This is an HTML version of an article that ran in the April 2014 issue of Real Estate Forum. To see the story in its original format, click here. 

The construction crane, which following the downturn seemed as close to extinction as the whooping crane, has made a comeback in select markets and sectors. However, if the misquoted maxim from Field of Dreams —if you build it, they will come—ever held true, those days are past. It's closer to the mark to correctly cite what the disembodied voice told Kevin Costner in that 1988 movie before he began putting up a baseball stadium in an Iowa cornfield: “If you build it, he will come.” In other words, targeted development.

“End users are becoming much selective in terms of what they would like to see,” Charles Pinkham III, vice president of development at Portman Holdings in Atlanta, tells Real Estate Forum. “Good real estate is good real estate and always will be, but what's happening inside that real estate is becoming more crucial.” In office development, for example, those end users want a space that encourages collaboration, especially since a fair amount of the individual worker's daily responsibilities can be carried out off-site, he says.

For mixed-use projects, “You need to figure out what the magnet is—how you're going to pull people in continuously every day,” Kurt Rosene, senior vice president of national development with the Alter Group, tells Forum . In former years, MXDs may have put some retail into the mix with office “because you had to make the pro formas work.” Today, he says, “every component has to stand on its own,” while also complementing the others. “That's what the lenders are looking at. It's making us, as developers, look much more at the bottom line of individual components. Hopefully, they assist each other.”

Alter Group is building an MXD on tribal-owned land in Scottsdale, AZ that illustrates this principle. Its 176-acre Riverwalk development along the Pima Freeway is approved for 1.5 million square feet of office all told, but a more recent addition is a TopGolf facility, which broke ground last July and is geared toward players of all ages and skill levels. Alter Group expects 400,000 visitors to TopGolf in the first year after its completion, half of them non-golfers. With TopGolf, an adjacent casino resort and a Major League Baseball training facility on or near the development, the project's hotel and retail components will have a ready customer base.

The Phoenix area was among the hardest-hit markets when the housing bubble burst, but Rosene notes that the region's well-thought-out MXDs survived the downturn better than most. They did better, for example, than much of the standalone big-box retail that accompanied the single-family building boom in the city's suburbs before the housing market cratered.

Florida, too, took a body blow when what first surfaced as the subprime-lending crisis became a global downturn in 2008. Yet development has returned and, with it, the impetus to mount a multi-city project that was on the radar seven years ago but took an extended hiatus. Florida East Coast Industries' All Aboard Florida, first announced in 2012, is an intercity passenger rail project that will connect Miami to Orlando with intermediate stations in Fort Lauderdale and West Palm Beach. At each stop along the way, there are development opportunities in residential, office and retail—a total of 4.5 million square feet, Michael Reininger tells Forum.

“Today, Florida is clearly growing out of the downturn, and it's clear that infrastructure and mobility are key to the growth and the sustainability of that growth,” says Reininger, president and chief development officer for All Aboard Florida. “So the time again appears to be right.” An alternative to the highways connecting Florida's two biggest cities has been sought for years, because “the current options for mobility in the state are challenged, due to growth and limitations of capacity.”

Along the Orlando-to-Miami corridor, “there are literally hundreds of millions of trips being taken every single year” between the four stations that AAF will serve. “The vast majority is being taken by individuals in private automobiles.” The costs of maintaining the roads, and the congestion these trips create, can't be sustained long-term by that one mode of transportation, he adds.

On the surface, it might sound as though the project is taking a page from the examples of transit-oriented development seen elsewhere in the country. Yet in a way, Florida itself was a very early adapter of TOD: As long ago as the 1890s, Henry Flagler built the Orlando-to-Miami rail corridor that AAF will run along. The rail infrastructure has been in use ever since by FECI's freight lines, although intercity passenger service between the two cities was discontinued in the 1960s.

“Something on the order of magnitude of 50% of the state's population lives within proximity of that corridor” between Orlando and Miami, says Reininger. “All of that gives rise to the opportunity we have today: both to reinstitute passenger rail service in an express format for the state of Florida and also to develop and redevelop the central cores of three of the major population centers in South Florida. The big picture is that we're connecting the biggest markets and destinations in Florida, which is soon to be or already is the third largest state and economy in the country, with a new alternative mobility option that is quick, convenient and comfortable” as well as being priced competitively with other transportation options.

In mapping out the AAF plan, “We've studied, and have a learned a lot, from analogous situations that have evolved elsewhere,” including Reininger's own involvement with the Denver Union Station redevelopment project, and other examples both domestic and international. However, Reininger says, “there is no complete playbook for what we're doing here. The thing that makes this project distinct”—and, perhaps, the first of its kind—“is that we're simultaneously taking on the delivery of the transit infrastructure and the real estate development.”

Generally, those two components are handled by “independent entities,” Reininger says. In most cases, that has meant public-sector development of the infrastructure. “The real estate is one of the mechanisms that funds the infrastructure, but typically is taken on by the private development community.” In the case of AAF, the private sector is handling both: no public grant money has been requested, nor will the project require any ongoing subsidies.

The 4.5 million square feet of future development will be “a carefully crafted mix of uses that is meant to optimize the real estate, but also optimize what that real estate will contribute to the transit solution,” says Reininger. That means a mix of retail uses that will benefit from the footfall created by the transit, as well as specific residential uses that are an offshoot of the project.

“Our residential products are going to be targeted toward a young, urban customer who is very interested in an urban-core location where they can use the mass-transit options that are available to them” while also close to both employment centers and cultural attractions. And there are also office and hospitality opportunities “that are mostly induced by the creation of this new urban core.”

Establishment, or revival, of urban cores naturally points to multifamily, and new construction has continued apace. At REISA's Spring Symposium in San Diego last month, Bill Lehew of Hines Securities observed that values in multifamily have risen to the point where his firm finds development in his markets more cost-effective than acquiring. “We're also looking at macro trends,” Lehew said in March. “Gen Y tends not to think like my generation. For them, owning a home is not their top priority, and they will continue to focus on renting.”

However, with rent growth beginning to flatten in many markets, there are growing worries about overbuilding. “As we get further into 2014, concern remains about which MSAs will become oversupplied as new supply outpaces demand,” says Jay Denton, VP of research with Axiometrics. The company has projected that 240,000 new units will be delivered nationwide by year's end.

If any sector outside multifamily is seeing widespread standalone development these days, it's industrial. In the space of a week in late March, for example, Forum sister publication GlobeSt.com reported that Dermody Properties broke ground on what will be a 1.2-million-square-foot, three-building industrial park in north Reno, NV; supermarket chain Aldi bought 55 acres in Moreno Valley, CA to build a regional headquarters and distribution center; and Houston-based Transwestern Development Co. and Chicago-based Ridge Property Trust announced a joint venture. “This joint venture is a catalyst to the expansion of Transwestern Development's industrial development program,” Carleton Riser, president of Transwestern Development, told GlobeSt.com last month. “Ridge Property Trust has a strong reputation and track-record of successful execution in some of the most desirable industrial markets in the country.” The JV plans to develop in a variety of cities throughout the Northeast, Southeast and Pacific Northwest.

Although industrial is seeing a lot of building, it's in no immediate danger of overbuilding, according to K.C. Conway, chief economist for Colliers International. In calendar year 2013, Conway wrote in a recent report, “The 65 major US industrial markets absorbed 188 million square feet of space compared with just 80 million square feet of new supply being added. In other words, the US industrial markets continue to absorb more than twice the new supply being added.”

In view of Colliers' forecast of 2% to 2.5% GDP growth this year, Conway doesn't see a risk of overbuilding, even as new supply—including spec development as well as build-to-suit—is coming on line. Although 28.9 million square feet of new product was added across North America in the fourth quarter alone, or about one-third more than in the previous quarter, “only 45% of that new supply was speculative,” writes Conway.

In fact, BTS is behind the increasing supply of warehouse space, especially in the US, where about 60% of the 24.3 million square feet added in Q4 was BTS. Further, Conway observes that the US market has absorbed approximately 50 million square feet of warehouse space per quarter since 2011, compared with just 20 million square feet of new construction.

By comparison to industrial and, especially, apartments, office development has lagged—a result in part of the slow pace of recovery in office-using jobs. However, Cushman & Wakefield reported that office space absorption for the first quarter was up 133% year over year, and the rise in demand bodes well for development.

Further, according to Cassidy Turley, “there is also clear evidence that new office construction is picking up.” There was 65.4 million square feet of new space under construction as Q1 ended, up 31% compared to a year ago.

“Echoing this progress is the value of office construction put in place, which has grown 20.2% from a year ago and is a reflection of greater overall demand and remodeling activity,” according to a Cassidy Turley report. “The South and the Northeast regions are leading the way in new office development, with New York, Houston, Dallas and Boston accounting for 37.5% of the current office space under construction.”

A fair amount of that new office construction is occurring within the context of MXDs, build-to-suit or both. USAA Real Estate said earlier this month that it would develop a 660,848-square-foot new headquarters for the National Science Foundation within the Hoffman Co.'s master-planned Hoffman Town Center development in Alexandria, VA after buying the land parcel from Hoffman. And KDC is putting up a 489,000-square-foot, three-building BTS facility for Raytheon Co. at the developer's 186-acre mixed-use CityLine project in Richardson, TX. Some 1,700 Raytheon workers will relocate from nearby Garland, TX to the new campus at CityLine, which also includes retail, hotel and apartment components.

The MXD of the future may benefit from a program being launched at Hudson Yards, the 28-acre megaproject on Manhattan's Far West Side. Related Cos. and Oxford Properties Group have partnered with New York University's Center for Urban Science and Progress to create what reportedly will be the first “quantified community” in the US, one in which key physical and environmental attributes at Hudson Yards will be measured an analyzed.

“The ability to conceive of and develop an entirely new neighborhood creates tremendous opportunities,” say Jay Cross, president of Related Hudson Yards. “Hudson Yards will be the most connected, measured and technologically advanced digital district in the nation.”

Adds Dr. Constantine Kontokosta, deputy director and head of the quantified community initiative at CUSP, “Given the scale and significance of Hudson Yards, we believe that our partnership with Related will help to create a model for future sustainable, data-driven urban development.”