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One crazy idea for developing better projects in Minneapolis: build smaller

Two-story mixed use buildings
Guerrilla Development
Two-story mixed use buildings designed for the Creston-Kenilworth neighborhood in Portland, Oregon.

In a room full of people who make a living in the development business, it might have been the most provocative thing Portland architect-developer Kevin Cavenaugh said.

In 25 years, he predicted, people will look at five-over-one apartment buildings the same way we look at strip malls today: not very kindly.

For those not immersed in the particulars of commercial real estate, five-over-one (sometimes called one-plus five) is the ubiquitous form of construction that has been filling lots across the Twin Cities for the last decade. It consists of five stories of wood stick-frame construction over one story of concrete, and is designed to maximize lots with the most-affordable construction method permitted by building codes.

“We look at strip malls, and there was a time when banks lent on them all day long,” Cavenaugh said at a program sponsored by the Urban Land Institute Minnesota Young Leaders Group last week. “There’s a formula and banks got it because most development is done through the rear-view mirror.”

The formula now is the five-over-one apartment, he said, with several hundred units and a few floor plans to choose from. Those projects are now attracting institutional lenders. And yet, Cavenaugh said, “In 25 years, we’re gonna cringe at those the same way we cringe at strip malls.”

‘Best’ has been ignored

Cavenaugh doesn’t build a lot of five-over-one apartment buildings. Actually he doesn’t build any. What he is known for — and what he came to Minneapolis to talk about — is building smaller. The title of his presentation was “Not-So-Big Real Estate: Growing Cities 3,000 SQFT at a time.”

Cavenaugh’s Guerrilla Development Co. began by developing smaller buildings on cheaper lots that he could finance with smaller chunks of money. One of his first projects was The Ocean, a former Tire Factory outlet that is now home to four micro-restaurants, small spaces that are the next step up for food truck owners.

Another is the Zipper, built onto a triangular lot on a car-oriented arterial he compared to Minneapolis’ Lake Street. It too holds micro-restaurants as well as a punk-rock nail salon called “Finger Bang” and a bar and outdoor space with fire pits.

Several of his projects do not max out the lot lines or the maximum allowed height — something that might not sit well with density advocates who loathe single-story buildings. Cavenaugh said “highest and best use” is “Development 101,” that every lot should be exploited fully.

“In Portland, Oregon — and to some degree what I have seen in the Twin Cities — is that people are building the highest use but the word ‘best’ has kind of been ignored. And that makes for a shitty city,” he said.

With the Zipper, though Cavenaugh’s building was low-rise, other developers have purchased lots nearby and built taller residential buildings. He thinks they were drawn by the activity created by his tenants and by the rents he was able to achieve. “Mixed use doesn’t have to be the same building,” he said. “Mixed use could be a village.”

David Frank and Kevin Cavenaugh
MinnPost photo by Peter Callaghan
Planning director David Frank, left, and Guerrilla Development owner Kevin Cavenaugh discussing developing smaller buildings on cheaper lots.

Another project, one he calls The 2/3rds Project  (because it’s designed to cover two-thirds of the lot, be open two-thirds of the day and rent for two-thirds what other developments do), is a two-story, traditionally designed building in a neighborhood that hasn’t seen a lot of construction. It has residential, commercial and restaurant spaces.

While he could have built higher, he wanted it to feel natural in the neighborhood. “It’s not dense but it’s packed full of bodies,” he said. “In my opinion, density has nothing to do with … floor area ratio. It’s about how many bodies utilize this building, come to this building.”

Cavenaugh’s underlying message is that builders-architects-developers in the Twin Cities can build similar projects by raising money in small chunks, sometimes including crowd funding, and building smaller. “I spend a lot of time taking rich people to coffee,” he said. “It’s just like dating. You know in five minutes whether there will be another date.”

He said he has been able to make money, provide good returns to financers and collect strong rents because the buildings are interesting, unique and functional.

He also said it is more likely the people who do projects like his will be small operators — even onetime house flippers — rather than big developers doing big projects. That’s because it’s easier for small guys to scale up than for big guys to scale down, he said. “Instead of doing a 2,000 square-foot house, they might do a 4,000 square-foot mixed use building,” he said.

Cavenaugh’s website includes downloadable spreadsheets on all of his projects, showing the financing and the income generated.

Could it be done here?

To allow someone in Minneapolis to do what his company has done in Portland, Cavenaugh said, the city must loosen its zoning codes to give developers more range to build as a matter of legal right rather than needing city permissions, variances and zoning amendments. After hearing the city of Minneapolis’ Director of Economic Policy and Development David Frank’s lengthy, somewhat tongue-in-cheek-but-accurate description of the current land use process, Cavenaugh said that might be the problem. “That alone is why you can’t do what I do. Sorry for wasting your time,” he joked.

Portland, he said, has more-permissive zoning, which gives neighbors less power to block his projects. They can talk to him about details to make a project more palatable, but it is difficult to stand in the way (though, as this City Observatory article points out, not impossible).

Of Minneapolis’ system, he said: “That’s a great way to do formulaic, uninventive projects. Give me some teeth to do some inventive, thoughtful, forward-thinking civic work. Because most of the neat buildings [in Minneapolis] I’ve seen today were not allowed by right.”

Minneapolis is in the midst of a rewrite of its comprehensive plan, a year-long process that will be followed by changes to zoning codes to implement the plan. But the difficulty of that process was illustrated by the negative reaction by some to the leaking of one detail: that the city might allow fourplexes in single-family neighborhoods.

Not everything Cavenaugh builds is small. Perhaps his most noted project is called The Fair-Haired Dumbbell. (Project names are as unusual as the buildings, including “Dr. Jim’s Still Really Nice,” “Atomic Orchard Experiment,” “Jolene’s First Cousin” and “Rig-a-Hut.”) Built on a city owned parcel that once was destined to be a Home Depot, Cavenaugh decided on a commercial building because other developers with pieces of the property were going with residential. The project was one of the first using crowdfunding, something he said was slow going until he was featured in the New York Times.

Portland, he said, is facing more severe displacement problems than the Twin Cities. That has caused Portland to lose its flavor, he said. All of the quirky stores and restaurants featured in the comedy “Portlandia” are going away, he said.

He said his projects haven’t displaced current residents, but acknowledged that any projects in previously underdeveloped parts of a city will lead to some gentrification. The Zipper, built in a used-car lot, didn’t displace anyone and was supported by people living in the neighborhood because it provided fun restaurants and services.

“But usually, five years later, those people who were ecstatic don’t live there anymore because other landlords see the rent I’m getting,” and raise their rents. In response, Cavenaugh said he has done projects with unsubsidized affordable elements usually by finding “impact investors” willing to take a smaller return because of that element. Jolene’s First Cousin, for example, includes some non-subsidized affordable units for tenants who were recently homeless, and a current project is being created to provide lower-rents to social workers.

“If I can’t help with homelessness, I can help those helping with homelessness,” he said.

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Comments (10)

Question for Mr. Cavenaugh

Why do you see the the five-over one buildings going the way of strip malls? If its aesthetics, I can see how tastes can change, especially with less expensive construction.

But the real problem with strip malls isn’t just that they are ugly. Its that they are a poor (non-dense, parking-centric) use of land. The five-over-one mixed use buildings don’t have that problem. Is there more to it than that?

Some would say...

That these cookie cutter five over one fake brick and aluminum clad buildings are ugly. And the problem with strip malls isn't so much the fact that they're ugly, the problem is they're empty. To the extent that strip malls are ugly we could just slap nice facades on them like builders used to do routinely.

As interesting as Cavenaugh's testimony may be, one thing he has in common with all other developers is a desire to eliminate or severely curtail the voices of people who live wherever he wants to build something. He can claim that what he builds is better than what some other developers build but he's assuming that it makes sense to let developers build whatever they want wherever they want. So people who live among the developments are left with a lotto-system whereby if they're lucky, some developer builds something good for the neighborhood, but if they're unlucky they get something that diminished and disrupts the neighborhood in a negative way. Some would say that people who live in a place and make their lives, homes, and families in THAT place, shouldn't have to rely entirely on "luck" to provide a sustainable neighborhood.

In the end what Cavenaugh is doing may be different, but whether or not it's "better" is a serious question. People who live in places may not want to roll the dice on whether or not they get a developer like Cavenaugh or someone else. All developers ever risk is money, arguably the people living next to these developments have a lot more at stake.

Different question

Why should people get to decide what gets built in their neighborhood in the first place? Obviously, you can’t build a factory in a residential neighborhood, but if its housing getting built, but why should anyone get to veto what another property owner wants to build? Does the ugly (in some people’s eyes) apartment building in your neighborhood constitute “a lot at stake”?

The Twin Cities (and other big cities like San Francisco) have a housing shortage and high rents in part because zoning laws and building restrictions have made it difficult to build enough housing to keep up with demand. The effect of giving people veto power over new and different construction and focus on single-family homes has made things difficult for renters - who aren’t generally part of neighborhood councils or otherwise involved in making city code.

If you have a single-family home in Minneapolis that is appreciating 10-15 percent every year, the status quo may be fine for you. But if you are someone who doesn’t own a home and pays too much in rent or can’t find housing at all, not so much.

Everyone says they want affordable housing. They just don’t want that housing built by them.

Whatever housing gets built, it isn't affordable.

The idea that these developers are building affordable housing is a myth. They build housing to make money, and where they build, rents go up, not down, THAT'S how they make money. Even Cavenaugh admits that his projects are commanding high rents. His pitch isn't that it builds affordable housing, on the contrary his pitch is that he's making money, and he admits that he's promoting gentrification.

Simple supply and demand models don't explain housing costs, nor do they dictate housing costs. If density decreased rents, rents in the city would already be lower than those in the suburbs, they wouldn't be higher.

Why should people who live in a place have some say in what get's built there? It's called democracy. Why would you assume that a developer is more interested in the well being of a community than the people who live in that community?

By the way, steadily increasing housing values aren't necessarily a "good" thing for homeowners, those increases raise our property taxes. These are the same houses they were 20 years ago, when value goes up simply because somebody built something else nearby, or modified some other house on the block, that's actually an artificial rise in value because it's not based on the intrinsic value of the house. This idea that our housing is part of our investment portfolio rather than a place where we live our lives is actually driving the prices up, THAT'S the real cause of un-affordable housing.

Economics

No one is claiming that developers are building affordable housing, at least without incentives/mandates. Developers, like any other business enterprise, are trying to make a profit. No one goes into business to lose money.

But supply and demand models very much do apply to housing. Even adding market-rate rental housing will bring overall rents down. The new buildings themselves (again, absent affordable units set-aside through incentives/mandates) may not be affordable, but increaing the overall supply will reduce the pressure on the demand and bring prices down. There is almost no vacancy, which makes it a seller’s (landlord’s) market.

Your suburb argument doesn’t work because there isn’t the same demand (and thus the same shortage) in the suburbs. It isn’t the density itself that decreases rents. Its the increase in the housing supply, and density is a way to increase the housing supply.

The problem is the “community” that opposes building often does not include renters. Its not about what developers want - they are just a necessary tool for getting housing built. Its about people who can’t afford housing.

I’m not sure what your last paragraph is getting at. There is nothing artificial about the value of your house. If you sell it for its value - which is based on location, what is built nearby, etc., someone will pay you real money for it. There is no such thing as intrinsic value - its the supply and demand that sets the value of a house, just like almost anything else. And I’m not sure how people recognizing that their houses are appreciating in value causes un-affordable housing.

You're entire comment is based on this false premise:

"Even adding market-rate rental housing will bring overall rents down."

That's simply not what happens, on the contrary rents tend to increase the area around new building, they don't decrease. We call it gentrification for a reason.

I would refer you to the nation wide collapse in housing prices we just experienced if you want understand the nature of artificial housing value.

The fact is that the elementary "principle" of supply and demand is more of a popular myth than an economic principle with powers of explanation. In the real world pricing and value are complex matters and the only real guiding principle is that sellers always want the highest prices they can get.

About renters by the way

Clearly renters are people too, but they tend to be temporary residents that rarely stay in the area longer than 4 years. For one thing, landlords raise rents every year essentially penalizing those who do stay. At any rate I'm not sure why a transitory renter would be considered a better representative of the neighborhood than a homeowner. And at any rate, what "renters" are we talking about? Actual renters who currently live in the neighborhood, or people who don't live there but might if someone builds an apartment for them rent? There's a clear distinction to made there. Existing renters are represented, but are "potential" maybe-if-the-price-is-right wannabe renters entitled to equal representation, or superior representation?

Land value

It's all about the underlying land. Building value is based on labor and material costs. The underlying land value is based on surrounding population/wealth and the community's investments in schools, parks, police/fire, infrastructure, etc. To address affordability, it's best to use land trust arrangements in which -- in lieu of property taxes -- land rent for residences is pooled and partially used to fund an equal credit for residents. To learn more, I recommend Martin Adams' "Land: A New Paradigm for a Thriving World."

Pooled land rent?

Sound an awful lot like something we like to call: "property taxes".

property taxes

I think we like to forget that taxes and fees of all kinds are monies we've agreed to pool for a common purpose, with a "government" being the manager of them.

Taxes are like a shared "common."

Now I am not naive enough to say that it always works, and certainly not naive enough to think everybody agrees with it or likes it.

But that's what we've got. If it doesn't work its up to us to participate in making it better.