Ok here we go!
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Originally Posted by snfenoc
If the law of Supply and Demand is BS to you, then, I'll say it again, what's the point in trying to convince you? I see it differently. That's it. There is not much I can say to someone who is diametrically opposed to my values. I will note that saying you don't believe in market economics isn't really an argument. It's just a quick and lazy way to deflect reality.
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Dude where did I say anywhere that I think the law of Supply and Demand is BS? And how is it apparent to you that I am making my entire argument that I don't believe in market economics? What I said was I don't buy that "the market is always right" which has absolutely nothing to do with supply and demand. And even besides that point, the vast majority of my post was actually inquiring about the differences (cost/profit/etc) between similar markets, seeking actual data, not just throwing my hands up and saying "I don't believe in the market" or "I don't believe in supply and demand". What I mean is that just because "the market" thinks something will or will not be successful doesn't not mean its "right" in signaling that it won't. For example, before The Saywer, "the market" decided not to build million dollar condos in Downtown Sac, assuming because there was "no market", yet after it was built, million dollar condos sold. "The Market" signaled it was too expensive to build anything taller than 5 story wood frame housing in Sacramento, yet the 11 story steel building at 19J is about to open. If it fills up no problem, then "The Market"™ was understating the financial feasibility of 11 story steel framed residential apartments in Sacramento. The same story if Mohanna gets her 15 floor apartment on K street, we will wait and see on that.
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Originally Posted by snfenoc
Speaking of reality... How many privately built 15-story towers go up in Sacramento during this economic boom? What does that tell you? Do you think that developers and investors are intentionally keeping Sacramento down? I don't. I think they are doing the best that they can to build the best that is possible. If you go on Athem's website and take a look at their projects (admittedly, many suburban-style developments), they seem to be pretty knowledgable about development. They seem to have a good track record. So I find it difficult to question them when they say it's too expensive to build much taller on the Cathedral Square site. I trust them. However, I guess that's not enough for you.
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I'm not saying I'm an expert that knows better than developers, what I have been saying is that I am skeptical on how accurate this is based on my observations of other markets. Thus my inquiry on *why* its too expensive/unprofitable to do it here versus other places. For the sake of argument lets say what they say is 100% accurate, what is the problem with me being curious to dig into the details as to *WHY* its so unprofitable compared to other markets? During this boom, as to why we didn't have a bunch of 15 story residential buildings going up, I would agree that in 2008 The Grid and Sacramento being a "urban" market was much much more unproven than it is in 2019. I think if we started in the "2019 Sacramento" during the start of the boom it would of been much more likely to produce the 15 story towers.
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Originally Posted by snfenoc
With regard to wanting facts and numbers, I don't want to seem like a jerk, but why do I have to put together scholarly report for you? You're basically asking me to Google everything for you, sort through all the data and come up with some sort of complicated mathematical formula proving why mid-rises are the best option at this point, and why we should strike while the iron is hot. No offense, but do it yourself, and come to your own conclusions. Then, maybe you can share your knowledge with us... You know??? Maybe do that instead of complaining about every single proposal that doesn't meet your standards?
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No you don't have to put any scholarly report together. You don't even have to reply to any of my post if you don't want to of course. It sounds like to me you don't know, don't want to look, and just trust whatever developers say. Thats fine, but I'm more skeptical/less trusting of "markets" and what companies/developers say in general. For example, when Waste Management left Sacramento they first said it was because of "California Taxes", then later admitted it had absolutely nothing to do with "California Taxes", it was political BS. So no, I don't trust developers/corporations state by default. I am not trying to argue in bad faith though and can be convinced of anything, even if I'm initially skeptical.
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Originally Posted by snfenoc
As I've said before, I am a development "buff". I read the articles and I listen to what the experts are saying. I don't sit and run the numbers. Sorry. However, I've learned some pretty cool things just by reading, listening and asking those who know more than I do. For example by reading, listening and asking the experts I've learned a number of things....
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Thats exactly what I'm doing. I'm sitting down and listening. As I stated before, what is wrong with being skeptical and trying to understand the underlying factor deeper than the single phase "it doesn't pencil out"?
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Originally Posted by snfenoc
I was speaking to someone involved in financing construction projects a few weeks ago. He explained that a lot contractors won't even consider working on many of the construction projects that we all love. You know why? Because of all the fires in Northern California. You see, insurance companies don't hassle the contractors over what they do. Insurance companies basically write a check and say, "go to town." Contractors love that. It's way better than worrying about those silly investors wanting to account for every penny. An interesting piece of info, huh? You think that might add some competition, decrease the number of available contractors and increase construction costs?
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I'm not even following what this means. Are you saying contractors rather work to rebuild from fire damage with an insurance check rather than build for an investor?
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Originally Posted by snfenoc
With regard to the "Cali Premium," I can't tell you what percentage of the overall cost it is. But common sense tells me that California is just more expensive, and significantly so. Sure, you can justify building at an expensive price if you're getting $6 or $7 a square foot (like 90 minutes away, in SF), but not so much if you're only getting say $4 or $5 a square foot in Sacramento. Again, we have competition and supply and demand. I learned fro Son of Travis when he wrote about $1.5 million in permitting fees for an $8 million project in West Sac.
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I'm genuinely curious in larger projects (10+ floors) what percentage of the costs is this "California Premium". I would figure at some point the project becomes so expensive the cost of land/permitting/lawsuits become much less significant as a percentage. The Arena and The Sawyer I think cost $500 million, and had the face the "California Premium", I'm wondering what % of that $500 million is the California tax?
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Originally Posted by snfenoc
I do know that in the 3 years it took for Yamanee to go through the courts (a CEQA claim was part of that lawsuit), construction costs rose significantly (I remember reading something like 10-15%).
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Well yeah you already know me and you are on the same page on things like the CEQA, regulation, and all of that crap. It needs to go or be significantly reduced. As for construction cost rising during lawsuits/delays in California, yeah I agree thats a factor probably other states don't have to contend with. I wonder why, however, given the California delays, why developers don't just propose things and start the process maybe 2-3 years before the market is "ready". For example, things were already turning around in 2014. I wonder why there wasn't a bunch of proposals started then so by the time 2016/2017 hit, during "peak boom", they weren't ready to start moving dirt?
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Originally Posted by snfenoc
I have learned by working as an office manager that when businesses talk about their costs, labor is number one; and we know labor is more expensive in California compared to many other states. We know Thant land is more expensive. We know that taxes are higher. I know I am rambling, but I found this interesting. Again, from asking people in the business, did you know that tax credits, say for projects that include low-income components, can be bundled and sold on the market to companies that have nothing to do with the actual project. From what I gathered, many companies will actually pay more up front than the tax credit is actually worth. (I guess, if they do their accounting correctly, they can lower their tax base and save even more. Interesting.) So, a developer can use that upfront money and, basically, subsidize his or her project. Nifty, huh? But it makes me wonder, can Sacramento hand out as many tax credits as other cities in California or in other states? Again, Sacramento has a lot of bigger, richer cities with which to compete for those credits. Plus, other similarly-sized cities across the country are often the biggest cities in their respective states; so they may be able to hand out more subsidies than Sacramento can. Here we go again with that difficult competition.
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This is actually a good point. The vast majority of states only have 1 big city to focus on. So they get a lot of state level support since that is the states "showcase city". Sacramento has a lot of competition for state level support. I wonder in other states because they only have 1 big city if developers get a lot of tax credits there that they don't get here. That would uneven the playing field quite a bit.
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Originally Posted by snfenoc
Frankly, I think your estimation of 0.01% premium is off by at least two zeroes. Since it's common for equity partners to demand 15% IRR, a 1 or 2% Cali Premium can certainly make the difference. Remember, construction projects are risky and have slim profit margins. So a 2% premium could lower profits a lot! Due to its lower rents compared to other, major cities in California, and that Sacramento is considered risky, I understand why investors may not want to invest in a high-rise there. At least, not just yet.
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Yeah, maybe its 1% and 1% is enough for it to "not pencil out"? But what I'm more interested in out it compares to other similar cities not San Francisco. San Francisco is literally I think the most expensive city in the country. Highrises are build in other places besides SF.
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Originally Posted by snfenoc
It's funny that you mention Nashville. Because I just read an article in Forbes about that city. Nashville was the third and fourth fastest growing economy in in 2017 and 2018, respectively. You know what city did not even crack the top 10? Sacramento.
Nashville is not only the state capital of Tennessee, it's also the home of country music - a $6.5 billion dollar a year industry in Nashville. Entertainment dollars can pay for a lot of glitz and glamor, including high-rise housing. So, yeah, I think it may have different economics than Sacramento does.
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At the end of the day this would show up in rent prices or housing prices right? And salary numbers right? Just "being the country music capitol" doesn't put money into investors pockets unless entertainers are renting apartments or buying condos... which again would show up in the rent price/housing prices data.
What I am curious about ultimately is what is the price per sqft do you get in similar sized places vs the cost to build. Those data points should in theory tell us a lot about investor motivation if profits are the ultimate goal.
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Originally Posted by snfenoc
Going back to Son of Travis, I learned from him that Sacramento is an untested project for high-rise living. It needs to either have an investment "fairy" in the guise of CalPERS on 301 Crapitol Mall, or it will need to string together quite few successful mid-rise projects before the investment gods will take a risk on a high-rise. Well, that's all the more reason to be exited about 7, 8, 9, or 10 story projects getting proposed - especially by companies with access to lots of money and strong tack records. If a number of them get built and are successful, then we could see a few high-rise residential projects in a decade or so.
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I think we are teetering on the edge of "untested" as we speak. To the point where we should wait before we fill up our main corridors.
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Originally Posted by snfenoc
True, I am taking a leap of faith by "going with the experts on that one," and believing these articles about development. (I know you probably consider Forbes to be a capitalist pig magazine.) However, they seem to be truthful, and I have no reason to question them. Also, I have to add that you and I are both not developers or crapital investor, and since it's not our 10s or 100s of millions of dollars at stake, I think we should be willing to let them decide what works and what doesn't. But what do I know? I don't have the "numbers," right?
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Yes, see my initial response at the top.
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Originally Posted by snfenoc
You mentioned that you're OK with 7-10 story developments, just not in downtown, on J Street. Ahhh yes, the magical land of "Elsewhere." You realize that's the same kind of argument that wburg likes to make when he opposes anything over 5 floors in midtown, right? We have both called him on that. Developers don't have their pick of the litter. They buy what they can buy, and they build what makes sense to them. They don't have the luxury of passing on properties and leaving them to someone who can build something different.
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Yes I actually do realize I'm doing a wburg in reverse. I however think its better to kill of low density projects in what should be high density areas. wburg is more interested in killing off high density projects in low density areas. I believe my views are better for the city, and another key difference is I just rant on the internet while wburg actually sues and does real damage.
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Originally Posted by snfenoc
Maybe you're right. Maybe the next boom will see Sacramento on the rise? But that could be a decade away. Also, I recall that we said this stuff a decade ago, when the towers failed. Well, ten years have come and gone, and we did NOT get a bunch of high-rise residential buildings. BUT we have gotten (and continue to get) multiple awesome mid-rise projects that have changed some pretty blighted areas for the better.
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Even if it takes another decade to fill up J street and Capitol Mall with high rises its worth it to me. I could be wrong but I'm willing to take that risks while the rest of the city fills up with midrises.
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Originally Posted by snfenoc
I'll leave you with one more thing. I was in Sacramento last summer with my spouse. We stayed at the Citizen hotel. (Got a great rate on Priceline.) I was excited to show off my hometown. It was completely embarrassing. J street looked like shit. So, you know what? I am happy if Anthem only builds an 8 or 9 story building on the Cathedral Square site. I am happy if the Metropolitan drawing turns into a real 8, 9 or 10 story building, which would be a lot taller than any stupid drawing. I'll take the sure thing. There will be other opportunities. If half of all these mid-rise proposals get built, reduce blight and improve the city on ground level, they will build the foundation for something much grander. But if Sacramento misses these opportunities, holding out for taller buildings, it's back to square one. I would rather see progress, whether it's in the form of a high-rises or a bunch of really nice mid-rises. Let progress happen!
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LOL for one, 10th and J is literally the absolutely worst block in the entire city, thus this entire conversation. 10th and J is super embarrassing, but I'm sure every city has a block like that, ours just happen to be on our main street and exactly where you happened to stay. I don't know why that prevented you from showing off nicer things to your spouse as the the citizen hotel itself is nice, and all you would of had to do is turn the corner and take a look at "ten ten bar" and K street is starting to clean up nicely, especially by the arena.
In fact DOCO is starting to become a very nice and lively place. I'm more concerned about DOCO long term however with the lack of new housing in downtown proper.
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