The Lights Are On: Is Anybody Home?
Downtown developers try to ride out the recession
One evening last summer, Tim Hendricks and Craig Jones took the company credit card and set off on a walking tour of Downtown. They threw back a couple of beers at the Stephen F. Austin Hotel, ate Cajun food at Gumbo's, hit some bars on Sixth Street, and ducked into a few haunts in the Warehouse District before heading over to the Speakeasy for a nightcap on the rooftop.
The two may have looked like any other middle-aged guys on the prowl that night, but Hendricks and Jones were no ordinary fellows. They were developers convinced they had struck gold in a downtown that's been stumbling around in the dark for a couple of years.
Why do they see gold where the rest of us see lumps of coal? Financial analysts from here to Wall Street have been asking the same question since late 2001, when Cousins Properties Inc., an Atlanta-based real-estate trust with deep pockets, jump-started construction on an office high-rise -- after September 11. Even before the attacks, local developers had assumed Cousins would delay the project. What's more, Cousins is building the 33-story tower at Fourth and Congress (henceforth "Congress at Fourth," the actual name of the project) entirely on spec -- that is, without certainty of leasing out the building -- at a time when the Downtown office market is limping along with an occupancy rate (as of Dec. 31) of just 79%, down from an already tepid 85.2% a year ago. Few investors would risk such a daredevil venture in a recession, but Cousins has invested an extraordinary amount of cash directly from its own till, thus bypassing the usual preleasing requirements of banks. Hendricks, a vice president of the company, won't reveal the cost of the project, but The Wall Street Journal has cited a cost estimate of $137 million for a Class A building of this size and scope.
Hendricks has lived in Austin since 1975, and he loves to show off the place to out-of-town visitors like his boss, Craig Jones. Jones is president of the Cousins office division in Atlanta, a city straining under the consequences of rapid growth that has spawned sprawl, automobiles, congestion, and smog. Now, the Georgia company looks to Austin and sees gold in them-thar hills -- though thankfully, the developer is thus far leaving the hills the hell alone.
How does Hendricks respond to the financial naysayers who track public development companies like Cousins? "That's usually the case," he said of the negative reception. "The analyst's job is, never be too positive." Hendricks was flying pretty high when he spoke last week. He had just nailed the fourth and largest tenant, the law firm of Graves, Dougherty, Hearon, & Moody, and at press time, he had just announced a fifth tenant, New York-based Dewey Ballantine, an international law firm that opened an Austin office last year. That would bring the building's current occupancy to 35%, and Hendricks says more tenant announcements are on the way. Still, it's hard to tell how long it will take to fill up all 525,000 square feet of a building that's expected to open its doors in 11 months.
Hardly anyone in the real estate business believed that the slump, which hit Austin roughly two years ago, would drag on this long. Cousins' mistake, they are now buzzing, is that it forged ahead with this huge new project on the dicey bet of a quick turnaround. "I think they were a little overly optimistic that the downturn would be shorter than it is," said Michael Kennedy, president of Commercial Texas. Nevertheless, the building is generating an unusual amount of interest, if nothing else because of its unusual design. "It's not going to be the cheapest deal in town," Kennedy went on, "but it's certainly the newest, flashiest building on the skyline." The most striking feature of the closely watched project is its sharply pointed crown of translucent glass. Statesman humor columnist John Kelso couldn't resist a jab, likening the crown to "something you'd use to pull nose hairs."
Hendricks, who likely hasn't heard the end of the jokes, is equally quick on the counterpunch: The locked-in lease commitments from a handful of big law firms show that the market is responding favorably, he says. "It's a stamp of approval that tells us we're accomplishing what we set out to do."
Charles Heimsath, president of Capitol Market Research, a real-estate consulting firm, gives a nod to Cousins for pushing its building plans forward despite outside predictions of the project's doom. "They have an irreplaceable location on Congress Avenue, a premier address," he said. "Without question it's a bold move, a countercyclical move, on their part."
The stir of interest on Congress Avenue doesn't make Jeff Pace's job any easier. Pace, managing director of CarrAmerica Realty Corp.'s Austin office, is competing directly with Cousins for tenants at 300 W. Sixth, a 23-story office building that opened in January 2002. The high-rise, which CarrAmerica built and manages, is now 70% leased, but Pace doesn't expect to see a full house anytime soon. What's worrisome, he adds, is that for every new tenant he takes in, a vacancy opens up somewhere else. It's a drastic turn from just two years ago, when the market was squeezed to the limit with plenty of tenants to go around and fewer office buildings to compete with. "The trough is a lot deeper and wider now than any of us expected," Pace said. "Virtually all the new leasing activity is from existing companies moving to one building and leaving empty space in another."
Two Ways to Look at It
The office market isn't the only segment of Downtown feeling the pinch. The familiar drumbeat of jackhammers still resounds from construction sites, cranes still loom in the air, and pockets of development dot the cityscape, but -- with the notable exception of the Cousins Properties folks -- there's not a booster around who's ready to declare victory.
Eddie Safady, Liberty Bank president, Congress Avenue resident, and arts patron, was feeling particularly out of sorts the other day. The weekend before, Safady had all he could stand of pushy panhandlers and people sleeping on park benches in "broad daylight." "I was so annoyed I actually called 311," he said. "It was such a beautiful day, and I saw this going on, and I said, 'This is embarrassing.'" Safady says he also sees more trash along the avenue than he's seen before and trees that have seen better days. "I love living Downtown, and that's why I'm so upset about this. You really do see a scary element on the street these days."
Apart from safety matters, Safady turned to the subject of another hot-button issue -- whether Downtown would benefit by transforming one-way streets into two-ways. The proposal is both divisive and divided, with the Downtown Austin Alliance, of which Safady is a member, taking the lead for the proponents and the Real Estate Council of Austin leading the charge to scrap the plan. On this one, Safady stands with RECA. "Why should we step into this now," Safady asks, "when we've got a budget that's so far in the hole to start with?"
Speaking for the DAA, Executive Director Charlie Betts envisions two-way streets that would calm traffic and create an attractive draw for pedestrians and, ultimately, retailers. "What is lacking is the connectivity," he said. "The weaving together of Downtown is not where we'd like it to be. The pedestrian influence is not in place. If we calm the traffic, we can make the pedestrian experience a more pleasant one." Safady rejoins, "Downtown is primarily a business district. You can't give in to what's great for a small neighborhood. We're not living in Tarrytown."
Therein lies a nagging question about the evolution of Downtown. Can the mercantile interests of the core business district be balanced with those of a residential neighborhood? Downtown Commission Chairman Chris Riley thinks so, but as a Downtown resident, he leans in favor of the "neighborhood." Right now his main concern is getting the residential population numbers back where they used to be, before a series of economic booms wiped out a sizeable chunk of living space.
That's not an unrealistic goal. In 1940, according to city statistics, there were 3,775 residential units Downtown. The figure fell to a low of 1,985 units in 1980, rose slightly, then dipped again and remained stagnant until a rebirth of residential construction two years ago brought the count to 2,450 units by the end of 2002. With far fewer homes than offices, Downtown registers a brighter residential occupancy rate of about 94%. The Nokonah, whose residents include a who's who of local movers and shakers, has sold more than half of its 95 condos, and Post Properties has a full house at its 239-unit apartment building on West Avenue. Currently, there are three residential properties under construction that by 2004 will deliver a combined total of 540 new units.
Yet Riley considers those prospects and worries that momentum is on the wane. At least five other proposed projects are entering their second or third year in a holding pattern. "It's a little ironic in that it feels like we seem to have lost interest in repopulating Downtown," he said. "When you lose places like Waterloo Brewing Co. and Liberty Lunch, people are a little less excited to see condos going up."
The missing link in the big picture is, as everyone agrees, retail. If you can't shop Downtown, you can't fully live Downtown. But the only Downtown retail project anywhere close to bearing fruit is the Whole Foods headquarters and grocery store project set to rise from the ground at Sixth and Lamar (see list and map, p.24). Otherwise, most of the street-level retail projects on the city's "emerging projects" list are little more than a glimmer on the horizon.
At City Hall, outgoing Mayor Gus Garcia and City Council member and mayoral hopeful Will Wynn have their own set of ideas for tackling the short-term challenges of the day. Garcia wants to close the book on the unfinished Intel building before he leaves office. The federal government is studying the abandoned Intel site for a new courthouse, and the city is doing its part as matchmaker to bring Intel and the feds to the table. "That would really erase a black eye," Garcia said.
Reaction or Planning?
Wynn, who counts Downtown redevelopment as one of his top priorities, would like to see a new public library go up on "Block 21," the block the city reacquired from Computer Sciences Corp., when the software company backed out of building a third office building. CSC has enough difficulty just trying to fill its two existing buildings. The CSC era, says Wynn, was part of the "reactionary" planning that took place in the late Nineties, under Kirk Watson's reign. At the time, the company was threatening to build a new office over the aquifer, so the city "reacted" -- cutting a sweetheart deal to lure CSC Downtown. Next came Intel. They needed an office, so the city made concessions for them to lay stakes across from Republic Square, only to have them pull the plug on the project when the economy went south. "Clearly the city of Austin learned a lot of valuable lessons with Intel," Wynn said. "And that was a very painful lesson."
Could another round of lessons be in store? More than likely. Business is indeed cyclical, but no one is ever certain how high or low any particular cycle will roll. Like similar economic pronouncements that emanate from Washington and Wall Street, prognostications from Main Street -- or in this case, Congress Avenue -- are always an uncertain combination of hard-boiled business acumen and entrepreneurial salesmanship, with a generous side order of wishful thinking. From the high-rising perspective of Tim Hendricks and Craig Jones, the Manhattan-like profile of their Congress at Fourth project is a visible symbol of their conviction that the Austin economy is on the rebound. Quite a few of their Downtown neighbors -- many of them equally experienced businessmen -- aren't nearly so certain that the city has seen the worst of the bust, or is approaching the light at the end of the tunnel.
By this time next year, it'll be much more apparent who was just whistling in the dark.