GROWTH & DEVELOPMENT
From Staff Reports
Is Chapel Hill’s experiment with high-density development working? Have large, mixed-use projects lived up to expectations?
The Local Reporter has examined town documents and interviewed current and former town leaders and developers to try to answer those questions.
We’ve discovered that the town’s efforts at increasing the tax base, providing affordable housing and increasing commercial development through the development of large-scale, mixed-use projects haven’t turned out exactly as planned.
The idea behind the push for large, mixed-use projects emanates from a concern about the slow growth of property tax revenues. The preamble to the town’s 2018-19 budget notes that “Revenues that fluctuate with changes in the economy, such as sales taxes, occupancy taxes and fees for services have grown as a percentage of General Fund Revenues while property taxes, our most dependable revenue source, has decreased as a percentage of revenues.”
Large-scale mixed-use developments are designed to increase town revenues. Incorporating both residential and commercial aspects, they are attractive to municipal leaders since, in theory, they positively contribute to local finances as well as provide housing, offices and shops. Economists have long known that the balance between property tax revenue and a municipality’s cost to service a property is quite favorable for commercial space, especially office space, and much less so for residential.
While there are costs as well to the new developments — the town must provide them with police, fire, transit, roads and schools — the increased tax revenue from the commercial component should more than offset that cost. Mixed-use developments can also potentially meet important needs such as that for affordable housing.
Currently, across the community, multiple large-scale construction projects are underway, as well as recently completed developments and ones in the planning stage. So how is the balance between costs and revenues working out for the emerging large-scale developments in Chapel Hill?
No simple answer
It’s a difficult question to address. First, according to Town Council member Amy Ryan, Chapel Hill has not had a thorough analysis of its cost of services, so it is difficult to evaluate the cost/benefit ratio of new projects. And since these projects are so new, there is not yet a history of how they perform.
Nonetheless, in a 2019 report on the Blue Hill district, along U.S. 15-501 and Franklin Street, the town projected some very rosy estimates, with revenues exceeding expenditures by $962,712 over a five-year period. However, the expenditures listed included only the debt service on the road and storm sewer improvements in the area. It did not include costs for police, fire protection, transit or the myriad other town service expenses that expand with increased population. The report seems to exemplify an inability to accurately attribute the costs to service new developments.
What about office space?
Office space usually has a very favorable impact on the tax revenue versus expenditure balance. It would seem desirable to include office space in new mixed-use developments, particularly with the decline of retail construction due to increased online shopping.
Historically, though, it has been difficult to get office space built in Chapel Hill, with limited amounts, for instance, at the Carraway Village development in the north of town or in the Blue Hill district. An exception is two large-scale projects planned by Grubb Properties. One involves office construction as part of the redevelopment of Glen Lennox, while the other involves the renovation of the former bank building at 137 East Franklin Street and the construction of a new office tower on the site of the town’s Wallace parking deck on the south side of East Rosemary Street.
Joe Dye, the executive vice president of Grubb Properties, acknowledged that a lot of office space is being built in the Triangle area while Chapel Hill has lagged behind. He explained that this is partly because of a perception that the construction approval process is difficult in Chapel Hill as well as a concern over the availability of tenants.
The Glen Lennox development envisions up to 500,000 square feet of office space but involves a tax rebate of approximately $2 million from the town if that goal is fully met. Dye explained that the support enabled Grubb to build on a speculative basis without pre-commitments from tenants.
The planned East Rosemary Street project would also involve major incentives. The town would undertake construction of a new $28 million, 1,100 space parking deck to replace the current smaller deck. Since the site is in Orange County’s Opportunity Zone, a recent federal tax incentive would allow a developer to write off capital gains after retaining possession of the property for ten years.
“Having the opportunity zone with a longer horizon gave us confidence in the investment,” Dye said. While he said he believed that Chapel Hill would never match the pace of office construction in Raleigh or Durham, the new projects would encourage others so that Chapel Hill would reach its natural equilibrium in the regional office market.
But it remains unclear whether office development in Chapel Hill can take place in the absence of similar costly incentive packages.
The same uncertainty about success seems true for other town goals.
Most of the projects to date have resulted in construction of a large number of apartments but minimal commercial space. Plus, the new apartments overwhelmingly have been rental units and almost no ownership units. The share of people renting in Chapel Hill rose from 50 percent in 2008-2012 to 53 percent in 2018. And this does not include the numerous apartments currently under construction.
“People need to be able to buy into town,” said former Town Council member Nancy Oates. She believes there needs to be the opportunity for people at all different income levels to be able own a home in Chapel Hill, but that the recent wave of rental projects doesn’t address this need.
And with the exception of the Greenfield Commons development that was highly subsidized by the town, there has been virtually no generation of affordable housing. Indeed, the construction of the new Park Apartments in the Blue Hill district entailed the demolition of the original Park Apartments that had relatively affordable rents.
We took a closer look at two local projects. Here is what we found:
Originally called The Edge, Carroway Village is a large development located on Eubanks Road in northern Chapel Hill immediately adjacent to I-40 and NC 86. Early plans for this development envisioned many tens of thousands of square feet of commercial space, presumably to capitalize on its proximity to major transportation corridors. However, the plan evolved over time and the completed first phase of the project has 400 apartments and about 8,000 square feet of commercial space, namely a Starbucks and a Chick-Fil-A.
In 2016 the town provided a $1.3 million incentives grant to Northwood Ravin, the developer, to assist with road improvements. The incentives would come in stages as additional commercial space was developed with the ultimate goal being 175,000 square feet.
Fifty percent of the award would be provided upon completion of 7,500 square feet, a condition that has now been met. Although the town and the developer have agreed on a plan for affordable housing, as yet none has been constructed. Current rental costs in Carraway Village range from approximately $1,340 per month for a 516 square foot studio to approximately $2,100 per month for a 1,493 square foot three-bedroom apartment.
By comparison, the median rent in Orange County in 2017 was $1,026.
Former Town Council member Laurin Easthom said she can see Carraway Village from her window, but views it as a missed opportunity for more commercial development. Current council member Ryan has also expressed disappointment in the limited commercial space to date.
However, council member Michael Parker said he sees Carraway as a work in progress, saying that “what we as a town have been finding out is that getting large-scale commercial development is a really heavy lift.”
A second phase of the project is now getting underway. It remains to be seen whether that will come closer to meeting some of the original expectations regarding affordable housing and commercial space.
The Blue Hill district encompasses a tract of land extending along Franklin Street and 15-501 from Elliott Road to the Chapel Hill cemetery. Several years ago, the town adopted a form-based code to regulate construction in this area. The FBC gives developers substantial latitude to build projects without public or Town Council input as long as the projects adhere to overall design guidelines. The FBC did not provide developers any direction regarding affordable housing, energy efficiency, green space, commercial development or other matters.
Councilman Parker pointed out that the nature of a form-based code is to define what the buildings are like physically, but not what goes on inside. He also explained that the original impetus for the FBC was to encourage development that would pay for needed traffic improvements at the Ephesus Road/15-501 intersection and for the extension of Elliott Road.
The FBC has certainly been successful at encouraging development. The first completed project was the Berkshire apartments on Elliott Road. In addition, four other major residential complexes are under construction or about to begin construction — Tarheel Lodging, Trilogy/Hillstone Apartments, Fordham Blvd. Apartments and the Park Apartments.
As of last September, 1,663 residential units totaling 2,014,851 square feet have been completed or are under construction in the district; almost all this space is devoted to apartments. By contrast, 124,569 square feet of commercial space has been completed or is under construction, which equates to 6 percent of the residential space. The University Inn redevelopment project will add 341 more apartment units, plus about 18,000 square feet of commercial space.
The relatively low percentage of commercial space has been of concern. Former council member Easthom observed that instead of finding robust retail development in Blue Hill, Chapel Hill residents were “sending their shopping dollars down 15-501 to Durham.”
In 2018 the town mandated that new projects in the FBC area include 10 percent commercial.
Another concern relates to the lack of affordable housing in Blue Hill. Current rents at the Berkshire range from $1,146 per month for a 777-square-foot one bedroom to $2,443 for a 1,379 square foot two-bedroom unit. The one affordable housing project in the district, Greenfield Commons, has 69 units completed, but this was a rather special circumstance since Chapel Hill donated the land to the developer by carving it out from the Chapel Hill Cemetery.
The town, said Chapel Hill Mayor Pam Hemminger, “can’t stop growth but it can help shape what happens.” One of her goals, she added, is to “try to get as much commercial space as possible along our development corridors” with a mix of uses, commercial and residential, in an area rather than single mixed-use buildings.
Yet Hemminger said that the form-based code the town adopted to regulate construction in the Blue Hill district hasn’t succeeded as hoped. The FBC, she said, was implemented before it had been fully thought through. But “once land is entitled you can’t take it away.”
Can Chapel Hill do better in the future? Can new projects be shaped by the town so they come closer to meeting the stated goals of financial sustainability, environmental stewardship, connectivity and affordable housing?
Hemminger said that in the future in dealing with developers “if we could be more clear we would have better outcomes.” But she added that was often difficult because of the varied interests of individual council members, the shifting composition of the council and shifting market drivers.
She also advocated the increased use of the relatively new conditional zoning process, saying it would afford more opportunity for communication between developers, the council and the public. By contrast, the SUP process is a very rigid quasi-judicial one that, in the mayor’s view, limits council and public input.
The town needs better foresight, better planning and more consistency in its interactions with developers, Hemminger suggested. The town needs to communicate its goals more clearly to developers and to create mechanisms to ensure that its original expectations for a project are met in the final product.