You will not find these comments in a single-interview story.
It is only by bringing experts together at one table, to build on the comments offered by their colleagues, that IB can offer readers such candid roundtables with spirited debate and opposing views. That’s the whole idea, and you will not be disappointed.
The U.S. construction industry showed an 18% unemployment rate in the month of July, so there wasn’t much development to speak of at the table.Even allowing for their wit and optimism, our panelists were sober about what is happening (or, more to the point, what is not happening in private commercial construction) as a result of a national recession. There was no reason to rah-rah green buildings, or to poo-poo Madison zoning ordinances. In fact, our experts acknowledged that the few cranes we see this month are mostly for public projects, many pre-planned and financed for the University of Wisconsin.
IB is especially pleased that David Hyzer participated during one of his final days before retiring as President of Strang. “It’s my swan song, perhaps,” he quipped.
And we’re honored to share it now.
Our Expert Panel
Jay Allen, Mayor, City of Fitchburg
Mike Davis, City Administrator, City of Middleton
Tim Sherry, Principal in charge of Real Estate Consulting, SVA Certified Public Accountants, SC
Robert Gorsuch, President/CHR, Oak Bank
David Hyzer, [Former] President, Strang
Tim Cooley, Economic Development Director, City of Madison
Robert Blettner, President/CEO, The Blettner Group
Prep: A Helpful Definition of Terms
What is the difference between Class A, Class B, and Class C commercial space?
Here’s a Wiki definition: Class A office space describes the highest quality office space locally available. The architecture of Class A office structures always prioritizes design and visual appeal over cost, and sometimes over practicality. A Class A building can be considered a monument and a testament to the success and power of its tenants.
In most areas, Class A office space is built in multi-story (usually 3 floors or more) buildings using structural steel and composite concrete construction. Cost for the structure alone (excluding land purchase and site improvements) is typically greater than $150 per square foot, and often rises to several hundred per square foot, depending on the tenantÃÂÂÂs preferences for interior finishes.
Office buildings are classified according to a combination of location and physical characteristics. Class B and Class C buildings are always defined in reference to the qualities of Class A buildings. There is no formula by which buildings can be placed into classes; judgment is always involved. A fair number of the Class C office spaces in the inventory are not truly office buildings but rather walk-up office spaces above retail or service businesses.
The Discussion
Are business leases renegotiable?
MODERATOR JODY GLYNN PATRICK [IB]: We’re together today to talk about development and construction; in particular, commercial construction. What’s going on in the sector and how is that tied to other things that are affecting it? Tim, can you start?
TIM SHERRY: Yes. In commercial leasing right now, there’s a lot of renegotiating going on. A tremendous amount of tenants — Class B and C Class tenants, not so much the A Class tenants — are actually coming back to the landlords and saying, “I need to have a change in the lease structure.” We’re representing clients requesting this type of thing, and they’re literally saying, “I can’t afford to pay the rent, so we need adjustments.”
And the landlords are saying, “Okay, if we’re going to renegotiate this lease in the middle of the lease, what do I get out of it?”
Usually, that’s an extension.
ROBERT GORSUCH: It’s not just B and C — there are some Class A tenants that are national concerns that whereas their local operation may be doing well, nationally they’re not. I know of one — happened to be an investor — and they just renegotiated a three-year reset on a significant decrease.
SHERRY: Is the landlord getting an extension on that lease term in the renegotiations?
GORSUCH: No.
SHERRY: So it’s all one-sided; it’s all tenant- sided.
GORSUCH: Yes, because there aren’t tenants to replace them. And on the financing side, it’s very difficult to get conventional financing right now for new projects because the vacancy situation is such that national firms are consolidating, they’re pulling stores out. There’s some feeling in the retail leasing sector that, well, that shoe hasn’t dropped yet; that it still could come and we haven’t seen that yet.
MIKE DAVIS: The commercial building bubble that I’ve been reading about ….
GORSUCH: Mini-strip malls — the things we see all along Mineral Point Road and Odana; and there’s some feeling of that nationally, and we’re affected. Madison … historically we’ve been somewhat sitting back here saying, “Well, we’re resistant to anything.” That’s not true this time around. With regard to commercial retail space, I know some of the very large office managers in this market are very, very strained now.
SHERRY: I believe there’s about 1.2 million square feet of either vacant office space or what’s coming on line. Bob, what’s the absorption rate in the city of Madison — 300,000 square feet a year approximately?
ROBERT BLETTNER: Historically, it’s been more than that, but those were the years 2005 through 2007.
SHERRY: The boom years.
BLETTNER: Yes, and things have changed dramatically. But you’re right, the absorption rate is actually negative right now. It has been this year. Class A space has had negative absorption rate, and that’s where a lot of the new inventory is coming in. Class B markets have had a positive absorption rate as some people move out of the $25-a-square-foot buildings into the $19 a-square-foot buildings.
DAVE HYZER: Do you see it the other way at all? Where they build a new mall, and then the old stores would move into the new space because it was new, and we’d see a deterioration of the shopping malls? Now, with office buildings, I wondered if the people in the C Class buildings want to move up because they’ve got an opportunity to get a better lease rate?
Do you see anything like that happening?
BLETTNER: No. This hasn’t been an issue for us, though I only know what I hear.
Is it a tenant wanting a better deal, or is it a competitor wanting a tenant?
IB: What is the competition from other developers for tenants already leased elsewhere with a few years left on a lease — not just those with sunsets approaching? I’m hearing of offers to buy out leases in order to move a company to another space now.
JAY ALLEN: What I’m understanding about that, especially from some developers that have been looking at projects in Fitchburg, is that developers are being required to have much, much higher pre-lease commitments than they were ever required to have in the past, before they can get financing now.
If they’re going to build a 50,000-square- foot Class A building, and they’ve got two 10,000-square-foot users, they need to get that third one signed up to get over the 50% so they can get the financing.
DAVIS: We’ve heard 60%.
TIM COOLEY: That’s what I’ve heard, 60%. The truly spec building that has gone on in the past is history. It’s history.
Pop! went the credit bubble, leaving us with … what, exactly?
BLETTNER: I think we more or less as a group agreed, while talking together over coffee before the roundtable officially started this morning, that we’ve come out of an extended period where credit was very, very easy. That created quite a bubble. The bubble has burst.
There will be a recovery period for a year or two, but then things are going to be flat, or even slightly declining, with mean incomes staying the same or going down for 10 or 20 years. The federal government will probably enact a federal sales tax — a value-added tax — because there’s no way it can pay back the debt that it is creating otherwise.
Perhaps as a background to this, we don’t see an economy that went down, and then takes off like a rocket. We see it went really down; it will come back part way, and then it’s going to be about the same for a long period of time.
IB: So this is the new economy and the new reality in lending as well as construction.
BLETTNER: Yes. It’s going to be an extended deflationary period. We’ve seen those before in the United States from 1928 to 1941. We’ve seen it in Japan more recently from 1988 to 2008. Same thing — bubble economies with real easy credit. It takes a long time to recover from those.
GORSUCH: I’m not sure the situation in Japan can compare here, because I think the Fed here has reacted much quicker than the central government did in Japan. Japan basically just let the thing go.
And that hasn’t been the case here. But following up on Bob’s comment, too, historically, we’ve come out of recessions with robust consumer spending, pent-up demand. This time, it’s going to be different. I’m sensing a whole different mentality developing in the consumer where savings, as opposed to spending, is going to take some priority.
They are going to be required in many situations to have a little more down for what they’re buying, or they’re going to wait to buy that new whatever until they have more money in the savings account.
So I think Bob’s right. It’s going to be a very slow recovery. There will be some inflation because, with all the money that’s being dumped in, I just don’t know how you can avoid it. And that would be good. I think some inflation’s good. But, you know, controlling that is still going to be an issue I think.
SHERRY: If you look back in the last six months, and you take a look at the statistics on the consumer/debt pay-down versus consumer spending, it’s flipped tremendously. Consumers are paying their debt down with any excess cash that they have right now, rather than going out and going to the retailers and buying. And that has caused the whole concept of sales tax revenue, municipal revenue … it just fell off like a rock. And that’s where the concerns are coming from, from some of the municipalities.
GORSUCH: And consumer spending is 70% of our economy.
COOLEY: In the meantime, you’ve got a growing paralysis from both consumers and businesses. They’re just unsure. They don’t know what’s going to be happening next. On the consumer side, if you don’t have a job, you’re not spending. If you do have a job, you’re paying down debt that seems to be going up with every credit card statement.
And, you know, in the past we came out of recessions two ways. We’d start a war; we’re in two of those now, and they’re not working out all that well. Or we’d wait for worldwide recovery to reinvigorate our manufacturing base; well, that’s gone offshore also.
The difference, I think, in this recession is that we would create or have in place safety nets to take care of people when they lost their jobs until those jobs came back. I don’t think they’re going to come back this time.
And now we’re in a situation with the largest erosion of wealth in history having taken place, declining municipal incomes unless we, as municipalities, start raising taxes to a ridiculous degree — which is so counterproductive, that as we come out of this, I just don’t know where the engine is to get things moving again.
Is Madison really well positioned? In the end, it still takes (lots of) cash.
DAVIS: I would agree. The basic industries — automotive, steel — there’s a major restructuring of the economy with regard to those, as well as construction of new buildings, office, retail.
I think, though, that we’re well positioned in this area because we’ve already started the new economy in the Madison area, and we already have the biotech jobs. The stem cell research work being done. Research on cures for various diseases is all happening here. So we’re fortunate in that regard, that we already have a new economy that’s started. And to me, the work that we can do now is more re-development as opposed to new development.
In fact, our new Tax Incremental Finance [TIF] district in Middleton is going to be almost solely redevelopment in two areas to boost the community. And I think that’s the way of the future in terms of energy conservation as well as economic job creation. We’re well positioned. We’re fortunate in this area, whereas in other parts of Wisconsin that are more dependent on basic industries, it’s a lot tougher situation than what we’ve got.
COOLEY: I agree Madison’s got some tremendous attributes and strengths, but there are some gaping holes, and the biggest one is access to capital. We talk about the biotech, the stem cells — and all those are going to have tremendous ramifications for health and welfare over the years — but as far as large generators, not so much. But they do have good multipliers, and they do bring wealth into the area.
But on the flip side — everything from small business to other industries that just don’t have the access to professional investors — how do we fund those early-stage start-ups? There’s a capital gap there.
SHERRY: You bring up a very good point. From both a new business generation and job generation [viewpoint], the capital needs that are required to do that are significant. You’re familiar with the new Marcus Tax Credit Program, there’s the Historic Structure Tax Credit Program, there’s the WIN Credit Programs, there’s the Energy Credit Programs. But right now, the equity markets, the players, aren’t there. They’ve retracted into their shell. The big players, the big banks, the big guys that were out there, they’re not doing it anymore right now. And that’s caused a huge issue.
COOLEY: Yes, all the credits and all the incentives are great, but it still takes cash. You still have to write a payroll check.
SHERRY: That’s correct.
We’ve historically underpriced tenant “risk.” Will developers do that again?
BLETTNER: I think we’re coming out of the period that was characterized by a dramatic under-pricing of risk.
COOLEY: That’s a good euphemism.
BLETTNER: And that is going to be a period that borrowers, lenders, investors all have to re-adjust to the fact that 4% and 5% interest rates aren’t going to work. People need much higher rates of return for the risk that they’re taking.
The New Economy reminds me of the things I see in travels to Third World countries, in the sense of the payback periods. If you go to Central or South America, the payback period isn’t three years, forget it.
It may not be that dramatic here — and I don’t suppose I should be naming anybody — but all developers have had a parade of people coming to their door for the last 10, 15 years who need 2,000 square feet now for their start-up company, which has got the cure for cancer. And they want an option on 100,000 square feet next year, and 300,000 next year.
And only a few of those survive. So the payback periods are going to have to be very short, even for the successful ones.
COOLEY: We’re talking about development, and we’ve always equated economic progress or economic development with real estate development.
The reality is that there’s never been a square foot of office, condo, industrial, manufacturing, commercial space that has generated anything much more than a temporary job. We’ve really got to figure out how to get businesses to either start here, and then grow here, or to locate here.
I think smokestack chasing is over with. It doesn’t pay off, and that really is a race to the bottom.
New approaches for “New Economy”
COOLEY: I think we need to take a look at how to position the Madison area for the battle for the top. We’ve got to take the strengths we have here and we’ve got to work to create the opportunities. We spend and invest a tremendous amount of money in Wisconsin to educate our kids. And unless we create the opportunities here for them to keep them here, we watch that investment walk away.
We’ve got the number one or two research university in the United States. We have all the determinants of what should create that New Economy that Robert [Blettner] was talking about: Research university; airport; transportation system; culture; quality of life — it’s all here, but we need to figure out a way of packaging it and getting it to critical mass. Because otherwise, we’re not going to have anybody.
We’re going to end up fighting each other to try to grab what little business is here. And that’s just moving chairs around on the deck of the Titanic.
IB: Jay, what is Fitchburg’s lifeboat moored to? What is your emerging development strategy?
ALLEN: We’ve had to change some of our strategy. In 2002, we drank the biotech Kool-Aid and we invested an enormous part of our land use plan and our resources into making biotech happen in Fitchburg.
And we’ve gotten some. I mean, there’s no question about that. But the problem is that it’s not grown according to the promise that was made in 2002. Same situation Bob was talking about, where you’ve got small businesses saying they’re going to be the next Promega, and they’re not.
So we’ve had to re-adjust what our future plans look like. I think Mike [Davis] hit on part of it; we first of all have to figure out some redevelopment opportunities, what we can do to re-use what we have.
But also, that future development plan needs to be in a more sustainable way so it doesn’t cost so much to provide services. And in some ways, we’ve done a pretty good job of that in Fitchburg, with reducing the cost of servicing new ventures.
But there’s a broader perspective. That’s why I’m really hopeful about whatever we can get done in this area for commuter rail, because the biggest issue we struggle with, and I’m sure Mike can confirm this, is transportation.
When you build a development of any kind, you’ve got to move people from place to place. And you can only build roads so wide. We can’t have an eight-lane University Avenue; it’s just not going to happen. So how do you move all those people from one place to another? The more options we have, the better off we’ll be.
Transportation: Getting our act together is hard, even in this group
DAVIS: I would agree that regional transportation solutions are important, not only to Fitchburg and Middleton and Sun Prairie, but also, and particularly, to the city of Madison. We’re all in it together from that perspective.
I’m not so sure commuter rail is going to happen in the near term, but I think planning for it makes a lot of sense for the long term.
More importantly, there are pluses for commuter bus transportation and planning for more express buses. The university and the downtown area are under-parked to a large extent. And we’ve all been — not only Madison, but also the city of Middleton, Fitchburg — planning for Smart Growth, planning for more public transportation.
So the more that we can get our act together, in terms of a regional transportation authority, and the way we look at it is not just commuter rail, but planning for that and more focus on bus transportation in the near term, I think the more successful we’ll be in getting transportation, housing, and jobs conveniently located for people so they don’t have to commute as far for work.
IB: How important is that to you, David, looking at the construction horizon?
HYZER: Well, when our clients look at different sites, one of the things we look at is transportation. But a lot of the people we work with are in the biotech area, and I don’t think transportation is as big a thing to them — maybe airport transportation to their parent company or clients — but buses and commuter traffic isn’t as big a deal.
I was on the Middleton Public Works, and we ran the numbers. We looked at the buses, and we can’t even keep the buses full that we have now. So I’m not necessarily an advocate of this commuter transportation push yet, because I think we need to figure out how to fill the buses up first, and understand the different modes of getting people to where they need to go. I think the airport is a big thing.
A respectful disagreement emerges over biotech’s role in a community
HYZER: You talked about Fitchburg and the expectations of what biotech would do for the community. I think that these people, the entrepreneurs who build these facilities, are optimistic by nature. And they’re going to say, “Well, in three years, I’m going to be here. I mean, they wouldn’t be starting the business if they weren’t optimistic.
The research park started in the early ’80s, and it took them 10 years before they really got off the ground, but then they really exploded. So these things start slow, and then they go.
Same with Fitchburg. I think you’ll find that you’ve got the Promega and you’ve got the Fitchburg Center over there on the Kelly property. You can start to get that infrastructure, and after awhile, it will tend to grow, but you need that infrastructure first.
I think you raised a good point about having to be smarter with how you spend city money and how you support this. I think it’s something that we better address in the future.
COOLEY: Yes, I think David [Hyzer] is right. I mean, you get a cluster dynamic that goes through different phases, but eventually it gets to the point where it is kind of self-sustaining. It becomes an attractant to other businesses around the world that need to have a presence here to have access to that cutting-edge research that’s being done, or the development.
We’ve seen that happen with companies like Roche buying into companies here in Madison that they’ve been looking at or investing in over the years, and then just purchasing them. You’re seeing more and more companies around the world that are basically outsourcing research and development. They find it much more efficient to take $100 million and invest $5 million in 20 companies that may have an interest to them, as opposed to funding $100 million internal research and development operation on their own.
That will benefit cities and areas in regions like the Madison area with a very highly educated workforce, a research university that’s spinning off IP, and entrepreneurs. In some cases, I was amazed when I got here, in the biotech area’s serial entrepreneurs. They’ve done it once, they’ve done it twice, they’re on their third or fourth start up. And we’re building up that bench strength.
Somebody recently asked what’s the biggest frustration that I have. And the real answer is my own impatience, because I want it to happen now. But when I look back over the last 25 years, to where I was, it took that long for some of this stuff to come to fruition.
Again, I think we’ve got the building blocks firmly in place. Now how do we network those together, how do we develop an overall strategy for what we want to be — as both Madison and as the region? And I look at the region a little bit smaller than Thrive. I look at 10 miles around the square.
DAVIS: We’re included.
COOLEY: Yes, you are absolutely included.
Getting to critical (bio) mass
SHERRY: Do you think there are enough incentive plans that either the municipalities or the state can put out there to reach out to get these seed companies to grow bigger or attract them to come in?
COOLEY: I think we’re competitive from a state perspective. The programs that have been attempted … mixed results.
Lorrie Keating Heinemann (Secretary of the Wisconsin Department of Financial Institutions) had a piece in this last budget to build a venture center to try to attract more venture capital into the area. She based it on a small fee increase going out to the broker dealers. They [legislators] approved that, but then took the money generated and put it into the general fund, leaving her with very small funding to go ahead with it.
We’re looking at Madison, at the whole TIF statute, and whether or not we can use that to be a little bit more pro-active in attracting and retaining businesses that want to make investments here, as opposed to building another condo.
We don’t have the tools, and I think that we need to be able to compete effectively. We’re not only competing with Middleton and Fitchburg and Verona; we’re competing with Rochester, New York and Dublin and Dubai. We’re competing internationally for some of these companies, and it’s difficult to come up with the right answer, but it all comes down to money, environment, workforce.
IB: In your dream, is it “build it and they will come” — build the greatest labs and the incubators and other extensions that attract big pharma or investors — or is your intention to build from within and build around the serial entrepreneurs and their seed businesses?
COOLEY: It’s a little bit of both. We’re lucky that we have somebody that’s already “building and they will come,” and that’s the university. You look at the cranes in the air; that’s where the cranes are. And we can take advantage of that as the Madison region. So we’ve got the best of both worlds.
HYZER: I’m going to take a new perspective, here. When you’re in business, you look at your competition and you look to your strengths — and your competition’s weaknesses — to succeed. And you try to take advantage of both.
We are in an economy here that’s poor, but Wisconsin is doing pretty well compared to the rest of the country. I think the home prices haven’t fallen as much as they have in other areas, for example.
A lot of our competition in the biotech area is in California, and California isn’t doing very well right now. Given the home prices, they’re going to have big tax problems, school problems. A lot of different things are going to happen there. That might be an opportunity, I guess, to make Wisconsin more attractive to people wanting to start a business, raise a family, and move to this area where maybe it’s more stable than some of these other areas in the country [that are] now less stable.
DAVIS: Tim [Cooley] is going to bring them all to Wisconsin.
COOLEY: I’m bringing them one by one. There is an Orange County contingency that’s been showing up in Madison.
DAVIS: That’s good!
COOLEY: But seriously, it’s tough. Again, going back to the money, especially in the biotech arena. That takes a lot of cash, and early-stage investors have a bad habit of wanting to invest close by. If they’re going to put small money into a company, it doesn’t make sense to put a partner on a plane that’s going to take three days to a once-a-month board meeting.
The proximity issue is important. We need to be able to grow capital sources and funding sources here in Wisconsin. People keep saying, “Well, if there were enough deals there, we’d be there.”
Well, there are enough deals here, but as often as not, if a company does attract venture funding from outside of the area, part of the requirement is for them to move. And that’s not just Wisconsin.
I was having that problem [in a previous job in economic development] in Southern California, where they would make a move to Northern California.
Stimulus? Let’s talk honestly about stimulating outlying communities.
ALLEN: Speaking of some of the money, we’ve had a little frustration with how the state chooses to use money. And one of the problems with the stimulus package was that Fitchburg could not apply directly to the federal government for stimulus money. The stimulus money was being sent to states, and then the state’s internal bureaucracy got to decide where the money went.
So now this project has started in Madison at the Highway 30/94 Interchange that they’re funding with $40 million of stimulus funds.
My understanding on stimulus funding was that it was supposed to be adding economic development, creating jobs, doing those kind of things. That’s a maintenance project.
That project is going to maybe create a few — I heard 200 — construction jobs, but once that project’s done, it’s not going to spur on any development. It’s not going to add to any value in the community.
We applied, through the state, for a $10 million interchange off of Highway 14 that we’ve been trying to get built for a decade. And it’s been a chicken-and-egg situation where we have a developer who wants to get a project going there, but we don’t have the money to build the interchange to do it.
That project, the Green-Tech Village Project — according to the plans that we have, and what we’ve been working on — ultimately is going to create 20,000 jobs in the area and add close to a $1 billion in new valuation to the city of Fitchburg.
But instead of funding a project like that, $40 million went to fund a maintenance project.
And, to me, that’s one of the problems we have here: The state seems to use money for projects on its radar screen, but it never makes its way down to the local people who can really use it.
We’re the ones in contact with businesses. We know what it takes to make these things happen. And they aren’t letting us do that. It’s like this giant sucking sound; all the money gets sucked in and they use it on their projects, but it never gets anywhere else.
State Help: Much ado about nothing?
BLETTNER: I agree. And there’s a really key point here that, hopefully, we can all benefit from. Dave Hyzer’s comments, a number of comments have had to do with the economic impact of how we’re allocating money. Wisconsin and, in my opinion, Dane County in particular, have had a long-term dismissiveness towards the science of economics.
Government’s going to have to get a whole lot better at deciding, first, what are our shared priorities? And second, what’s the most effective way to do it?
Two quick examples: First, regional transportation’s very important, and frankly, I’ve had a 30-year history of supporting rail, but I’m worried about that right now. I see the Governor vetoing the binding referendum making it advisory. It looks to me like the stars are being put in alignment to spend a bunch of money on this without really having done the financial feasibility study. Maybe this should first be buses and then, 20 years, 10 years from now, be rail.
COOLEY: And taking roads out of the equation; I’m saying the Governor did, and I think that was wrong for getting an RTA.
BLETTNER: Yes. So that’s looking forward. When you look back, and I’m just trying to make the example here — not criticizing anyone, but we all have to learn from our mistakes — ethanol has been a disaster in this state. It’s an economic disaster, and it’s an environmental disaster.
Six gallons of water to make one gallon of ethanol. Fundamentally, ethanol has 75% of the number of British Thermal Units (BTUs) in it that gasoline has. Now if a dumb old real estate developer who knows practically nothing about science understands that, how did this go through the state Legislature and the Governor’s office?
GORSUCH: Well, it’s a federal incentive still.
BLETTNER: Federally too. I mean, this is a really dumb idea that if anybody had thought about it, they would have known this wasn’t going to work.
SHERRY: It takes more energy to create the amount of ethanol than it does to use it.
BLETTNER: Exactly.
COOLEY: It was sexy. In California, it was the California Regenerative.
BLETTNER: We’ve got to get beyond that. We’ve got to do the financial feasibility studies and say, “Oh, economics, yeah, that’s the dismal science. We all think this is a good idea, — don’t you farmers, don’t you environmentalists? — well, okay.”
GORSUCH: And connected to that, an issue I haven’t heard is taxes. I mean, Wisconsin, we talked about attracting new businesses and there are a lot of states in this country, not on the left or right coasts, that have some very favorable tax structures vis-a-vis Wisconsin.
SHERRY: We’re now in the top 10 and moving up.
GORSUCH: Depending how you look at it, and it may not be so much the business tax as the individuals who will be locating here, when they’re looking at what their taxes are going to be vis-ÃÂÂ -vis where another option might be. Oklahoma or wherever.
Meanwhile, are we allowing our core [Madison] to be hollowed out?
COOLEY: In the meantime, our average income here is falling. From a state’s perspective, and even in Madison looking at a microcosm, we’re watching the discretionary income in the higher household income move out to the suburbs. And as they move out to the suburbs, it’s a short move from watching where the discretionary income goes to seeing where the retail goes and where the services go, where the restaurants go and the hotels go.
We’ve got to be very careful, I think, in our area to maintain the strength of the core, which is Madison.
We’ve seen over, the last 200 years, cities get hollowed out as you’ve seen the flight out. But I think, because this area is kind of an island, the core sustains the suburbs and the suburbs need to sustain the core. That’s working well right now, but we have to be careful that it does not start hollowing out the middle.
Average household income is basically flat in Madison. We’ve seen extreme growth in the suburbs. Job growth over the last five years is 50% greater in the suburbs than it has been in the city. And as a state as a whole, we rank exactly even with Alabama for average income, which is not, I don’t think, attractive.
When you’re looking where you’re going to locate a high-growth international company, you’re looking for a little bit more vibrancy.
SHERRY: Tim [Cooley], you talk about the hollowing out. I’ve heard that there’s a move toward bringing the density back and the people back into the major cities, and having bigger development concepts and density and people living closer together. Is that happening?
COOLEY: You’re seeing that around the country. Yes, there’s a move now to come back in. The suburbs are very attractive for raising families — the school districts and everything else — but you’re seeing now a move to come back in.
Madison, as we all know, is beautiful with the Isthmus, but … the Isthmus could kill us as far as how do you put the density there. What do you do about the parking situation? At the same time it’s beautiful, it’s challenging as far as how we’re able to develop that area, and be able to develop it competitively; not only competitive with the east and west sides of our own town, but also of Middleton, Fitchburg, Verona, Waunakee, Sun Prairie.
ALLEN: I agree with you that the hollowing out of the core is something I’m concerned about, and I’m not in the core. But I understand that Fitchburg is a city of 24,000 and Madison is much larger, so it’s the economic engine that drives Dane County. As mayor of a surrounding suburb, I have to be concerned about what happens in Madison.
It’s one of the reasons that I want to go back to the transportation topic to hit on something David [Hyzer] mentioned earlier.
Transit: What is “smart growth?”
ALLEN: We’re looking at the North/South rail line; Fitchburg owns a 15-mile piece of railroad that goes down it. This essentially could connect from O’Hare all the way to the Dane County Regional Airport, and Madison, I think, is going to end up activating a piece of rail line. At least, it’s being talked about right now, to go from the high-speed rail to downtown Madison.
That’s the same line that we own a piece of a little further south. And I think that North/South connection that goes right under the Convention Center all the way out, that piece could make those connections better. It starts to address some of the parking issues, because if you can start creating neighborhoods where people don’t need two cars for the family, or maybe any car at all — if you can start creating neighborhoods where all the things that people need all the time are very close to them or easily accessible, you’ve made a lot of things easier.
This brings us back to this whole issue of transit, and in some of our re-thinking, we’ve got to include transit.
The comment was made about buses running empty half the time. Guess what? The roads are empty half the time. Fitchburg spends almost $20 on roads for every dollar spent on buses. And I can tell you that in our city, almost all the money that we spend on buses goes to support Fitchburg residents. But a lot of the money that we spend on roads, probably a third of it, is providing transportation for people driving through Fitchburg from Verona, Stoughton, McFarland, Oregon, everywhere else.
So our taxpayers are paying a lot of money on that infrastructure that’s helping other people, which is fine. That’s how the network works.
But as long as we keep thinking that a bus is not cost-effective because it doesn’t have enough people on it … that kind of thinking isn’t going to get us to solving some of these broader problems. We have to take transportation in a holistic approach. What are all of the things that we need to make the system work?
DAVIS: I think that’s part of why, as you just expressed Jay [Allen], the core of downtown Madison is important to us. It’s somewhat of an umbilical cord between Madison and — I don’t like to call us a suburb — our urban ring community. We [Madison and Middleton] actually had the same birth date.
ALLEN: Make sure that gets in the article, Jody.
IB: As you wish, gentlemen.
DAVIS: [laughs]. Yes. And both the rail and the road networks need to be interlinked for better public transportation, as well as housing and jobs locating near each other.
We’ve all planned for Smart Growth. In Fitchburg, it’s very important in your plan. I know it is in Madison’s and Middleton’s as well. And that Smart Growth relies on public transportation, because any building, any density within downtown Madison means that there’s going to be less parking availability, and you’re going to need to rely more on public transportation. Certainly the Isthmus is a great case in point; you just don’t have the ability to do much without building upward.
ALLEN: But the other thing about Smart Growth, getting to Bob’s point, is if you build properly and you really build according to a good Smart Growth plan, you create enough tax revenue coming out of that area to more than pay for the services that it requires.
We have a pretty good idea what it costs us to provide service to a neighborhood. And many of the neighborhoods, many of the older neighborhoods in Fitchburg, cost us more to provide service to than what they provide in tax revenue, simply because of the way they’re laid out and the cost that it takes to maintain all that infrastructure.
If you can condense the infrastructure to a smaller area, and you still have more things going into it to create that value, you can end up generating more revenue than what it costs you to provide the service.
DAVIS: And to get back to the point Bob [Gorsuch] was making earlier about taxes, one strategy is to build Smart Growth so that you have less sprawl, more concentration of development. You do more re-development, re-use and show a reduction of building materials, and the cost of our services are much more concentrated and so less in the long run.
A day of financial reckoning?
GORSUCH: And I wasn’t just referring to real estate taxes. It’s across the board.
We keep talking about “downtown” and I keep thinking of what’s downtown, other than some neat cultural things. But during the week, it’s primarily governmental employees. I’ve been saying this for years: If you think about Dane County and the huge number of state employees, we have a 10% reduction in government employment, it’s like losing a major factory in Janesville.
I think that day of reckoning is just starting. We’ve seen the furloughs, we’ve seen some actual reduction in government. It’s almost a oxymoron to say — reduction in government employment — but I think that’s going to occur. Then you have to ask, “What’s that impact on downtown Madison?”
Even the university has the temptation to go private, when it looks at the percentage of their income that now comes from the state government.
BLETTNER: 16%.
GORSUCH: When we look at the significant reliance we have on government employees, we shouldn’t forget that that may have to be less of a factor.
COOLEY: We also need to keep the downtown attractive for the other types of businesses like the professional services businesses. That means having an environment that is conducive to them being down there, that’s enjoyable for them to be down there, that their executives are able to move in and out.
We talked a little bit about what’s the sexy thing du jour. Smart Growth is a great idea, but we’ve got to be careful with that. too. Until you can develop a transportation system where middle- and upper-management people can move around effectively, and be able to get to their place of work, be able to move around as they may need to during the day — be it a banker, an accountant, or be it a developer — you’re not going to get them on public transportation. It’s as simple as that.
If you don’t have the executives on public transportation, and it becomes too difficult for them to operate in an area, they will move out of the area. Then that whole exodus starts happening again.
BLETTNER: Don’t we need, in all of these things — regional transit, Smart Growth, ethanol, all of it — to file an Environmental Impact Statement? In this day and age, before you do anything significant, what we need in my opinion, is the same attention to filing an Economic Impact Statement. And those two should have equal priority, because we don’t have the money anymore to keep making these mistakes. We have to prioritize things.
ALLEN: We actually require that of new developments.
BLETTNER: I agree with everybody in the room. It’s a good idea.
ALLEN: We require a full economic analysis of what it’s going to cost for services.
Who takes the lead? (This turns out to be a loaded question) …
IB: We know that when developers have taken the lead with a density product downtown, that hasn’t worked so well. So who takes the lead now? Is it now the City + bank, is it developer + bank, a developer + City? Who’s championing the “economically beneficial impact + requirements” impetus outside of this conversation, gentlemen?
ALLEN: We’re going to see a new era, and I think this is going to be part of the new economy, of a whole different way of thinking about public/private partnerships.
One of the things I’ve become very convinced of is that it’s a stupid cliché, “if you build it, they will come.” But if we put in the right kind of infrastructure, we can get the kind of development we need. The problem is, we can’t afford to go and tell the Fitchburg taxpayers, “Hey, guess what, we’re going to put in $50 million worth of infrastructure and hope and pray that these other people come.”
What we have to do is figure out how we’re going to partner differently.
I think Tim [Cooley] brought up a point that under current state statutes, we’re limited. We don’t have some of the same opportunities that communities in other states have. We have TIF, and that’s really the major tool, but there’s just not a lot of options with that.
Now we’re starting to explore some ideas on how we can do … gymnastics to go through, because the statutes right now don’t allow us some other competitive tools.
