Connection and Community: a formula for highest and best use

Covid- 19 set off a worldwide crisis of widespread illness, death, and economic disruption, leading to global lockdowns and jarring changes to our daily lives. Thirty-eight months later, the road to recovery has exposed our burdensome baggage and cultural clutter, glaring a light on existing health, social, and systemic inequities. We grapple to find focus in the face of new information, while a sense of having survived fuels a cultural crisis of consciousness that has us questioning our priorities and how and where we choose to live, work and bring value to our communities.  

Connecting the dots for a new paradigm of hybrid work. Workers don’t want to go back to the office five days per week. Rather, workers find unpalatable the idea of a compartmentalized work life that makes no room for the complexity of the whole person, their personal priorities, preferences and needs. Having mostly proven an unintended hypothesis that hybrid work can be equally if not more productive than full-time office work, today’s post-pandemic worker is foregoing the perks and promises of onsite employers, reclaiming stolen personal time lost to years of commuting, and demanding work with built-in flexibility and hybrid schedules that offer better balance. Most workers also agree they benefit greatly from two or three days in the office each week to collaborate with co-workers in- person, hold department meetings and brainstorming sessions. Combined with two or three days of focused work from home, this hybrid schedule is the best of both worlds for many. With news of growing layoffs, some employers are reclaiming power, however, by dropping hybrid work schedules in favor of the traditional forty-hour office routine, which they claim will result in a bump in employee productivity, better collaboration and opportunity for training.  

While the push-pull between employers and employees continues, the power struggle speaks volumes about a collective shift in priorities for many modern-day workers. Employers, and real estate developers, especially, should listen carefully. As the tension over hybrid work plays out, the future of Office as an asset class seems uncertain and those who win at the challenge of anticipating future demand for workplace space, will pave the way for a new paradigm of productivity and enterprise in the built environment. 

People need people. Even our desire for hybrid work schedules points to the fact that while we may highly value flexibility, we are social creatures who also highly value our interpersonal connections with colleagues and co-workers; the visceral exchange of thought that is synthesized by the full spectrum of our physical senses, in-person, has no substitute and conveys ‘data’ that simple cannot be digitized. 

Given our propensity for human connection, it’s not surprising that isolation and loneliness took root for many during the stringent lockdowns of Covid-19, igniting comorbidities like depression and mental disorders. As restrictions began to lift and entertainment venues, restaurants and large gatherings came roaring back to life, droves of the socially-starved flocked to mix and mingle at the first signs of post-pandemic life. If there is not one other silver lining, Covid-19 has affirmed our desire for analog connection in a digital world. We simply cannot overlook the importance of community when we consider how people feel about their broader well-being in the context of work and home life. The built environment has the potential to serve as a conduit that connects all facets of our lives in a seamless way, blurring the lines between live, work and play, while holding space for community and connection that remain a basic human need.  

There’s a disconnect on how to house a nation. According to the U.S. Census Bureau, the median household income in America in 2021 was just over seventy thousand dollars per year. John Burns Real Estate Consulting recently reported that zero (0%) percent of new housing stock in the pipeline for 2023/24 is for housing under $200,000. A mortgage of $180,000 in today’s interest rate environment would equate to a payment of roughly $1,500 per month, or more than 25% of the average American's income. How do we house 50% of the workforce, making less than what is necessary to afford a $200,000 entry level home that no one is building? Industry leaders and consumers alike scratch their heads at this seemingly unsolvable equation. National inventory of housing remains at anemic levels for an outpaced need, despite lofty goals to increase production to meet demand. 

In California alone, the state has set a goal to produce more than 2.5 million new homes by the end of 2023, including more than 1 million affordable homes. The 2022 State area median income (AMI) for a four-person household in Los Angeles County is $91,100. According to the federal government, housing is “affordable” if it costs no more than 30% of the monthly household income for rent and utilities. Most affordable housing developments are built for families and individuals with incomes of 60% or less than the area median income, which would equate to around $54,000 for Los Angeles County residents. Under the government’s formula, housing designated as ‘affordable’ in Los Angeles should cost around $1,350 per month. An average studio apartment in Los Angeles currently rents for around $1,650 per month and the cost and time to construct ‘affordable’ units often make profitability a distant aim for developers, even with government-issued subsidies and credits. In fact, there is a huge disconnect between what these buildings cost to construct and maintain and the rents most people can pay. Combine this high cost of development with labyrinthine approval processes and antiquated building code, and the city is left with only the steeliest and most bullish of developers who dare take a swing at developing property in the Los Angeles market.  

Office-to-resi conversions aren’t the magic bullet. While the war on housing rages on, investors and commercial owners marvel at their half-vacant office buildings dimly lit in quiet urban cores, available triage having already been applied, fresh out of creative strategies to drive revenue for a dying breed of building as loan maturities and lease expirations come to a swell in the next couple of years. Data from CBRE found that the national office vacancy rate hit 17.3% in the fourth quarter last year as adaptive re-use becomes the new topic ‘du jour’ and leading architects and industry leaders dream up new ways to repurpose abandoned office space.  

With a woefully undersupplied housing market, vacant office space appears a beacon of hope for real estate and ripe for a retrofit, but the statistics suggest otherwise. Despite their high vacancy rates, most office buildings across the country simply aren’t suitable for conversion to residential housing, having less to do with structural limitations and more to do with the time and prohibitive cost of converting an existing building for a new use. Even so, CBRE also reports that the number of office-to-apartment conversions in the U.S. is expected to triple this year, to 34 from 11 in 2022, representing only 2% of office stock. The fact remains that those projects will barely make a dent in reducing the surplus supply of office space and despite adding residential units, won’t come close to moving the needle on alleviating the larger housing crisis either. 

While office conversions could potentially offer a repositioning strategy for owners who seek to stay out of hot water with their lenders, only the best of conditions allow for this route, and committing to this exit in the midst of an evolving global workplace still very much in flux, gives developers additional reason to pause.  

Private sector solutions. If office-to-resi conversions are mostly cost-prohibitive and won’t do much to change the landscape on housing, it’s likely that these spaces will remain office space, with owners resigned to settle on remodels and retrofits that better support hybrid work. 

But what about more housing? Consider downtown Los Angeles, a struggling urban core with a shocking homeless problem, its notorious Skid Row hosting nearly 5,000 homeless who live on the streets and sidewalks of a nearly fifty block area of the Central City East district of DTLA. Substance abuse, mental illness and poverty characterize the typical story of plight that afflicts the nearly forty-two thousand people who live without housing throughout the city. In DTLA, new retailers, restaurants, businesses and cultural elements have brought life, commerce and clever placemaking to the area in the last decade, but steady growth and a strong real estate market have also led to soaring land costs, making underwriting anything less than the most luxury of residential concepts in DTLA, a cost-prohibitive exercise. Moreover, lack of infrastructure that makes vibrant walkable cities so enticing- like pedestrian friendly streets and parklets, bikeways, robust retail, medical services and adequate policing- are lagging and simply not adequate to service the growing needs of the neighborhood, let alone the discerning tastes of an UHNWI paying fifty thousand dollars per month to live in a sky box in a disjointed urban core. But while costs to deliver and own market rate housing in Los Angeles continue to push the boundaries for developers and buyers alike, it turns out building affordable housing is also not particularly affordable either.   

Don Peebles, founder, chairman and CEO of the Peebles Corporation, recently spoke to Urban Land magazine about his Angels Landing project, which has been seeking entitlement approvals in L.A. for the past five years. Angels Landing will include a 63-story skyscraper and a 42-story high-rise with two hotels, condos and apartments, and a multi-level plaza with commercial retail and restaurant uses in downtown Los Angeles. The project will include market rate housing, as well as 20% of the units reserved for affordable housing.  

“One of the challenges with affordable housing in Los Angeles is the comprehensive and burdensome and costly entitlement process, and that in turn drives up the cost of land. It also delays projects for a certain amount of time. The key for affordable housing is that there’s such a shortage of it that the dollars need to go further, so affordable housing shouldn’t be developed on sites where the land is super expensive,” Peebles says. “Affordable housing ought to be linked from the project to another area or another site where it’s more cost effective to build it, so that the dollars can go further.” 

But Peebles’ land-use philosophy seems contrary to the tenets that underpin an equitably integrated, mixed-use plan approved for his Angels Landing project. His ethos instead more closely resembles the directives of the new Downtown Community Plan for Los Angeles, which proposes guidelines and rules for development over the next 20 years. The plan designates a part of historic Skid Row as an area where only affordable housing could be built. The area will be rezoned for mixed industrial use, making it the first area of the city with new housing reserved for residents defined as acutely low income (homeless or almost) to moderately low income. 

Proponents of the affordable-housing-only district believe the new zoning will ensure poor people aren’t displaced by the market-rate development that will otherwise transform the community. Others see a problem with what could be interpreted as economic and social segregation that only serves to perpetuate the existing problems inherent to low-income, underserved populations.  

While relegating affordable housing to cheaper land appears to overcome the economic hurdles of a particular parcel, it does little to advance scalable solutions for housing affordability or inclusion.  The last three years of quarantine served as a bitter-sweet reminder of our humanistic need for connection and community; the aim of isolating an at-risk population as a proposed solution to widespread affordability seems more likely to promise further long-term social divide and inequity that drains community of resources. The disconnect between social theorists, policy makers and for-profit businesses leads to well-intentioned, but impractical policy that lacks humanism and holistic perspective, inevitably failing by a rash of unintended consequences that create more harm than good or simply stall in accelerating progress towards real change. Policies that attempt to uplift social welfare and enhance urban planning often fail to deliver on their mission, as holistic implications get overlooked and the delicate symbiosis between private and public interests becomes imbalanced. Disconnected policy fails to offer solutions that are scalable, profitable or practical when considering workable solutions for getting people off the streets, creating needed housing, and building cohesive, healthy cities that thrive.  

Practical policy. Consider SB-9, for example, passed in California in late 2021 and intended to encourage more housing through upzoning, which allows for multi-unit housing to be built on land that is zoned for single-family residential use. The legislation allows homeowners to convert a single-family home into a duplex, or split a single lot into two parcels, with potential to build a duplex on each. Over a year later, the senate bill’s promise to ease the way towards more housing has resulted in only 282 applications across the state of California. Several requirements of the legislation seem to have stymied progress towards upzoning, with one last-minute stipulation of the bill requiring that homeowners live in the property for three years. The requirement was put in place under the false premise that doing so would ensure that the ability to upzone single family properties directly benefits the homeowner, and not an investor who seeks to add value for profit. 

While well-intentioned in theory, policy makers in California failed to look at the potential effects of SB-9 through a practical lense. With fewer than 300 applications across the state, the reality is more likely that most homeowners don’t have the time, capital or knowledge to assume the risk to develop their properties, while also living through the construction process, or forced to find alternative housing during the construction cycle. SB-9 could have been an effective avenue to upzoning and more housing if only the real estate development community had been viewed as a capable ally instead of an adversary towards accelerating housing solutions.  

States like California need to come to terms with the fact that the private sector, and commercial homebuilders, must and should make a profit from building much needed housing. Profitability is the driver of all business in a capitalist democracy and stated simply, builders who are profitable, build more. Housing legislation must consider the mutual goals of the private sector, the greater community, and the ways in which balancing the needs and motivations of each can help revive a delicate urban ecosystem. By creating laws, incentives, tax abatements and other policy measures that encourage development of equitable and adequate housing across our cities and states, we stand a chance at creating communities that can truly serve their highest and best use. 

The community connection. Brilliant examples of smart urban planning abound around the globe, but the challenge of any evolving city remains achieving highest and best use for the future, while also preserving aspects that lend character, local point of view and context in the expression of placemaking and flexible, integrated building design.  

At least a few principles are universal, namely that urban design should be human-scale and people-focused, running counter to a century of auto-centric, industrialized and outsized uses for city space. More than ever, environmental sustainability and realistic long-term plans for how spaces will be used lies at the cornerstone to solving complex urban design challenges and ensuring the healthy evolution of our cities and built environment. 

So too, urban planning and placemaking is a collaborative community effort not to be left solely to the hands of the privileged few or the loudest voice, but the entire community. How do cities broaden their outlook and consider a framework to support future innovation and adequate housing supply among so many divergent voices and competing interests?  

While we may not know exactly what the future holds, the challenges of present day speak clearly of a need for better connection, community and integration in policy making and urban planning for a new era of city living: workers want more balance and integration between professional and private life, underserved populations gain through inclusion and support, and the human experience cannot be outsourced to AI; complex problems require our humanity and depend upon our inter-connectedness. It’s not surprising then that the best real estate ecosystems are comprised of complementary elements that forge connection and celebrate interdependencies between buildings, as well as people. Convergence of space that incorporates office, retail, housing and elements of public placemaking offer the greatest promise for creating integration among the most important and time-consuming aspects of our lives, like work, family and community.  

Retail and entertainment uses that appeal to the people that live and work nearby create a walkable, lively environment while green spaces carve out connection with nature and provide opportunity for engagement with neighbors and community activations. Wide availability of affordable whole foods, city-wide broadband access, readily accessible mass transit and safe, walkable streetscapes make the foundation for a vibrant, balanced and thriving urban community and provide a tangible path towards humanizing today’s post-industrial cities.  

Assuming these principles of model urban design are worth pursuing, the ability to bring forth an abundance of housing and improved infrastructure then rests upon not only an agreement of highest and best use, but a willingness by all constituents to architect policies that are inclusive, fuel the entire urban ecosystem, keep business profitable, uplift the underserved, and benefit the majority of citizens. Deliberate, relationship-driven communication and the work of forging common ground is the critical human element that very well determines the success, productivity and outcome of development projects that promise to either burden or uplift communities.  

Interests need not always be misaligned, provided business owners, policy makers and community members can keep sight of the elements that make cities livable: quality of life, environmental sustainability and competitive economics. All stakeholders in the urban ecosystem must have their needs met for housing to truly be inclusive, sustainable and renewable and only when policy makers and the private sector can forge mutually beneficial development agreements will this be possible in most cities across the country. 

The road map to great urban development relies on conscious connection. It’s up to local communities and jurisdictions to rise beyond theory and wishful thinking and scrutinize the overarching impacts of potential policies before adopting them. Policy makers and developers must seek out community point-of-view in all its facets to truly meet the needs of the collective, while the private sector must embrace for-profit builders and investors as allies and partners in the development of equitable housing. A tightly-connected community that strives for holistic understanding of what drives actionable outcomes locally, will achieve the slow but reliable route to producing more housing and improved infrastructure in today’s changing urban environment.  

Revisit this article originally published at Urban Pulse Real Estate