offers foreign businesses attractive concessions and several investment incentives, including 100 percent ownership of a subsidiary and zero taxation.

Before concluding his presentation, Mr. Al Sarkal reminded us that our goal should not just be to become a developer, but an entity that creates transformative change.  Mr. Al Sarkal enjoys exploring, learning, and creating new ideas that inspire the people around him and plans to continue doing so as the Managing Director of Chapter 3.  On behalf of the Cornell Baker Program, we would like to extend our gratitude to Mr. Al Sarkal for imparting valuable learning opportunities and knowledge on the innovative real estate strategies of Sharjah to our students.

Dahlia Idris, BXP Company, Seattle, Washington

In this short reflective essay it is difficult to sum up ten weeks’ worth of insightful and enlightening experience as Boston Properties’ (BXP) Summer Associate.  While working in the Seattle region office, I challenged myself in a way that fostered both my technical real estate knowledge and interpersonal growth.  As an example, I achieved numerous learning goals such as (1) live deal sourcing and underwriting, (2) asset repositioning milestones, (3) life science feasibility/capital market research, and so much more.  The rewarding experience can be attributed to the BXP’s comprehensive summer associate program, supportive colleagues, and the mentorship of my supervisor and Seattle Region Head, Kelley Loveshin.

It was fascinating to learn that despite COVID-19’s significant impact on cities, especially the office asset market, BXP has remained resilient.  The company’s strategy to focus on acquiring/developing in the growing market and high barriers to entry cities while providing best-in-class asset management services has shown to be advantageous.  Not only that, but the company’s comprehensive knowledge of the office asset class allows them to find opportunities in the market gap and unmet consumer demand.  All-in-all, I believe BXP’s adaptive strategies, evolving operations, and strong leadership, are the main factors of the office REIT’s resilience through the pandemic.  I anticipate Boston Properties to remain resilient in the next few years and to come out of these trying times stronger than ever.

Roshy Chhillar, Silverstein Properties, New York City, New York 

I spent my summer working as an asset management summer associate with Silverstein Properties in NYC at WTC 7.  Having spent 9 years in NYC, I still hadn’t explored Lower Manhattan to truly understand how the neighborhood had evolved over the years.  My key responsibilities included running Net Effective Rent analysis for potential office tenants based on market leasing assumptions and target-taking terms.  I worked on monthly cash flow reports, rent rolls, stacking plans, and leasing reports for office and residential assets.  It was valuable to understand the life cycle of an asset from different perspectives and the capabilities deployed in maximizing returns.  Throughout the summer, I worked closely with teams in various engagements by Silverstein Properties, ranging from the office to residential conversion of 55 Broad St with Metroloft to the Innovation QNS project in Astoria.  In addition, the intern group had weekly mentorship meetings with company executives Marty Burger, Dino Fusco, David Marks, Lisa Bevacqua, and Brian Collins.  These meetings offered great insights into the company’s future, the real estate market in NYC, and professional development.

I had the opportunity to attend exciting events such as the Tribeca Film Festival Simulation Event held at 120 Broadway and go to site visits for upcoming projects such as 4 Hudson Square.  The two main highlights of my internship were successfully performing an office underwriting assessment using ARGUS and meeting Mr. Larry Silverstein on the first day, which brought luck and instilled great spirits.

Connor Mattoon, Lincoln Avenue Capital (LAC), Santa Monica, CA

Over the summer, I worked as a Development Intern at Lincoln Avenue Capital (LAC).  LAC is focused on the development and preservation of affordable housing across the U.S and is headquartered in Santa Monica, CA.  Jeremy and Eli Bronfman started the company in 2016 and have been rapidly acquiring and developing affordable housing assets to become one of the biggest affordable housing developers in the U.S. My role at LAC was a combination of underwriting potential acquisitions, as well as managing business executions for ongoing live transactions.

In addition, during my time at LAC this summer, the team was in the process of selling an asset in the Los Angeles area.  I joined members of the development team to tour the property and work with brokers to determine the best route to take potential buyers through the property to highlight the assets of the interior units and community amenities.  During the final week of my internship at LAC, I presented a potential acquisition during investment committee meetings, which included the market, financial model, and suggestions on which business plan would be best suited for the acquisition.  I will continue working for LAC part-time throughout the school year, and I look forward to continuing to work for LAC upon graduation.

Sasha Paikin, Fengate Asset Management, Toronto, Canada

Over the summer, I worked on the Investments and Development teams at Fengate Asset Management in Toronto, Ontario.  Gaining experience on two teams during the summer was invaluable to my Cornell experience.  It allowed me to try multiple roles before choosing which field I would pursue a full-time career post-graduation.  On the investments team, I assisted by underwriting potential industrial deals we received from brokers and preparing investment committee memorandums.  Near the end of the summer, I had the opportunity to be on a team presenting to the firm’s investment committee after helping prepare the presentation showcasing the findings from underwriting and market analysis related to a potential multifamily investment. I also assisted with executing ongoing projects on the development team by performing entitlement and grant research, budgeting, and financial modeling.  In addition, after conveying my interest in sustainability in real estate, I initiated the process to upgrade the firm’s industrial portfolio to Net Zero Carbon Ready.

On top of gaining relevant work experience and significantly advancing my learning about the real estate industry, I also participated in exciting team social events ranging from attending ULI networking events to playing in the NAIOP beach volleyball tournament to trying axe throwing.  Overall, this summer was a fantastic experience, and I am very grateful to the team at Fengate for all their guidance and support!

Frederic Madigan, E.P. Madigan & Son Inc., San Francisco, CA

This past summer, I worked for my family’s real estate development firm in the San Francisco Bay Area.  Over the summer, I continued the work on a commercial transit-oriented development in a suburb of San Francisco.  It was interesting to work with the city to understand its goals for the central business district of the city.  There was also recent state legislation to change local zoning codes to increase density and housing, which was interesting to learn how it affected our project.  Other responsibilities include leasing out commercial space and providing the tenant with improvements necessary for the new tenants.  I also offered property management services to several multifamily buildings.

On Thursday, September 22, 2022, the Cornell Baker Program in Real Estate hosted David Rupert (BA Economics ’79), Vice Chairman of Griffin Capital, a full-service real estate investment and management company that owns institutional-quality assets across the United States.

A founding board member of the Baker Program at Cornell University, Mr. Rupert’s love for teaching showed as he delivered an information-packed 90-minute talk on the inter-related aspects of real estate (RE) markets. Recollecting his time as a Harvard University MBA student, Mr. Rupert believed it would be helpful to give students an overview of the big-picture perspective on real estate markets and transactions in the US early on. In a Socratic back-and-forth with the students, Mr. Rupert explained the relative size of public and private debt and equity markets, the spectrum of lease terms within commercial real estate, and the ‘winners and losers’ of property types during the COVID pandemic. Mr. Rupert also shared the role of alternative investments in a properly diversified portfolio, something that institutions and endowment funds have increasingly emphasized since the 1990’s. Adding assets that will move the portfolio towards the top left of the efficient frontier is important. A passionate teacher – Mr. Rupert expressed his happiness with the expanded diversity of backgrounds in the Baker Program since its inception and urged students to challenge him with questions.

Students appreciated learning about investment decisions by REIT teams and their impact on the overall RE markets. Mr. Rupert drew direct links between the role of emotion in valuing deals or assets and its effect on prices. He distinguished between the fundamental value of assets and the ‘price’ determined by buyers and sellers and highlighted how it leads to the creation of opportunities for an informed investor. “Emotion is the number one reason why individual investors underperform on a balanced strategic portfolio”, he stated. “The institutional model for investing that has proven to be successful for Griffin Capital uses mathematics, not emotion. Emphasis on numbers is not an option but a necessity.”

Mr. Rupert urged students to leave no stone unturned in finding out everything there is to know about the market and the asset under consideration. When assessing the creditworthiness of tenants, “reading the footnotes can sometimes reveal the true cash generation capabilities, and/or inherent risks of the company”, he said. He stressed that with all the information available to investors today (much of it via the internet) there is no reason to be less than fully informed when making key decisions.

Answering a question about recent transaction volume dropping below the recent annual average of $800 billion, Mr. Rupert responded, “Markets are very challenging today. Many buyers use leverage, and the cost of debt has doubled in some cases —that means lower prices for sellers. In the office sector, things are even more challenging because lender credit departments don’t want more office buildings as collateral; as a result, there are very few transactions taking place. But that’s not to say there won’t be some money made in this cycle. Market participants tend to overreact, and that creates opportunities for informed players. As a property owner, focusing on tenant needs, and keeping buildings occupied is a prudent strategy—it’s much easier and less expensive to incentivize an existing tenant than to go out into the market to replace a tenant should one vacate.”

Mr. Rupert then shifted to sharing several stories and photographs of buildings the Company has owned over the years. Starting in a 2-bedroom apartment in Manhattan Beach, CA (not zoned for office use), and now operating from a large open format headquarters in El Segundo, CA (just south of LAX Airport), Griffin is one of the top integrated companies in the net lease arena, owning key office and industrial properties leased to blue chip tenants such as Shaw (a Berkshire Hathaway company), Restoration Hardware (RH), Amazon, Pepsi and others. Griffin buys existing buildings and does ground up development, with two notable transactions – a 1 million square foot warehouse for RH in California and an 800,000 square foot fulfillment center for Amazon just outside Columbus, OH. That warehouse was delivered within 12 months because Amazon needed it finished before peak holiday shipping season. The warehouse has more than 7 miles of conveyor belts inside and ships over 8 million packages a week. One of Griffin’s most successful investments wasn’t a warehouse, it was Dreamworks’ headquarters in Burbank, CA. There Griffin bought with a belief that with streaming services beginning to take off (Netflix was in its early days when Griffin bought the building), the content creation space would become highly sought after in land-constrained Los Angeles. That strategy was spot on, and Griffin sold the property to an institutional investor at a significant profit.

Mr. Rupert also shared some photos of the team building and charitable activities of the Company, which he said helped build the company culture of giving back to the communities where employees live and work. Two featured charities over the years were homebuilding with Habitat for Humanity and month-long activities for breast cancer awareness.

As parting advice, Mr. Rupert reminded Baker students that RE professionals should never take their eye off the ball. “Know what is going on in the market, know your competitors, know when it’s time to invest, but also know where you stand relative to the market and what the numbers say about what’s possible and what’s not. Always be in an analytical mode when thinking or talking real estate. Don’t think that the laws of nature don’t apply to you and your portfolio. Periodic arrogance should be dealt with before it becomes an issue”, he recommended.

Students of the Baker Program thoroughly enjoyed Mr. Rupert’s highly energetic, interactive, and fast-paced talk. The Baker Program thanks Mr. Rupert for his visit and his continued contribution to the Program as a board member and wishes him continued success in the future.

Project History

In 2008, to address the significant opportunity for the expansion of the high-tech sector in New York City, Mayor Michael Bloomberg’s office launched a competition to develop an applied sciences campus with a focus on entrepreneurship and innovation, where the winning school would be gifted $100 million of free land for construction. Seven universities submitted formal proposals, and, in December of 2011, the project was awarded to the conjoined bid for Roosevelt Island by Cornell University and the Technion-Israel Institute of Technology. The bid proposed creating 28,000 jobs and $23 billion of economic benefits.

Cornell’s design consisted of two phases, and construction began in 2014 with the demolition of the vacant Coler-Goldwater Specialty Hospital’s South Campus. The full campus plan was designed by Skidmore, Owings & Merrill Architects and Planners and James Corner, Felid Operations Landscape Architects, and the 12-acre project will be fully complete in 2037.  Phase I consists of five buildings: the Emma and Georgina Bloomberg Center, The House, the Tata Innovation Center, the Verizon Executive Education Center, and the Graduate Roosevelt Island Hotel, and details about these buildings can be found in the table below.  Throughout the entirety of the design and development process, sustainability was paramount. The project team was determined to maximize the sustainable capabilities of this project and minimize the carbon footprint of the campus. While the sustainable features ended up causing roughly $10 million, or an additional 15%, in project overruns, the team did not calculate return on investment metrics, stating “the purpose of these features was our commitment to the planet, not for profit”.

Renewable Energy Journey

In the search for methods to produce renewable energy for the campus, the team explored four energy alternatives: solar power, ground source heat energy, wind power, and hydrodynamic power.  The development team conducted several studies over the course of a year to determine which methods would be most efficient, for both energy and cost, based on the natural features of the project site location.

The first method of renewable energy generation explored for the campus was solar energy.  Typically, solar energy is difficult to implement in New York City, and specifically in Manhattan, because of the density of high-rise buildings and the shadows they cast.  The Cornell Tech campus has the unique advantage of being removed from Manhattan, which means that the team was able to successfully implement photovoltaic canopies on both the Tata and Bloomberg Buildings.  These canopies are now the largest solar photovoltaic installation in all of Manhattan.  The team prioritized integrating the canopies into the architecture of the building to create a cohesive design.

The second method that was implemented into the project design is heat from ground source heat wells.  Thanks to these wells, the Bloomberg Center does not burn any fossil fuels.  To determine how effective the wells would be for the ultimate project, the team installed a pilot well for a full year to get readings and measurements of production levels.  After the year, it was determined that the wells could be implemented successfully, and a closed pure water loop system was created with 80, 6-inch diameter wells installed 400-feet below-grade underneath the campus lawn.  The closed-loop system means that it uses the same fresh water throughout the system rather than using the water from the East River; this system was developed as a result of the brackish nature of the river water that would corrode the equipment over time.

The third method of energy generation investigated was wind power.  Before the existing hospital building was demolished, a LIDAR instrument was installed on the roof to detect the wind power for one year.  The readings from that year showed that the wind speed was only 8-12 miles per hour on average, which generated insufficient power to earn anything less than a 20-year payback for the instruments.  The winds came predominantly from the West, so they were blocked by the skyscrapers in Manhattan.  Considering that industrial-grade 2-megawatt wind turbines only have a working life of 20 years, a renewable energy asset that will not earn its payback until the end of its life is an unworthy investment.  Plus, the project team was not looking to incorporate a full industrial-grade wind turbine on campus, and so this method of renewable energy generation would have relied on a more compact technology that did not yet exist.  Ultimately, it was determined that wind energy was not a strong enough source to pursue this method.

The fourth and final method of renewable energy generation that was investigated was power from hydrodynamic sources.  The team placed a prototype water turbine in the East River to conduct readings of how much energy could be collected.  Through this innovative process, the team discovered several issues with this method of energy collection.  First, there were several regulatory and permitting issues involved with the permanent installation of objects into the East River.  Second, the river has a bidirectional current, so the water turbines’ potential would be cut in half.  Third, the debris in the river tended to obstruct the turbine blades.  As a result of these three issues, this method was not pursued.

In terms of financing both the photovoltaic canopies as well as the geothermal wells, the team initially considered using a power purchase agreement (PPA) for both. A PPA is a contract between two parties where one party provides the facilities to generate renewable energy and another party designs, purchases, and installs the renewable energy equipment.  This would have allowed Cornell to forgo initial capital outlays for both these systems and instead pay the external organization, like a utility company, a fixed rate for the electricity and heat these systems produce.  Unfortunately, the PPA market in 2014 was not very robust, especially in New York City, and several factors decreased the demand for agreements for this project.  For the photovoltaic canopy, the system was integrated into the design of the building; it sits on top of the six-story building, and the time frame for design and construction was very short.  The geothermal wells were the largest ground source heating system in an urban setting at the time of development, which made some investors hesitant.  Despite putting out a bid for the design, permitting and operations of the renewable energy systems, the bids that Cornell received were priced much too high for the school’s comfort, and so Cornell ended up undertaking the pronouncement of the photovoltaic canopy and the ground source heat themselves.

Additional Sustainable Design Methods

While the focus of this article is discussing the journey to the methods chosen to generate renewable energy on campus, the development team incorporated several other unique features into the campus design that make the overall campus more sustainable.   These methods include, but are not limited to, green infrastructure like bioswales, rainwater harvesting tanks, passive house principles, LEED certification, and sustainable demolition practices.

The campus has six bioswales – a greener alternative to storm sewers – that replace the previous method of stormwater management that pushed the rainwater through catch basins, then out to the East River.  This new method manages water onsite and only pushes overflow out to the river after it has already been naturally filtered with a thick bed of plantings, rocks, and sand.  Another exciting water management feature is the installation of a 40,000-gallon rainwater harvesting tank that collects rainwater from the roof of the Bloomberg Center.  The water is then treated with UV and filters; the recycled water is used as gray water in the Bloomberg Center and for lawn irrigation.

The campus has attained Passive House certification for The House and LEED Silver as the minimum standard for each building on campus, two important measures of building efficiency.  The House became the tallest and largest Passive House residential building in the world upon its completion.  This designation denotes a rigorous design methodology wherein a building cuts energy use by 60-80% in comparison to code requirements.  To obtain this designation, the House has exterior walls with 8-13-inch-thick insulator panels that retain 882 short tons of carbon dioxide annually. LEED Silver designation was a requirement for the campus team; however, the design team went the extra mile by pushing the Bloomberg Center to LEED Platinum and aspires to be one of the largest Net Zero energy buildings in the country.

Another conscious decision by the development team was to increase the sustainability of the demolition process to clear the site for the campus.  One method that increased the energy efficiency of the demolition process was the use of a debris barge in place of trucks removing debris from the property, saving the equivalent of 5,000 truck trips.  There was also a brick and concrete crushing operation for the debris from the demolition of the hospital on the site , and the debris was then used to build up the elevation of the campus.

Takeaways

The Cornell Tech campus shows the innovation that is possible within real estate development.  The development team for this project continuously pushed the boundaries of sustainability in real estate by conducting thorough studies prior to construction to determine the best renewable energy sources for the site, pioneering the discussion of a power purchase agreement market at the time of development, and rising above required sustainability standards to achieve astonishing energy savings. With Phase II plans currently under discussion, Cornell students cannot wait to see what the team achieves next.

Information derived from interviews with Cornell Tech’s Director of Construction, Diana Allegretti, and Project Manager, Andrew Fowler

Cornell Tech on path to reach net zero at the Bloomberg Center. Cornell Tech. (2018, November 20). Retrieved June 5, 2022, from https://tech.cornell.edu/news/cornell-tech-on-path-to-reach-net-zero-at-the-bloomberg-center/

LEED rating system. LEED rating system | U.S. Green Building Council. (n.d.). Retrieved June 5, 2022, from https://www.usgbc.org/leed

Richard, M. G. (2020, May 3). The Energy Payback for a 2-megawatt wind turbine that lasts over 20 years is… 5-8 months. Treehugger. Retrieved June 5, 2022, from https://www.treehugger.com/energy-paypack-megawatt-wind-turbine-lasts-over-years-months-4858396

Young, M. (2020, August 20). Exterior work finishes on Verizon Executive Education Center and Graduate Hotel, on Roosevelt Island. New York YIMBY. Retrieved June 5, 2022, from https://newyorkyimby.com/2020/08/exterior-work-finishes-on-verizon-executive-education-center-and-graduate-hotel-on-roosevelt-island.html

YouTube. (2018). Modern Campus Helping to Build the Future of Sustainability | Diana Allegretti | Cornell Tech | Heff. YouTube. Retrieved June 5, 2022, from https://www.youtube.com/watch?v=7Jood7sABlA.

The vast majority of the western portion of the City is zoned for low-density single-family and duplex units, and historically building any high-density multifamily projects has been a challenge.  The 100% affordable project, to be located at 2550 Irving Street, is proposed by Tenderloin Neighborhood Development Corporation (TNDC), a non-profit developer who focuses on 100% affordable housing developments in San Francisco.  The project was partially financed through Inclusionary Housing Fees, a fund overseen by the San Francisco Mayor’s Office of Housing Community Development (MOHCD), which was created to oversee and implement inclusionary housing fee funds.  Projects utilizing inclusionary housing fee funds, like 2550 Irving Street, are required to build 100% affordable housing projects.  The 2550 Irving project has made headlines in San Francisco over the past few months, as the Mid-Sunset Neighborhood Association was created to combat the development in their community.  The project, which utilized an SB-35 application, was not legally required to hold community meetings with the Mid-Sunset Neighborhood Association due to the by-right approval nature of the SB-35 application.  However, according to statements by Katie Lamont, senior director of housing development at TNDC, although the project itself doesn’t have to come to a vote for approval, they want to engage the community on the design impact of the building.  Ultimately, Mid-Sunset Neighborhood has filed a lawsuit alleging the 2550 Irving Street project represented a breach of contract, negligence, and breach of “implied covenant of good faith and fair dealing”.  The lawsuit is unlikely to shut down the development due to the by-right nature of the SB-35 application; however, the community’s opposition to the project will cause many months of further delays.

This article gives a brief background on how 100% affordable housing projects like 2550 Irving Street are developed in San Francisco, as well as the balance developers must consider surrounding the time-consuming nature of community involvement as the dire need to increase affordable supply in San Francisco continues.

The Proposed Project

The proposed 2550 Irving Street development will offer a seven-story building design with 91 total units.  Of the total, 73 units will be set aside for families earning between $38,450 to $102,500 per year, and 17 units will be set aside for formerly homeless families.  In addition, the building will offer 2,250 square feet of ground-floor community space and a rear courtyard.  Renderings of the proposed design are highlighted below:

What Are Inclusionary Housing Fees and How Does Senate Bill-35 Play A Role?

Inclusionary housing fees are one of three ways market rate developers in San Francisco are allowed to fulfill their inclusionary housing requirements.  For instance, if a market rate developer is proposing a project of 25 residential units or more, and the developer does not want to include any affordable units in the development, they will pay an “inclusionary housing fee”.  As of the date of this article, the fee is calculated as $199.50 per square foot of gross floor area applied to 30% of the project’s size.  Based on data from the City and County of San Francisco Controller and Budget Analysis Division, fees collected from the program have been approximately $200,000,000 from 2014 to 2019 (the most recent data available).  These funds raised are set aside exclusively for the development of 100% affordable housing projects.  In most cases, the collected funds are then awarded to non-profit developers like TNDC to develop projects similar to 2550 Irving Street.  From 2014 to 2019, 96 100% affordable projects have been completed, which translates to 6,112 total units.  The fees generated and distributed to non-profit developers are overseen by the Mayor’s Office of Housing Development (MOHCD).  Typically, MOHCD will identify a development site within the City and issue requests for qualifications; non-profit developers respond with their credentials and vision for the project.  Once a developer is selected and construction starts, MOHCD issues funds for the project, which typically amount to 25% to 50% of the total project costs, based on the amount of other non-city funding sources.

Written into San Francisco’s charter is that every permit is discretionary, meaning all proposed developments need to receive conditional use permits, even if the proposed use is a legal zoning use.  For 100% affordable housing projects in San Francisco, there has historically been much community involvement necessary in order for 100% affordable housing projects to be built.  At times, community concerns are legitimate traffic, parking, and density issues; however, not-in-my-backyard (NIMBY) mindsets within San Francisco are also prevalent surrounding affordable housing projects.  As a response to a long entitlement and community involvement process for affordable housing projects in San Francisco and California at large, State Senator Scott Wiener introduced Bill 35, which was enacted in 2017.  The bill included many housing initiatives, including changing 100% affordable housing projects into by-right housing.  By-right housing approval allows construction to begin for a development without acquiring discretionary approvals from the planning commission.  According to Sam Moss, Executive Director at Mission Housing Development Corporation, the by-right nature of SB-35 projects has made the development process faster by months, if not years, for non-profit developers to build 100% affordable housing projects.  The difficulty developers now face, including TNDC with their 2550 Irving Project, is how much community involvement is truly necessary now that the projects have become by-right.  In the case of TNDC and the 2550 Irving Project, engaging with the community on their plans for the project has caused multiple delays, a reduction of 50 units in the overall size of the project, and a lawsuit against the developer from the Mid-Sunset Neighborhood Association.

The Community Opposition to 2550 Irving Project

After the 2550 Irving Street project was proposed, a neighborhood group was formed to raise their concerns surrounding the development.  During a community meeting at a local church in the Sunset District, 200 opponents of the 2550 Irving Project gathered to discuss their concerns.  The concerns from the community were expressed through signs held by community members with messages like “Be Kind To The Adjacent Community”, “Tell the Supervisor To Stop Toxic Waste”, and “The Right To Light For All Neighborhoods”, which were noted by a local San Francisco Chronicle reporter who was at the meeting in November 2021.  In addition, multiple persons in the crowd targeted Gordan Mar, the District Four Supervisor for the Sunset District, with chants of “Recall Mar, Recall Mar”.  Anonymous attack posters were posted throughout the Sunset neighborhood and slipped into mailboxes that read “No Slums In The Sunset” and “In just two years, 2550 Irving Street will become the best place in San Francisco to buy heroin” as well as additional attacks on the project, its tenants, and Gordon Mar himself.  An image of the mentioned poster is highlighted below:

The intense opposition to the 2550 Irving Project highlights the challenges affordable housing developers face in San Francisco, especially in the western portions of the city which have seen extremely few affordable or multifamily housing developments.

The Balancing Act of Community Engagement

The intense community opposition to the 2550 Irving Street Project is clear; however, this opposition is not unique to 2500 Irving Street but rather consistent with the difficulties affordable housing developers face throughout the City on all affordable projects.  According to local developers in the San Francisco area, many homeowners in San Francisco assume 100% affordable housing projects being built today will resemble some of the failed public housing projects that were previously developed in San Francisco and resembled large 15-story concrete blocks.  However, as noted by Sam Moss, Executive Director at Mission Housing Development Corporation, newly developed 100% affordable housing projects being built in San Francisco today usually resemble well-designed market-rate housing.  People are typically unable to differentiate between an affordable housing project and market-rate products.  To combat the strong community opposition to affordable housing in the City, non-profit developers have historically engaged deeply with the community in order to receive their preliminary approvals.

One downside of the SB-35 is that it has not had time to normalize itself in the mindset of many non-profit developers in the City.  For decades, affordable housing developers have tried to blend into the neighborhood and make the smallest amount of noise possible, in hopes their projects would get through the long approval process.  In return, concessions on the number of units for many projects had to be made, ultimately reducing the much-needed supply of affordable housing units in San Francisco.  The goal for 100% affordable developers, and people responsible for entitling these projects, is to become more accepting of the by-right power that SB-35 gave 100% affordable projects.  History has shown that local communities within the City will continue to fight against 100% affordable developments, especially in neighborhoods in the western portions of San Francisco that see little multifamily development of any type.  Thus, in order for the City to become a more affordable and equitable place, non-profit developers may need to change their mindset from minimizing their presence to using the power of SB-35 to create more affordable living options, with greater density and at an accelerated pace.

The waterfront-bound neighborhood of Sunset Park lies between Gowanus and Bay Ridge, spanning between 15^th street to 65^th street between 9^th Avenue across the 8^th avenue corridor. Industry City is a new mixed-use development set on 35 acres of centuries-old industrial land in Sunset Park. It is one out of three massive historical industrial complexes along the Brooklyn Waterfront. One of them being the Brooklyn Navy Yard, where the CEO of Industry City, Andrew Kimball led the transformation of the 300-acres former Naval ship-building facility. The other one is the Brooklyn Army Terminal on 65^th street from where troops shipped out during the World War I and World War II. The third one is the Bush Terminal, which is where Industry City exists today, and it used to be the port for manufacturing goods coming in and being warehoused for further distribution in New York City. All three developments experienced peak employment between the years 1930-1960 but hit a long period of disrepair in the 1970s when large scale manufacturing shifted to other US cities. The Brooklyn Navy yard and the Brooklyn Army Terminal being publicly owned were quickly brought back to life through massive subsidies provided by the government to fix the decades of deferred maintenance.

The Brooklyn Navy Yard is a leading model for industrial heritage reuse that under the leadership of Andrew Kimball took $280 Mn from the City of New York for basic infrastructure improvements and leveraged $1 bn of private investments to create thousands of innovation economy jobs.[1] It was in August 2013 when Mr. Kimball joined Industry City to direct the redevelopment of the long-underutilized privately owned industrial facility. At present, the 6 million sq.ft. of mixed-use space is designed as a creative hub to attract retail and commercial tenants from across the different boroughs of Brooklyn. Industry city is co-owned by Jamestown Properties, Belvedere Capital, Angelo Gordon & Co., Cammedy’s International and FBE Limited. Jamestown Properties which is a design-focused real estate investment and management company is the brainchild behind the vision and the leasing strategy of Industry City having executed iconic projects such as Chelsea Market in New York City and Ghirardelli Square in San Francisco. The main challenge at hand for Industry City has been to take a massively privately owned site without government relief to structure the ecosystem of uses that will drive the creation of private investments. The vision revolves around industrial heritage reuse while keeping innovation economy principles at the forefront. This translates into place making for modern manufacturing standards that is not simply about making physical products but facilitating a new kind of manufacturing at the intersection of design, art, technology, and engineering. The 5000 sq.ft. of space earlier required to assemble segregated parts in a single product can be achieved in a 500 sq. ft of space using technologies such as 3-D printers and laser cutters.

Jim Somoza, Managing Director at Industry City referred to a “campus vision”, with the entire development divided into 16 office buildings and the ground floors of each building connected via a seamless hallway while standing at one of the former train platforms used for industrial transportation during a ULI NYC site tour. Each building has unique characteristics embedded in its design, tenants, and waterfront view. Mr. Somoza explained how this adaptive reuse project was not simply about repurposing an old industrial development into office space but intended to retain the character of the neighborhood while bringing vibrancy and connectivity. The remains of the railway tracks from the former “Bush Terminal” are noticeable, reinforcing the site’s historical significance and the harmonious placement of the interactive outdoor art installations such as the “Pool” by Jen Lewin. The project includes $125 Mn[1] in capital investments by owners over the span of 10 years and a recent stake purchased by a Singapore sovereign-wealth fund GIC Pte. Ltd. that put a valuation of $1.3 bn on the sprawling Industry city project as of end of 2020.[2]

Here at Industry City, the developers have adapted the “shared office” model for the office tenants spread across 600,000 sq.ft. of total campus area, alongside a coworking space of 30,000 sq.ft. When marketing the property, the team knew that they weren’t seeking traditional Finance, Insurance, Real Estate (FIRE) tenants who would typically pick a traditional Manhattan office space. They worked to attract firms focused on design, architecture, marketing, fashion, consulting, technology, equipment supply, and other creative fields. The focus from the very start has been on building a community and providing a creative space for innovation. The retail portion makes up about 1 million sq.ft. of the total space with the leasing strategy of “local yet global” users.

The restaurant offerings are unique and unknown. They are not the go-to outlets plucked from Manhattan and transported into Sunset Park. They are mostly independently run mom-and-pop shops from across the country and with diverse backgrounds. One highlight includes a Californian couple who invested their life savings to bring Korean comfort food to Brooklyn at Ejen. The developers placed special interest in the success of the vendors, especially during the pandemic. They were able to retain all but one tenant post-March 2020 by providing reasonable concessions. The vendors returned more resilient and built a community around this shared resilience. An optimal retail strategy has been leasing out wholesale space for vendors like Lilac Chocolate and Colson Bakery, to supplement their retail stores right next door. This way the vendors can showcase the development cycle of their products while delivering it fresh to customers. The developers applied a countercyclical approach to attracting office and retail tenants. Colson Bakery has always operated as a local wholesaler, supplying baked goods across Brooklyn and Manhattan. Jamestown placed Colson Bakery at a central location and assisted them in launching a retail business arm, transforming them into an anchor tenant. The Colson Bakery team initially resisted opening a retail location but has since accrued great margins and is considering further expanding the business. As foot traffic increased from the office tenants, more established local brands such as Sahadi’s and Frying Pan opened shop in Industry City.

Post-Covid, 60-70% of the office tenants at Industry City have returned, as compared to a 20% rate for Manhattan companies. This has helped maintain foot traffic of 12,000 per day on the weekdays, of which 16% are visitors and 84% are employees, and 9,500 per day on the weekends, out of which 84% are visitors and the rest are employees.

It is essential to note that the Industry City project is not a copy-paste version of the Chelsea Market business model. The Industry City model is based heavily on the community and has a destination-oriented approach. It is not seeking international tourists but local New Yorkers who are curious about exploring different New York neighborhoods. Mr. Somoza likes to say their business is transportation, not real estate, in the sense that his team worked hard to curate tenants and develop a design strategy that transports visitors to global destinations. The Japanese Market is an open supermarket where one can watch a blacksmith while shopping for fresh, local sashimi. There is an upcoming one-of-a-kind Mexican market owned and operated by a Mexican native in the development. Industry City is the culmination of ideas, design, and quality while retaining the rough edges of the industrial aspects of the development.

Community buy-in was critical from the very start of the project, as the developers sought to revitalize the Sunset Park waterfront area, which has experienced poverty, blight, and a historic lack of investment. The support from local government and community members was key in obtaining tax credits for the brownfield redevelopment.

Potential Setbacks

Beginning in the 1950s, Brooklyn waterfront industrial developments experienced a general abandonment of vertical urban industrial properties due to a drastically changing manufacturing landscape. By the 2000s, the employment base around Industry City had dropped by 60 percent and much of the warehouse and office spaces were underutilized. Despite the deteriorating conditions of the neighborhood, in 1986 the nation’s first Chinese American supermarket called “Winley Supermarket” opened on 8^th Avenue and 56^th Street. This marked the onset of the growth of Sunset Park’s Chinatown, which does not experience the tourism of Manhattan’s Chinatown. The second-largest ethnic group of the neighborhood can be found northeast of 8^th Avenue, composed of Latinx first-generation family homes, Mexican American core businesses, and family-run restaurants. According to the 2010 U.S. Census, nearly half of Sunset Park’s residents are foreign-born and about 51% live in rent-controlled apartments.

The ambitious plan by Industry City to revitalize the Brooklyn waterfront is accompanied by potential gentrification and a lack of social equity responses to address resulting negative impacts, such as real estate pressures, rent increases, and reduced affordability. In early 2020, Industry City put forward a rezoning application called “The Sunset Park Waterfront Vision Plan 2020” to rezone a portion of the affected area from an M3-1 zoning district to an M2-4 zoning district to expand the existing Industry City campus development. The company contended that the existing zoning from 1985 required revision and rezoning would remove the outdated restrictions, such as square footage cap requirements for retail developments or changing the Floor Area Ratio (FAR) from 2 to 5.[1] The overarching themes included rehabilitated empty spaces through adaptive re-use strategies that would double as waterfront resiliency zones and place the neighborhood on the map for technology companies and developers. According to Startup Genome, a leading innovation and research firm, the growth rate of startups in Brooklyn is higher than in any other city in the United States, except for San Francisco.[2]

Despite the argument for turning the dilapidated industrial complex into an innovation-centric employment hub, the NYC City Council rejected the rezoning proposal as community members and city council officials opposed expanding Industry City by building high-end luxury housing units and hotels. Groups Protect Sunset Park and UPRISE rallied against the plan, stating how the negative implications of the proposal would supersede the job creation prospect by fueling gentrification in a community with a critical shortage of affordable housing.[3]

This brings attention to the critical problem of how to effectively uplift a local community while being mindful of the resulting social inequity. The concept of an innovative economy is essential to the development of an innovation district, and is created through Disneyfication, which is the transformation of an underutilized community into a controlled and safe environment. Industry City aims to respect the historical aspect of its campus by repurposing the socio-economic structures into a unique, cultural, and vibrant frontier. However, this Disneyfication comes with a cost of potential gentrification.

On the other hand, Industry City still faces leasing pressures with the neighborhood of Sunset Park in dire need of infrastructure improvements and increased safety requirements, especially following the recent subway shooting incident at Brooklyn’s 36^th street subway station in which 23 people were wounded following violent gunfire.[4] To attract long-term tenants and local visitors, the government needs to support local businesses and large-scale developments to attract private investments and encourage public-private partnerships.

Impact Assessment 

Of great importance to the Industry City project’s success has been the community’s commitment to uplift residents and the neighborhood’s empowering progress in overcoming a history of underdevelopment and underinvestment. This has helped in securing the required funding, approval process, and engaging well-known developers, architects, and urban planners. Revitalization development projects in distressed neighborhoods can largely benefit from public support. Public incentive funding and creative financing measures are important financial sources, especially in public-private jointly executed projects like Industry City. Even though Industry City is likely to increase gentrification, it is more likely to put in place a revenue-generating, safe environment, essential for the continued development of the neighborhood.

References:

[1] La Porte, Kimberly, “The Brooklyn Navy Yard: A Mission-Oriented Model of Industrial Heritage Reuse” (2020). Theses (Historic Preservation). 691

[2] Chan, Stephanie Yee-Kay. “Innovation, Intention and Inequities: Addressing the Potential Social Impacts of Innovation Districts in Post-Industrial Waterfront Zones upon Working Class and Minority Neighborhoods.” Columbia University, 1 May 2018.

[3] Grant, Peter. “Singapore’s Gic Buys Stake in Brooklyn’s Industry City.” The Wall Street Journal, Dow Jones & Company, 12 Feb. 2020

[4] “Industry City.” Wikipedia, Wikimedia Foundation, 19 Dec. 2021.

[5]  Menchaca, Carlos. New York City Council Member- District 38.

[6]  Startup Genome. “Top Global Ecosystems – Best Startup Cities – Startups Rankings.” Startup Genome,

[7]  Spivack, Caroline. “The Industry City Megadevelopment That Wasn’t, and How the Deal Fell Apart.” Curbed, Curbed, 23 Sept. 2020.

[8]  “Police Arrest Suspect in New York Subway Shooting ‘without Incident’.” BBC News, BBC, 14 Apr. 2022.

[9]  Chan, Stephanie Yee-Kay. “Innovation, Intention and Inequities: Addressing the Potential Social Impacts of Innovation Districts in Post-Industrial Waterfront Zones upon Working Class and Minority Neighborhoods.” Columbia University, 1 May 2018.

[10] Menchaca, Carlos. New York City Council Member- District 38.

However, there is notable evidence from recent reports that secondary submarket offices are experiencing significant growth in office inventory and sales volume, anticipated to outpace that of CBD submarkets.  Secondary submarkets are defined areas within a broader market or city, typically more suburban and characterized by less density and larger residential communities compared to a CBD.  The upward trend of the secondary markets’ demand caused office rents to be at par with that of the traditional metropolitan office neighborhood.  This nationwide shift in demand was reported as early as 2011 and accelerated during the COVID-19 pandemic, speculatively due to tenant preference changes, hybrid work schedules, and office space expansions.  This article reviews historical office real estate leasing and transaction trends in prevalent CBDs and secondary submarkets, and analyzes potential drivers of this shift.

Figure 1: Downtown Seattle                                                     Figure 2: Belltown/Denny Regrade[ii]

Seattle, Washington

Table 1: Seattle CBD & Belltown/Denny Regrade Office Market Key Indicators

In 2019, Seattle CBD saw a peak in office sales volume, with other area submarkets following suit in Q1 2020.[viii]  This flow of capital into the office asset market resulted in Seattle’s overall compressed cap rate and a wave of development in all submarkets during that period.  Other than the CBD, one of the strongest performing submarkets in the city is Belltown/Denny Regrade.  Belltown/Denny Regrade is a culturally significant and trendy district located just north of the CBD district.  The submarket is known to be bustling with activities and is home to affluent residential residents, upscale restaurants, art galleries, and nightclubs.[ix]  The submarket has notably been making historically high sales volume in the past couple of years.  The surge in sales volume could be linked to Amazon’s active presence in the submarket since 2012, noted by their large office space presence and development activity to expand and relocate their offices in this region.[x]  Now, the firm is dominating the submarket with a total of 5 million square feet of office space, influencing other firms to relocate into the area.

The COVID-19 pandemic, however, left a lasting and lingering impact on the city’s overall office market which swiftly halted the city’s growth.  The previously healthy real estate market was left in a distressed condition for the rest of 2020, with a large oversupply of office space and much more under construction.  Although there are signs of a rebound in 2021 and 2022, the recovery lags due to the abundance of office space inventory, especially for the Seattle CBD submarket.  Belltown/Denny Regrade was also heavily impacted by the pandemic, declining the YOY rent growth to 0.1%, down from the 10-year average of 4.3%.  Nevertheless, this submarket is anticipated to recover to YOY rent growth of 2.6% in 2022, similar to Seattle CBD.  This secondary office submarket is also forecasted to have an increased average vacancy rate of 10.1%, however, still 6.6% lower than the CBD projected vacancy rate.

The submarket’s anticipated steady recovery is due in part to companies’ preferences to be within proximity of Amazon, as well as rising demand for urban locations closer to high-end apartments.  The increase in demand is influenced by the migration of younger workers to mixed-use high-end residential locations, as they pursue a live-work-play environment amidst the hybrid work culture.  Companies now are incentivized to relocate closer to these demographics in order to attract more high-skilled workers into their firms.  Relocating also has the added benefit of enjoying lower rents in newer and well-amenitized office properties.

          Figure 3: Downtown Washington D.C.    [xi]                                                     Figure 4: NoMa[xii]

Washington D.C.

Table 2: Washington D.C. CBD & NoMa Office Market Key Indicators

Historically, Washington D.C.’s CBD has consistently been a sought-after trophy office space, boasting approximately 50 million SF of office space with a total asset value of $26.6 B.  The submarket has always had premium office rents due to its unrivaled location, but also offers ample affordable office options, making it an attractive market for many firms.  However, this submarket is one of the hardest hit by the pandemic, making historical negative net absorption and virtually no transactions for the first half of 2021.  The recovery outlook for this market is anticipated to be slow and difficult, as reports show slowdowns in leasing, poor net absorption, and a rise in vacancy rate.

The source of the slow recovery can be attributed to the aging office inventories in the submarket.  With more than half of the existing office spaces built prior to 1980, the amenities and specifications of these older assets do not meet the needs of prospective tenants and investors.  The leasing landscape today requires newer office layouts with the flexibility to incorporate a hybrid workspace, support work-life balance, access to technology, and many other factors.  The rigid structure of the aging office spaces in the CBD, coupled with the high rent (highest rates in the market), allows other areas to outcompete the CBD in the office market space.  Not only that, with large existing office assets and incoming inventory from other submarkets, the CBD is continuously suffering from office oversupply, stagnant demand, and declining occupancy. [xvii]   The CBD is now in a predicament as they determine whether to develop new offices in the midst of potential oversupply, as well as growing uncertainty of their ability to compete with office assets in other submarkets, which are well-amenitized with lower rents.

Office tenant prospects now investigate other submarkets to relocate and expand to.  Many articles have reported capital flow into Bethesda, East End, Tysons Corner, and Reston, with NoMa taking the lead in this growth.[xviii]  CoStar acknowledges NoMa as the top institutional market in Washington D.C., with one of the fastest population growths in the metro area.  NoMa has shown resiliency throughout the pandemic and has a positive prospect for a strong recovery.  The current vacancy rate for the submarket is reported to be 7.1% and forecasted to further reduce to 6.6%, a rate 10% lower than CBD.  Sales volume for the past year has also outpaced the CBD, with rents rising at the same pace as CBD.  All-in-all, NoMa is anticipated to be the next leading submarket in Washington D.C., amplified by the growth, resilience, and tenant preferences over the next few years.

Conclusion

Many markets have seen indications of decreasing investor interest in the CBD office market even prior to the pandemic, due to either the shift in demographics workforce or tenants’ needs for newer state-of-the-art office spaces.  The office asset class was profoundly impacted by the COVID-19 pandemic, resulting in historically poor performance and absorption, but also accelerating existing workplace trends and technology, as shown in the Seattle and Washington D.C. market examples.  CBDs are historically sought after neighborhoods but tend to have the short stick with this transition due to limited space, inflexible office layouts, and unpopular working environments, motivating the relocation of firms into the other submarkets.  Other submarkets have the advantage of vibrant and diverse mixed-use environments which entice both talent and firms alike. It will be interesting to see the future of offices in the CBD as stakeholders and city planners evaluate this transition and strategize ways to increase the flow of capital back into these submarkets.

References

[i] Jagannath, T., 2020. Central Business District (CBD) | Characteristics, Examples, Pros and Cons. [online] Planning Tank. Available at: https://planningtank.com/city-insight/central-business-district-cbd [Accessed 15 March 2022].

[ii] Martin Selig Real Estate, 2018. Neighborhood Spotlight: Belltown. [online] Martin Selig Real Estate. Available at: https://martinselig.com/neighborhood-spotlight-belltown/ [Accessed 2 May 2022].

[iii] CoStar, 2022. Seattle CBD 22Q1 Office Submarket Report. 22Q1 Office Submarket Report. [online] Available at: <https://www.costar.com/> [Accessed 14 March 2022].

[iv] CoStar, 2022. Seattle CBD 22Q1 Office Capital Market Reports. 22Q1 Office Capital Market Reports. [online] Available at: <https://www.costar.com/> [Accessed 14 March 2022].

[v] Cushman & Wakefield, 2022. Seattle CBD 21Q3 Office Market Report. 21Q3 Office Market Report. [online] Available at: < https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/seattle-bellevue-marketbeats > [Accessed 15 March 2022].

[vi] CoStar, 2022. Belltown/Denny Regrade 22Q1 Office Submarket Report. 22Q1 Office Submarket Report. [online] Available at: <https://www.costar.com/> [Accessed 14 March 2022].

[vii] CoStar, 2022. Belltown/Denny Regrade 22Q1 Office Capital Market Reports. 22Q1 Office Capital Market Reports. [online] Available at: <https://www.costar.com/> [Accessed 14 March 2022].

[viii] CoStar, 2022. Seattle CBD 22Q1 Office Submarket Report. 22Q1 Office Submarket Report. [online] Available at: <https://www.costar.com/> [Accessed 14 March 2022].

[ix] Crowley, W., 1999. Seattle Neighborhoods: Belltown-Denny Regrade. [online] Historylink.org. Available at: <https://www.historylink.org/File/1123> [Accessed 17 March 2022].

[x] Pryne, E., 2012. Amazon puts its stamp on downtown Seattle. [online] The Seattle Times. Available at: <https://www.seattletimes.com/business/amazon-puts-its-stamp-on-downtown-seattle/> [Accessed 17 March 2022].

[xi] Clabaugh, J., 2017. Met Square in Downtown DC set for facelift. [online] wtopnews. Available at: https://wtop.com/business-finance/2017/10/major-renovation-prominent-dc-building-met-square/ [Accessed 2 May 2022].

[xii] Long & Foster Real Estate, N/A. NoMa Washington, District of Columbia. [online] Long & Foster Real Estate. Available at: https://www.longandfoster.com/DC/Washington/NoMa [Accessed 2 May 2022].

[xiii] CoStar, 2022. Washington – DC CBD 22Q1 Office Submarket Report. 22Q1 Office Submarket Report. [online] Available at: <https://www.costar.com/> [Accessed 28 March 2022].

[xiv] CoStar, 2022. Washington – DC CBD 22Q1 Office Capital Market Reports. 22Q1 Office Capital Market Reports. [online] Available at: <https://www.costar.com/> [Accessed 28 March 2022].

[xv] CoStar, 2022. NoMa 22Q1 Office Submarket Report. 22Q1 Office Submarket Report. [online] Available at: <https://www.costar.com/> [Accessed 28 March 2022].

[xvi] CoStar, 2022. NoMa 22Q1 Office Capital Market Reports. 22Q1 Office Capital Market Reports. [online] Available at: <https://www.costar.com/> [Accessed 28 March 2022].

[xvii] 2016. Growing Trend – Advantages of Locating Office Product in Mixed-Use Projects and Neighborhood. [ebook] HRA. Available at: https://www.nomabid.org/wp-content/uploads/sites/4/2017/09/HRA-Study-2016.pdf [Accessed 20 March 2022].

[xviii] Banister, J., 2017. Tale Of Two Cities: D.C.’s Core Office Market Struggles As Emerging Areas Strengthen. [online] Bisnow. Available at: <https://www.bisnow.com/washington-dc/news/office/tale-of-two-cities-dcs-core-office-market-struggles-as-emerging-areas-grow-79970> [Accessed 19 March 2022].

The Baker Program was honored to welcome Paul Rubacha, Chairman of the Cornell Real Estate Council and co-founder and principal of Ashley Capital, to the Distinguished Speaker Series.  Mr. Rubacha started his career in the real estate department of Prudential Financial, Inc. and transitioned to equity operations with Goldman Sachs, establishing himself on Wall Street.  When discussing his career trajectory, Mr. Rubacha talked about the transition of manufacturing activities from local United States operations to global locations, particularly in Southeast Asia, in the 1980’s.  This resulted in empty warehouses as manufacturing operations increasingly moved overseas.  Hard-hit states like Ohio, Michigan, Minnesota, and Indiana faced widespread ill-effects as a result, such as unemployment, a depressed regional economy, decline in asset values, distressed landowners, and unused land.  This is when Mr. Rubacha and his partner, Rick Morton, identified the opportunity to buy vacant warehouses, upgrade them, and lease them out to provide a better tenant experience.

Mr. Rubacha’s first deal was a warehouse complex located on the far south side of Chicago.  This was the opportunity to lead the rehabilitation of an underused site into a desirable and functional warehouse for a top tenant.  The existing occupancy was less than 50% because of the site’s location in the Rust Belt, where industrial activities had sharply declined during the 1980’s.  Mr. Rubacha realized that the 12 buildings were quite functional with an overall size of 2 million sq.ft., decent sprinkler fittings to prevent fire hazards, and a reasonable docking ratio.  He took over most of the assets, bought the remaining two parcels outright, and financed them, using the proceeds to make the necessary upgrades to the entire development.  Following the upgrades, the development’s occupancy increased from 50% to 93%.  Mr. Rubacha adopted a creative financing approach to use a tax abatement, part of a tax deferral program and achieved great cash flows.  This first deal was key in driving subsequent deal flow, as it helped Ashley Capital build a strong rapport with clients, brokers, and local contractors.

Mr. Rubacha shared that the key to becoming a successful developer is putting yourself in challenging situations and using creative problem-solving techniques to deliver the highest return on your portfolio.  He was able to recognize the opportunity in buying warehouse properties with a low basis, creating value, and leasing them back at a higher price, while truly delivering results as required by clients.  Ashley Capital’s portfolio was originally comprised of existing warehouses that became value-add assets.  Today, the portfolio has equal parts existing warehouses and new warehouses constructed from the ground up.

Mr. Rubacha provided great insight into the different types of industrial deals in today’s marketplace, and the challenges associated with each.  One value-add deal, also known as a “forward acquisition” deal defined for an asset in either pre-development or under-development, yet to be completed, was for a cross-dock logistics facility in an infill location in Atlanta.  This deal had leasing risks, but no construction risks associated.  Ashley Capital was able to mitigate the leasing risk using its extensive relationship network with local brokers and contractors.  The other type of deal that Mr. Rubacha presented was for the acquisition of a “forward purchase opportunity” defined for a site that is still under construction but had a good preliminary plan approved by the municipality and an estimated timeline of construction.  However, there were still construction risks associated with the remaining work on the site, contingency issues, and tenant finish requirements that could not be easily accounted for, making the underwriting process a challenge.  The construction risks were mitigated by increasing contingency costs in underwriting.

It was helpful to learn about the major challenges associated with the industrial asset type, especially since it has been such a popular commodity in the capital markets for investors and developers in recent years.  There has been an unprecedented demand for industrial assets in the US in the last year, with supply chain strategy changing from “just-in-time” to “just-in-case” and more companies bringing their manufacturing activities back to the US.  The top reasons contributing to this shift are the increasing cost of shipping, increasing automation capabilities, the decreasing need for cheap labor, diminishing language barriers, and reduced time zone barriers, all of which have made it less desirable for companies to have their manufacturing operations in Southeast Asia.

It was important to note that not all players engaged in the development and investment of industrial assets will prevail, as Mr. Rubacha noted.  Those companies with long-term expertise in industrial assets are better positioned to benefit from sustainable earnings resulting from current market conditions.  A great example of this is Ashley Capital’s portfolio increasing in assets under management dramatically since its engagement with Amazon in 2017.  Ashley Capital’s experience with the location-dependent site selection process, civil engineering requirements, parking ratio suitability, and their strong relationships with municipalities have led them to complete more than 3.5 million square feet in transactions with Amazon thus far.

In 2016, Ashley Capital sought assistance from the Michigan Economic Development Corporation (MEDC) to turn a long-abandoned racetrack in Hazel Park into warehouses that now house Amazon, LG Electronics, and Bridgewater Interiors.  The brownfield tax increment financing program not only helped Ashley Capital build state-of-the-art mixed-use spaces for top tenants, but it also generated interest for future residential and commercial developments in Hazel Park.  “Having Ashley Capital redevelop the racetrack has helped attract new restaurants and breweries to consider locating here and contributes to an overall sense of pride for residents and workers in the city of Hazel Park” said Jeff Campbell, community development director of Hazel Park. [1]

The true essence of Mr. Rubacha’s success in real estate investment lies in his opportunistic business strategy and focus on quality.  When asked for advice on pursuing a successful career in real estate, he emphasized adopting a “proactive approach” towards the general understanding of markets, asset types, and investment strategies.  This will allow the successful investor to derive not only the big picture of the industry but also identify underlying challenges which may bring value-add opportunities.

[1] https://www.michiganbusiness.org/reports-data/success-stories/ashley-capital/

On November 18, 2021, the Baker Program in Real Estate had the pleasure of hearing from David Kramer, President of Hudson Companies, a full-service, primarily residential real estate firm responsible for $2 billion of multifamily developments in New York City.  The company covers the whole spectrum of housing strictly within New York City, from affordable to market rate to institutional housing.  This presentation served as the second part of a case study for the Baker students on the Cornell Tech Campus on Roosevelt Island in New York City, the first part being a discussion with Simon Allen, Associate Vice President for Asset Management and Financial Strategy at Cornell University.

Mr. Kramer grew up on the Upper West Side of Manhattan and has been contributing to the greater New York City community for the bulk of his career.  Mr. Kramer became heavily involved in homeless policy during his time at Yale University, and upon graduation was accepted to study Public Affairs at the Coro Foundation’s Fellow Program.  He worked at Skid Row Housing Trust in Project Management and then joined Hudson Companies as a project manager who ultimately worked his way up to become its President.

Photo: David Kramer

While Mr. Kramer walked through several fascinating developments, from the Founder’s Hall Residence at NYU to the Atlantic Center affordable housing project in Brooklyn, the highlight of the session was the discussion of Roosevelt Island, namely the residential portion of the Cornell Tech campus.  Hudson Companies, in partnership with Related Companies, was chosen through a request for qualifications to further develop Roosevelt Island, an unassuming island owned by the city of New York with a ground lease to the state of New York.  Prior to this request, the first developments on Roosevelt Island were built during the architectural period of ‘brutalism’ and gave the island a rather unpleasant reputation.  Hudson and Related went on to form an even-split joint venture and have since developed nine, soon-to-be-ten, beautiful and highly-desired residential buildings that makeup the Riverwalk neighborhood.  These residences have completely transformed the look and status of the island into a charming, outdoorsy, and quieter alternative to the main island of Manhattan.

Photo: Birds-eye view of Roosevelt Island

This development put Mr. Kramer and the company in prime position to be chosen for The House, the five-hundred-unit Passive House standard residential building on the new Cornell Tech campus.  A creative and magnificent example of a public-private partnership, Mr. Kramer vouched that the House likely changed the world by becoming the tallest building ever developed to meet the passive house standard of design and construction.  Mr. Kramer went on to evaluate the idea of the passive house standard, a set of design principles used to attain a certain level of energy efficiency within a certain comfort level through five building-science principles and compare it to other classic environmental and social buildings codes such as LEED and WELL.  To illustrate the effectiveness of the passive house standard to students, David described how with body heat and the constant use of screens, a 3-bedroom passive house standard unit in New York City may never need to turn on its heat.

Photo: Cornell Tech campus on Roosevelt Island, The House being the tallest building pictured

To round out the fascinating case study of The House at Cornell Tech, Mr. Kramer walked students through the capital stack composition of the project.  The materials he presented exemplified the exact methods for feasibility analysis his team used, a description of the earnings waterfall between Hudson and Cornell University, a description of their debt negotiations, plus stories of how the Cornell University Board of Directors used creativity and timing to make this project happen.

Mr. Kramer’s presentation of Hudson’s work provided fascinating examples of how real estate development has the capacity to help impoverished communities, celebrate and preserve history, build entirely new neighborhoods, and show us an energy efficient future.  It was a fantastic celebration of progress in all boroughs of New York City and how real estate reflects the human experience throughout time.