Rooftop ready: development moves forward in Edgerton (Part 2)

Editor’s Note: following is Part 2 of a two-part series about economic development in Edgerton. Part 2 will focus on economic development strategies, how they’ve changed, and the city’s role and response to the indentified changes. Part 1 focused on the various development sites throughout the city, both those in the planning stages and those that have already begun or are expected to begin the groundbreaking process this spring. A link to part one can be found here.

 

By Kim McDarison

Dan Rinehart, owner of Rinehart Properties, stood recently at the brim of a newly dug foundation, noting his pleasure with seeing progress made. The site, located across the street from 203 South Main, is Rinehart’s newest development and will soon have two buildings, each housing four 1,900-square-foot townhouse units, of a type that has been identified by both he and city planners as “upscale,” and by City Administrator Ramona Flanigan’s description, a barometer for the city; the hope is that these units will fill quickly, proving that attracting commuters from Madison, a demographic that typically pays higher rent, will help populate and grow Edgerton.

Rinehart himself, is confident, noting in a recent interview that his units usually rent before the drywall is finished; he knows the market, he said, and these townhouse units are no different in terms of their marketability than his previous historic tobacco warehouse developments, all of which rented before they were finished, he said, adding: they are what upscale renters are looking for, they provide quality and character, at a reasonable price, and using a pre-rent agreement, similar to one developed for the warehouse units, they will be rented before they are built. He wouldn’t be building them otherwise, he said.

The importance of rent rates

One might wonder: Why do developers and city planners seek higher rent rates? Isn’t it often the case that new and younger residents are attracted to areas where the barriers to entry are low, meaning rents and housing starts are affordable?

That, say both Rinehart and Flanigan, is a new part of the discussion. Making the area attractive to developers means making sure they can receive a return on their investment: once the building and carrying costs go in, the income generated must be able to cover those costs and make a profit. If rent rates are too low, developers will not see a prudent investment opportunity, both said.

There isn’t really a formula, Rinehart said, adding, to be successful, one looks at the probable development costs of the project being considered, then figures out a reasonable rental rate for the product being offered. “You look at your monthly mortgage and carrying costs for the project and if the revenue expected exceeds those costs, you do it; if it doesn’t, you don’t. If you can’t figure that much out, you shouldn’t be building anything,” he said.

The dynamic of rent rates surfaced again, after Madison-based Vandewalle and Associates, Inc., performed a recent updated analysis on the proposed South Main Street Development project, Flanigan said, with regard to a railroad spur that intersects a portion of the five-acre property.

“We (the city’s Redevelopment Authority or RDA) looked at the economics of moving the rail spur to open up more land for development. Keeping it there limits our ability to build there and create tax base so we were trying to move the rail to gain density, but given the rental rate in Edgerton, it may not be feasible,” she said.

Removing the rail adds front-end costs onto a potential developer’s project, creating a desire to recover those costs through rent. Rents in an area are a derivative of what the market will bear, Flanigan said.

Found within the updated portion of the Vandewalle and Associates study are the following statistics: prevailing rent rates, within the Edgerton area, are defined, with regard to the development of new rental stock, as “challenged,” citing a current range of 75 to 95 cents per square foot for newer units. While the study suggests there is a demand for empty nester and retirement rental units in the area, rents for smaller 1- to 2-bedroom units “are unlikely to exceed $1,000 per month in the next several years.” The study also reports that the city of Edgerton already maintains a high number of rental housing units, nearly 40 percent, as compared to Rock County, at 23 percent, and Wisconsin overall, at 30 percent. Still, the report found, area developers report “very little long-term vacancy,” and tenants represent a demographic mix, across all age and income levels, from those groups already mentioned, as well as seasonal residents, and commuters from Janesville and Madison looking for more value for their dollar.

In the final analysis, Vandewalle and Associates recommended that development plans for the South Main Street site include a mix of low-rise and single-story attached townhouses with “high-quality finishes at a construction price point (of) about $140 to $150 per square foot.”

Referencing the Vandewalle and Associates study, Flanigan said: “When you build these units, they have a set cost; it would cost the same to build them no matter where you build them. If the rent market here would not support the cost of building them, then there is less incentive to build these types of units (in Edgerton). What the study is saying is that rents in the area are not as high as investors would like them to be.” The new Rinehart townhouses would be testing that upper end market, she said.

In theory, Rinehart said, when he creates upscale developments, and attracts commuting tenants, he helps pave the way for more developers to come: his units bring higher rents, which helps to elevate the overall rent rate, which, in turn, makes it more lucrative for other builders to make similar investments in the community, he said.

“My townhouses are the project to watch because if these fill up, it will open up a whole new product for the city. If we can attract those renters, and I believe we can or I wouldn’t be building them, we will attract more people from Madison. The townhouses will rent at $1,100. Something comparable in Madison would easily rent for $2,500, so attractiveness of the facility, financial opportunity, as well as ease of commute will be of benefit,” Rinehart said.

Which comes first, the development or the people?

Is it the chicken or the egg? Turn’s out, this same structural question applies: deciding an order like what comes first, Flanigan said, is not as relevant as understanding that both things need to develop: rooftops, to house the people, must develop alongside of those projects that create sustainability through jobs. Philosophies about how such cycles are obtained, she said, have changed.

“Two decades ago, people believed that business brings people to live in an area. Two decades ago, that’s how we talked about it. Now we have a new model, one where those 20-somethings — that sought after workforce — move to where they want to live and then look for a job once they get there. So the economic development model changed.

“What’s new is this thinking: commercial development typically doesn’t lead the way. Commercial follows the things that commercial investors need, like workforce,” Flanigan said. Businesses seeking a workforce go to where the people are, she added, and the people, the new model shows, choose a location seeking quality of life first, and find employment after they arrive.

That means building residential rooftops and establishing population becomes a priority, Flanigan said, and helping to fill those residential units means creating amenities that people say they want and need. “We now focus on building amenities that will attract people, like bike paths and schools. Look at all the cities that make those ‘best places to live’ lists. People like those cool little places downtown, so people spend more time thinking about infill businesses. A lot of the northern climate cities make those lists. So people aren’t moving there because it’s sunny all the time; it’s quality of life,” she said.

“Once a population is established, then somebody who needs a workforce can entertain the area,” she added.

Rinehart, too, recognizes the new model. Most of his clientele, those residents renting units in his three established tobacco warehouse developments as well as those now being attracted to the townhouse project underway, are coming from southeast Madison, he said, noting that with Edgerton’s proximity to the highway, it is an easy 25-minute commute. That’s true for people coming from Janesville and Beloit, too, he said. Anyone looking to commute to Madison, would they be able to find attractive rental housing at an affordable price, would see value in Edgerton, he said.

“Not everyone wants to live in a large government-oriented community,” he said. “They are looking for clean, safe, and easily commutable communities like Edgerton. When you lessen the time spent commuting, that’s a significant chunk of time returned to your day.

“That time can be spent enjoying amenities like our library, downtown, pool and (Central) park. The city has made all of those investments to draw people, and we need more investments like that, to draw more people in,” he said.

Rinehart on rent rates

Relative to rent rates, and the likelihood of realizing rents over $1,000, Rinehart said: “It’s not hard to get if you have the right living space that will attract people from Madison. To attract people to move from Madison into the area it’s not enough to build a cookie-cutter apartment.”

With six years of building tobacco warehouse units under his belt, Rinehart said he’s developed an understanding of the market, what it can support, and where he believes it can go.

As early as 2012, he said, he was creating two-bedroom tobacco warehouse units (Mabel Berberich House, 351 West Fulton Street), all of which rented before they were finished, earning rents of between $745 and $795 per month. A second project (Marie Rinehart Building, 401 West Fulton Street) has 12 units, with mixed configurations of one-bedroom with lofts to three-bedroom units. The project was completed in 2014, with rents ranging between $695 and $995 per month.

A third project, 203 South Main, is the largest of the tobacco warehouses, he said, and has a mix of 26 larger units, ranging from 700-square-foot studio one-room units to three bedroom with lofts and bonus room 1,800-square-foot spaces, with rents, ranging from $595 to $1,195 monthly.

“I’m successful because I do my due diligence … I know the kinds of properties I need to build and I want to build as many of them as I can. I have full faith in this community to pull from surrounding communities with the right properties.

“It is 100 percent a mutually beneficial relationship because as I build more units, the city gets more growth, more tax base, more people to shop, and as more people come, and the rents go up, more developers are attracted to the community,” Rinehart said.

‘No more residential lots’

Businesses develop their business plan, Flanigan said, adding that what she hears from those who develop such plans is that they want to relocate to areas where the workforce is already established. “So it comes down to how many rooftops are here; how many people are here? If you want to support more businesses moving into the area, you have to have rooftops,” she said.

For Flanigan, the desire to create rooftops extends past the multi-family rental market, she said, noting that a good business model calls for a variety of inventory. “We don’t want to put all our eggs in one basket,” she said, but she added, the city faces a shortage of buildable residential lots.

“We need roofs, (but) we have no more residential lots to sell.” City planners hope someone with interest in developing more residential lots will come forward, she said.

Said Rinehart: “The reason developers are not platting out subdivisions, the reason they are not buying raw land to turn into buildable sites, is because the cost to develop that land is very high. You need to build roads, curbs, sewers, it’s costly and a gamble, it’s speculative, and those were the people who in the economic downturn (2008 and 2009) were destroyed, so now less people are willing to develop land. My developments are in the TIF (Tax Incremental Financing) districts and areas where those things are already there. And that’s in keeping with the Edgerton Master Plan, which is advocating more residential development in the downtown area.”

Infill and greenfield

Typically, Flanigan said, development projects fall within one of two categories: infill, defined as projects which renovate or repurpose existing structures most often found in the city’s downtown area, and greenfield, or projects that seek out open space where a developer can build something new.

“Modern retail, in its new format, wants a new building with a big parking lot behind it,” she said, adding: Greenfield developments appeal to retail big boxes, or any kind of chain, which now looks to create an identity that they can maintain anywhere. The downtown has a community identity; it is unique to the community. There is much effort made to preserve the downtown because people want to see that piece of history saved.

City planners have been making a concerted effort to focus upon infill projects, Flanigan said. The downtown area is still most often identified as the heart of the city, and for most, it is valued as a historic spot that helps shape a city’s individual identity and character.

“The difficulty is that the way we purchase things has changed. People used to walk and shop. Now we want to do that by car. So people work hard to find uses for the downtown buildings,” Flanigan said. Industries such as entertainment, offices and personal services have emerged as the best candidates to find uses for those buildings, she said.

She cited Rinehart’s tobacco warehouse residential developments as a clever and unique infill use. “They were a huge piece of our history and the feel of Edgerton,” she said.

Flanigan also pointed to the new fitness center (Anytime Fitness, which opened in August), which she said, was interesting in its concept: as a chain, it might have looked for greenfield space, but chose instead an infill opportunity downtown. She saw the fitness center as a test, asking: Will other modern commercial companies see an opportunity in locating downtown?

‘Private sector drives the ship’

Speaking highly of his experiences with the city, Rinehart said: “In the TIF areas, like downtown, Edgerton works well with its developers,” but, he added, it helps if the developer is aware of the city’s goals, outlined through its comprehensive development plan, noting that a city’s ability to offer support is increased if a developer’s proposal fits within the goals and guidelines as outlined by the master plan.

“Here, we have emphasis on attracting residential developments that meet the specifications of the downtown area. The projects I’ve done here meet the criteria of the master plan completely and I’ve gotten the city’s complete cooperation with helping me make those projects work.

“That’s what developers need: they need help with all the forms they have to fill out and the (submittal) process, they need to know what councils (and boards) they need to meet with and the city assists with that, they don’t just say you need to go out and find a lawyer. Edgerton is helpful; that’s why in 2001, I moved my taxidermy business here from Janesville, because I went to a meeting and saw that it was a helpful group,” Rinehart said.

Said Flanigan: “There is a perception by a lot of people that cities can control everything. We can’t. We can provide the services, but in the end, it’s their (developers) investment; if the private sector doesn’t see an opportunity, they won’t come here.

“Our job is to aid in the process, and to approve more land to attract businesses here. The city doesn’t get to save buildings; people have to do that. We do our best as a city to be prepared to offer support, but we don’t get to control when the private sector builds its buildings.

“We do what we can to attract businesses to come to Edgerton, but the private sector drives the ship.”

 

A big tobacco build

One of three Rinehart Property rental unit developments. (Kim McDarison photo.) 

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