So far I've covered the use of containers as residential structures. In this post I want to discuss a project idea that was brought to me by a local commercial property developer. I think maybe, first, a little background material that will help illustrate my point. The commercial property market in the United States, as a whole, looks pretty bleak right now. Nationally we have huge amounts of vacant commercial space. So much so that the underlying equity value of commercial property is open to question. Projects that were financed and constructed during our recent boom times are still carried on the books at the value they were projected to be worth during the boom. The truth is that the current actual value of commercial properties is much, much lower than book value. It will take years for this difference to equalize, if it ever does. The market recognizes this but it's not in anybodies interest to rock the boat. During the good times you could use the equity value of a preforming property to finance the construction of your next deal. And so now most commercial property is leveraged sky high and the underlying values that supported all this expansion have vastly depreciated. Nobody wants to be caught holding an empty bag so commercial property financing has dried up. If you can't build equity in commercial property at the moment then the next best thing you can do is create cash flow.
There are several parts of Portland that continue to thrive in spite of the national trends. As in almost every major city in the country there are areas that continue to gentrify. These old neighborhoods are undervalued to begin with and so draw the kind of people that always are looking for cheap rent, the creative community. Young families soon move in to these new enclaves and the property values rise. Eventually more traditional property developers begin to recognize whats happening and support the new community with commercial growth. The Alberta Arts District, here in Portland, is my local example. Most of the larger commercial buildings along Alberta Street have already been redeveloped into cute retail spaces, restaurants and the ubiquitous coffee bar. There are, however, several vacant undeveloped lots along Alberta Street. These are being rapidly filled with Portland's latest craze, food carts. The city of Portland to encourage entrepreneurial enterprise made it legal to operate restaurants kitchens inside mobile trailers. The quality and diverse selection of food this delivered very quickly caught on. There are now, in almost every neighborhood, previously empty lots packed with as many food carts as will fit. The property owner simply had to provide a network of power supplies and a shared water source, creating instant cash flow. Inevitably there will be a shake out as the weaker businesses fail and the large number of the locations contracts to right size themselves to the market. What I find most interesting in all this is that the people that owned these vacant unproductive lots have found a way to turn a small initial investment into a cash machine.
The same week that the Bethel Island project dissolved I was contacted by a local commercial property developer. He has several vacant lots on Alberta Street and is farsighted enough to see the eventual contraction in the food cart market and so doesn't want to over invest in that kind of improvement. Rather, he is open to the idea of creating an arcade of small retail spaces by using a combination of 20 and 40' containers on a 10,000 square foot L shaped lot in the heart of the Alberta Arts District. Really this whole concept was his idea, its brilliant. The financial thinking is that you invest just enough to create cash flow and forget about expensive equity building improvements. The rents while individually lower are collectively as high as you'd expect for a strip mall per square foot and he won't have a huge mortgage to service. It's exciting, sure there will be a bunch of turn over but by pricing each 20' unit at around $400 he won't have a shortage of people waiting for a chance to try their hand in a retail space on a good street. If it pans out this concept could spread to newly gentrified neighborhoods all over the country.
Friday, July 30, 2010
Monday, July 26, 2010
And this is how it ends
I got a call last Monday from the client. He let me go. The project had gotten too expensive. This wasn't really a shock, I'd sensed for some time that he was getting frustrated. It was a decision he took based on the most simple economic model. Other comparable houses on Bethel Island have been losing equity value over the past couple of years due to the effects of the burst housing bubble. Our current estimate of costs, which were driven at least partly because of county requirements (more on that later), had risen past the recent sales prices of these other comparable homes. To put it simply you should never build the most expensive house in the neighborhood. The average home on the levee at Bethel Island that was built high enough to overlook the water currently sells for about $350.000. The client paid about $100,000 for the lot. You'd think that building with containers you could construct a home overlooking the water for $250,000, well, not quite.
The first big hit came when we found out that the soil we wanted to build on was composed of peat moss. The soils engineers' recommendation was that we sink a number of piles at least thirty feet into the ground. He specified 14" square pre-stressed concrete piles. I checked around and the best price I could find was $3300 each. When I asked the structural engineer how many we would need he told me about twenty. When you add the grade beams that had to be formed, rebar added and poured the cost of the foundation could easily have risen to over $80,000. I talked the engineers into letting us use 12 round wood piles instead but the final costs still would have run about $50.000.
The next huge hit was due to the clients need to overlook the water. That is the big draw to living on the river but it came with a cost. In order to build the house high enough to get above the FEMA designated flood zone we had to put the habitable space above the second story. As you can see from the plans we had two habitable floors, a modest 2500 square foot home. However you cannot built a Type 5 residential structure higher than three stories or 40 feet.
The rules for building a Type 5 house are the ones that most people are familiar with, standard wood frame construction. It is also the least expensive form of residential construction. For our structure to qualify for the Type 3 designation we learned that to begin with all exterior walls had to have a two hour fire rating. As the walls of containers are made of non combustible steel you would assume that that wasn't going to be a problem. You'd be wrong. The fire rating of walls has to do with the combustibility of the whole wall system. And as we found out there is no UL rating for steel container wall assemblies. If you've really set your heart on this sort of thing you can hire UL to do this sort of testing but bring your wallet it's expensive. The alternative was to completely frame and sheet the structure with UL fire rated materials. I'm not sure which alternative would have cost more.
Lastly there was a water issue. This, however, didn't have anything to do with actually having water. All the houses on Taylor Road are served by a private water cooperative that run three different wells supplying 65 lbs of water pressure to each home. My initial inquiries about joining the co-op were well received. I was told there wasn't going to be any problems. But then something unexpected came up. Part of the county requirements were that we should have 8000 gallons of reserve fire fighting water on the property. This is not unusual when building in a rural area where there are no municipal water mains with fire hydrants to hook up to. What I didn't know was the communities history with the county's fire department. In order reduce their budget, because California is broke and they have to, they are planning on closing the fire house on Bethel Island. For decades the community had a volunteer fire brigade that was very effective. But a few years ago the county, because they thought it would be better, built their own fire house on Bethel Island and demanded that the volunteer fire brigade disband. This caused a lot of bad feeling in the community which only got worse. The new county fire department quickly got a reputation for letting houses burn to the ground rather than fight the fire. I'm sure they had excellent reasons for just controlling the possible spread to other homes but that didn't make the person whose house caught fire any happier. Really, how may of us have enough insurance to pay for a complete rebuild. To say that the residents I talked to about this were bitter is a vast understatement. When word got out that we were going to comply with the reserve water request all hell broke loose. The current residence which control the water co-op see this as the thin end of the wedge, a prelude to making them all install fire fighting tanks. The result, I gather, was that we would be drilling our own well (200+ feet to get to clean water). Wells aren't cheap and it's hard to get a permit besides. What makes this particularly bizarre is that we were building next to a river.
I'd like to build a house for somebody in the Bay Area. I've got the use of a factory to fabricate in. I've got great guy's that I trust to work with down there. But this is the second time that I've looked at a project there and until the state of California gets it's act together I doubt I'll be interested in investing my time or energy further there.
The first big hit came when we found out that the soil we wanted to build on was composed of peat moss. The soils engineers' recommendation was that we sink a number of piles at least thirty feet into the ground. He specified 14" square pre-stressed concrete piles. I checked around and the best price I could find was $3300 each. When I asked the structural engineer how many we would need he told me about twenty. When you add the grade beams that had to be formed, rebar added and poured the cost of the foundation could easily have risen to over $80,000. I talked the engineers into letting us use 12 round wood piles instead but the final costs still would have run about $50.000.
The next huge hit was due to the clients need to overlook the water. That is the big draw to living on the river but it came with a cost. In order to build the house high enough to get above the FEMA designated flood zone we had to put the habitable space above the second story. As you can see from the plans we had two habitable floors, a modest 2500 square foot home. However you cannot built a Type 5 residential structure higher than three stories or 40 feet.
The rules for building a Type 5 house are the ones that most people are familiar with, standard wood frame construction. It is also the least expensive form of residential construction. For our structure to qualify for the Type 3 designation we learned that to begin with all exterior walls had to have a two hour fire rating. As the walls of containers are made of non combustible steel you would assume that that wasn't going to be a problem. You'd be wrong. The fire rating of walls has to do with the combustibility of the whole wall system. And as we found out there is no UL rating for steel container wall assemblies. If you've really set your heart on this sort of thing you can hire UL to do this sort of testing but bring your wallet it's expensive. The alternative was to completely frame and sheet the structure with UL fire rated materials. I'm not sure which alternative would have cost more.
Lastly there was a water issue. This, however, didn't have anything to do with actually having water. All the houses on Taylor Road are served by a private water cooperative that run three different wells supplying 65 lbs of water pressure to each home. My initial inquiries about joining the co-op were well received. I was told there wasn't going to be any problems. But then something unexpected came up. Part of the county requirements were that we should have 8000 gallons of reserve fire fighting water on the property. This is not unusual when building in a rural area where there are no municipal water mains with fire hydrants to hook up to. What I didn't know was the communities history with the county's fire department. In order reduce their budget, because California is broke and they have to, they are planning on closing the fire house on Bethel Island. For decades the community had a volunteer fire brigade that was very effective. But a few years ago the county, because they thought it would be better, built their own fire house on Bethel Island and demanded that the volunteer fire brigade disband. This caused a lot of bad feeling in the community which only got worse. The new county fire department quickly got a reputation for letting houses burn to the ground rather than fight the fire. I'm sure they had excellent reasons for just controlling the possible spread to other homes but that didn't make the person whose house caught fire any happier. Really, how may of us have enough insurance to pay for a complete rebuild. To say that the residents I talked to about this were bitter is a vast understatement. When word got out that we were going to comply with the reserve water request all hell broke loose. The current residence which control the water co-op see this as the thin end of the wedge, a prelude to making them all install fire fighting tanks. The result, I gather, was that we would be drilling our own well (200+ feet to get to clean water). Wells aren't cheap and it's hard to get a permit besides. What makes this particularly bizarre is that we were building next to a river.
I'd like to build a house for somebody in the Bay Area. I've got the use of a factory to fabricate in. I've got great guy's that I trust to work with down there. But this is the second time that I've looked at a project there and until the state of California gets it's act together I doubt I'll be interested in investing my time or energy further there.
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