Tuesday, January 31st, 2012
Using the tech metaphors so common now, we have tended to focus on the “hardware” of place, the land, bricks and mortar. But maybe it is time to think more in terms of the “software”, of how we program and run places day to day.
There are two masters who have done this with real estate, one on the East Coast and one on the West Coast, and they have both been at this with single properties for more than 20 years. One is Dan Biederman of the Bryant Park Corporation, who has made that Midtown Manhattan space one of the world’s most densely used parks. The other is Ron Sher, who has turned the Crossroads Mall in Bellevue, Washington into the kind of active public people place that suburban communities lust after.
Before looking at their work, however, consider the term “property management”, which practically speaking means “property maintenance”: the oversight of building systems, cleaning, security, landscaping and utilities. “Asset management”, on the other hand, is largely a financial function, overseeing fixed expenses like insurance and property taxes, lease negotiation, investor reporting and the occasional repositioning or disposition. Real estate is one of the few industries where many owners farm out marketing, to brokers, many of whom have only an episodic relationship with a property. That’s why these two men are so interesting – they have given special attention to the public space which usually gets only swept or blown. In doing so, however, they have created notable value around them.
Out in Bellevue, Washington, one of Joel Garreau’s “Edge Cities” on the east side of Seattle, the Crossroads shopping center went up at the intersection of two arterials in the first wave of growth in the 1960s. This was before a new freeway, Highway 520, would reach eastwards to a town that was virtually unknown then, Redmond. Crossroads was an enclosed shopping center, but with just 40 acres it was definitely a “junior regional”. When enclosed malls reached their zenith of construction in the 1980s, most would be twice that size.
That’s why, by the late 1980’s, Crossroads was like the flotsam on the beach left after the wave of growth had gone by. The new store chains had followed the freeways out to the new shopping centers. Apartment houses nearby had deteriorated, and gangs showed up in the mall.
When Ron Sher and his partners bought the mall in 1988, one developer had already tried to turn it around and failed. It is surprising, in fact, that Crossroads was not torn down, for this was a period when developers replaced many of the older junior regionals with serpentine power centers that ranged big box stores along one another facing a single parking lot. Lacking freeway exposure, however, this was not an option, so in many ways the centers own failure saved it. Fortunately the price was very low, so carry costs were much less of an issue than in most acquisitions.
Sher and his partners did make some large initial capital improvements, such as lopping off one end to build a new grocery store that connected with the rest of the mall, but his main emphasis was on fixing the basics of the center. Had Sher simply re-tenanted the shopping center, however, he might have failed, but he also began to program the shopping center for activity not just in the stores but in the malls themselves.
Every larger shopping center has its car shows and seasonal choirs, but Sher built a stage at the center of the mall and hired inexpensive bands on Friday night to play and draw in movie-goers an hour or so before show times. Near the entrance to the grocery store he installed a giant chess set now attracts some of the top players in the region. Just inside the main entrance, in the mall itself, he set a magazine seller up in business, and added a Starbucks and Half Price Books store that is an island of reading. On a typical morning there are about two dozen people sitting and drinking coffee there, an hour or two before the main mall stores open.
One of the most important things Sher did was to take back the marketing of the tenant spaces, by setting up his own brokerage house. This gave him early and first-hand knowledge which chain stores were in the market, so he could catch them before they signed with better-located but slower acting centers.
It was also about this time that Microsoft moved its headquarters to a freeway site about a mile north. Few people outside the area know how much Microsoft has done to diversity the region with highly skilled tech workers from other countries. Fully one-third of the people in the area now speak a language other than English in the home. Many of these new workers were young people sharing an apartment or a house.
Rather than leasing to Burger King, QFC or even Panda Express, Sher leased his food court spaces to locally-owned ethnic operators. Go there at a lunch hour and the place is crammed with hundreds if not thousands of Microsoft workers. Their presence in the area also led to the upgrading of the nearby apartment houses, which, over time, have filled with more and more middle-class families new to this country. Sher targeted their needs with stores like JoAnne Fabrics, Michaels, Reclinerland, Dress Barn and Old Navy. He also catered to everyday needs by signing a branch of the public library, a motor vehicles office and a community policing station. Ann Taylor and Z Gallerie might have brought more prestige, but these tenants brought more everyday traffic.
So did increased programming in the malls. The calendar for a week this January shows about two dozen non commercial events, including musical performances; free tax advice; CPR lessons in Spanish; translation clinics in Hindi, Korean, Chinese and Russian; and knitting and crochet classes. Outside, Sher has met the needs of nearby apartment residents by turning an under-used part of the parking lot into community gardens. Longer term, he plans to create a plaza that will be wrapped with mid-rise housing. It’s the kind of multi-hour gathering place envisioned in town center plans, but rarely realized.
If Crossroads is an example of a profoundly suburban place reborn, Bryant Square is a example of a profoundly urban place reborn. Located at 6th and 42nd Street in midtown Manhattan, right behind the main branch of the public library, it is hard to believe that this place was once known as “Needle Park” because of the number of drug users there.
Biederman is an unusual guy to be known for running a public park, for he has degrees from both Princeton and Harvard, and he seems to know people at the Bloomberg level. But Biederman doesn’t work for Bloomberg or the City of New York. He works for and runs the Bryant Park Corporation, which is a non-profit that contracts with the city to manage the park.
How is a person who is runs a public park able to operate at such high levels? Because he has created such value around him. A study by a major accounting firm found that his turn-around had created hundreds of millions of dollars of value around the park.
The interesting thing about this park turn-around is that it is the reverse of the classic redevelopment play in which governments use their powers of eminent domain to tear down and resell land at a discounted value, and then use the increased property taxes to pay back the financing. Financially, that strategy relies on leveraging just the land value of a place, and even when it works, it usually takes ten or 20 years to realize significant results. Biederman’s strategy was to focus on what wasn’t working, the public places, and to use the improvement there to draw people and value back to buildings that were already in place, leveraging their full value, both land and improvements. Not only was this lower risk, but the return period was much shorter. Today he takes no public money to run the place, operating solely on funds from a local improvement district. Are such improvement districts the wave of the future, in lieu of traditional redevelopment?
A couple of core principles guides his work. One is opening up the park to the gaze of passers-by, a kind of “eyes on the park” strategy that made it safer for everyday people. A second is a focus on programming, to create events and activities that draw people there “6/16/12” or six days a week, 16 hours a day, 12 months a year. A third principle is providing public services at private quality standards. The lobby of the restrooms, for example, has large, real flower arrangements worthy of a Four Seasons hotel. The bathrooms there have made it a nominee for the “America’s Best Restroom” award.
Like Ron Sher, with his Peruvian flute bands, Biederman has not been afraid to buy activity. Biederman paid a New Jersey bocce ball club to change its location and play in his park, for he realized that it would draw on-lookers. He has a seasonal outdoor skating rink that is free, compared to $15 at Rockefeller Center seven blocks north. Biederman knows who his customers are, for he sends people out with clickers at different times of the day to count them, and his goal is to fill in the slack hours with activity, like movies on warm Saturday nights in the summer.
One of the most important things about Bryant Park is that Biederman trusts the public, collectively. The bathrooms are one sign of that. Another is the chairs, which are not bolted down. You can pick them up and move them, but try take one away and people will stop you or call one of the maintenance people in evidence. In fact, like Disneyland, part of the perception of quality in this place is simply seeing those people moving around and working.
What Sher and Biederman have both done is to fine-tune the management of places, in such a way that people feel it is theirs. It is true that private coffee houses are gathering places, but there is a rush and hub-bub that with each whoosh of the cappuccino machine reminds patrons that they are essentially sitting on rented seats. Sher and Biederman have created ease.
Back to the computer analogy: one of the essential questions for the upgrade of Apple’s operating systems is backwards integration: how many old applications should they continue to support, and at what cost to speed and elegance and new features? This is the same question for effectively managing and programming real estate, be that a place to live, work, learn, shop or play. What Sher and Biederman have shown is the value and success that comes from paying attention to real and immediate needs. Get the basics right, and your customers will come along with you and draw new ones as well.
Also by Rod Stevens:
The 31-Flavors of Urban Redevelopment
Rod Stevens is a business development consultant on Bainbridge Island WA, specializing in urban ventures.