Home in the city: Downtown Chattanooga rental housing has some catching up to do

Home in the city: Downtown Chattanooga rental housing has some catching up to do

August 5th, 2014 by Joy Lukachick Smith and Ellis Smith in Local Regional News

Construction workers Dwane Richardson, left, and Donald Farnsworth install cardboard tubes for pouring concrete into vertical columns at the construction site of retail and apartment space on the corner of Main and Market streest in downtown Chattanooga.

Photo by Doug Strickland /Times Free Press.

POLL: Would you like to live downtown?

A cascade of new public and private deals to bolster shopping, dining and entertainment venues in downtown Chattanooga has boosted hopes for a second renaissance in the core of the Scenic City.

But while the commercial sector is beginning to fire on all cylinders, officials are moving to support downtown Chattanooga's lethargic rental housing market, in which demand increasingly has outstripped supply.

Chattanooga's booming commercial and entertainment sectors have made the city increasingly desirable for residents, but the fact is that there simply aren't enough affordable apartments downtown to nourish the city's work force or supply enough customers to sustain the commercial boom.

That's why Mayor Andy Berke's office has attempted to revive a former tax-break agreement for developers who commit to building affordable housing in the downtown core. The City Council will take up the proposal today.

The plan, which county officials approved in 2012, is a crucial step toward lowering rents downtown despite high demand, said Donna Williams, director of the city's office of economic and community development

It will "ensure there's not an elitist wall around the greater downtown area," Williams said.

That wall is today driven primarily by the economic realities of demand outstripping supply.

An analysis by River City Co., a nonprofit downtown development agency, shows pent-up demand for 2,400 new housing units downtown, more than half again the current 3,900 downtown residences. Including demand from the University of Tennessee at Chattanooga for about 250 new housing units each year, planners estimate downtown Chattanooga could support 900 more homes per year, even after sating pent-up demand.

New residents aren't just the key to sustaining downtown's growth, officials say. Without a steady stream of new people to live, work and play in the city's core, existing restaurants can't sustain themselves, grocery stores can't thrive and the expansion of the city's flourishing nightlife could halt.

People drive growth, and vice versa

Much is at stake for the city's commercial interests.

Owners of the famous Chattanooga Choo Choo hotel plan to spend $8 million to turn the facility inside out and build more crowd-pleasing venues for residents and tourists alike. The city has signaled it will move forward with a $3 million remake of Miller Park and Miller Plaza, taking a page from River City Co.'s playbook to add affordable housing at the edge of Miller Park and connect the center city to UTC through a revamp of Third and Fourth streets.

Two national apparel chains will open outlets at Warehouse Row, the latest in a seemingly continuous series of announcements that include new restaurants, grocery stores, retailers and more on both sides of the Tennessee River. Not to mention new sidewalks, bike lanes, parallel parking spaces and a planned light rail transit line, all courtesy of the city's taxpayers.

What's missing is homes for all those workers, patrons and shoppers.

"Rental housing is where we are sorely lacking," said Jim Williamson, vice president of planning and development for the River City Co.

The dearth of housing is not for lack of trying. Williamson and other officials constantly court developers. But many choose not to engage in the expensive and unpredictable process of building rental housing in the city's historic downtown district.

"If it were easy, it would have been done already," Williamson said. "It is more difficult to build in an urban core. The construction costs are different, it takes a more sophisticated developer to do it well, and there's no silver bullet or easy solution."

High cost a barrier

Much of the problem is cost. Building a high-quality multistory building downtown is more expensive than building in the suburbs, and recovering that increased cost through higher rents can quickly price many potential residents out of the market. Much of the dynamic growth enjoyed in downtown Chattanooga has been driven by young professionals and entrepreneurs who can ill afford rent that starts at $1,400 and increases to $3,500 per month in some areas.

This problem is not unique to Chattanooga, and typically drives two solutions: a push by developers to build more housing to increase supply, thereby lowering rents, and moves by governments to incentivize rent-controlled properties, in which rent is maintained at an artificially low level in exchange for tax incentives.

Both are happening simultaneously in Chattanooga.

Developer John Wise has led the charge to build nearly a dozen apartment complexes of various sizes, primarily on the North Shore, to capitalize on the strong demand for luxury rental housing there.

Wise is vertically integrated. He's the developer, builder and landlord, so he can lose money in some areas and make it back in others, he said. That's one of the reasons he's been able to swing the cost of building rental housing while others have shunned the prospect.

Though Wise recently started a project on the city's Southside, he has built nothing in the middle of downtown. But a proposed payment-in-lieu-of-tax (PILOT) deal for downtown development promises to attract competitors -- including Wise himself -- to the center city.

"That's why they're doing the PILOT, to get us to come downtown and do apartments," Wise said. "They're trying to lure people to build down there, and if you get housing down there then it'll probably bring more business back there."

Berke's office said that while more housing is important, part of the administration's goal is to ensure it remains affordable for the entrepreneurs, servers and secretaries who work downtown.

PILOT vote today

The City Council will vote tonight whether to approve a PILOT program that offers a 10-year tax break for developers of affordable housing. They must agree to make 20 percent of their units affordable for people earning less than 80 percent of the area median income, around $31,000. That works out to rents of about $775 per month, said Kim White, president and CEO of River City Co.

One local activist argues that Chattanooga's plan doesn't go far enough to help the city's most vulnerable residents, including an estimated 24 percent who live below the poverty line.

The mayor's office should look at what cities like Memphis have done, said Perrin Lance, president of local advocacy group Chattanooga Organized for Action. Memphis offered tax breaks to developers who would set aside 40 percent of their units at 60 percent of the area median income.

But developer John Clark warned that such a rent control policy "doesn't have a great history," and that "you won't find a conservative or liberal economist who is pro-rent control."

Even though the proposed housing PILOT is not yet approved, "a large volume" of apartment projects are already in the planning stages thanks to higher rental prices, he said.

"What you need if you want to keep rents down in Chattanooga is more supply," Clark said.

"I don't see the PILOT as part of the equation," he said. "I see increasing demand, increasing rent and very stable low interest rates; those are the things that are going to increase this. And it already is."

Contact staff writer Ellis Smith at 423-757-6315 or esmith@timesfreepress.com with tips and documents.

Contact staff writer Joy Lukachick at jlukachick@timesfreepress.com or 423-757-6659.