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Zac Ziegler: I'm Zac Ziegler, and you're listening to Oregon Rainmakers from KLCC. On this edition, I talk with Dan Neal, the founder of Paradigm Properties in Eugene.
There's a small vacant lot on the corner of Seventh Avenue and Oak Street in Eugene. Most weekdays, you'll see a handful of law enforcement vehicles parked there as officers and deputies head for the courthouse across the street, or maybe you'll see the trucks of Lane County Farmers Market vendors on the days they're set up. But if you pass by some years from now, you'll probably see an apartment building several stories tall. The Butterfly Lot, as it's called, will be home to a rare addition to the downtown Eugene housing stock. Its developer, Paradigm Properties, is no stranger to building multifamily housing in Eugene. Its past projects include several student housing complexes, mixed-use developments and more. I recently headed to Paradigm's office off Pearl Street to speak with founder Dan Neal about developing the Butterfly Lot, building downtown and more. He starts by telling me about the project.
Dan Neal: Well, the city decided within the last few years that it would be best for Eugene if it could have a bunch of people living there and an active first floor that creates the vibrancy already present with the farmers market, the Saturday market and the other things that happen in that area on certain days of the week. They believe, and I think they're right, that it would be very desirable to have a bunch of new residents living in that part of our community. Their goal is a project with the lively, interactive ground floor we talked about, plus 80 to 100 units above. The lot is relatively small, about 30,000 square feet, which is about two-thirds to three-quarters of an acre, so to get that many units, it's necessary to go up pretty high.
Ziegler: Yeah, I can imagine. What are you talking, probably eight to 10 stories?
Neal: It could be that high, but more likely 12. To hit the desired unit count with less than 12 stories, you'd have to cover the whole lot, and we believe it would be very desirable to continue the plaza onto the other side of the alley, onto the gravel lot. Having open space there would be a really nice thing for the community, even if it costs us something in unit count.
Ziegler: Yeah, that's kind of the vibe you see in a lot of those buildings downtown. I think of the Fifth Street Market area, and how even when you get those taller buildings, you still get the breezeways that move through the area where people can walk through, and you need access to those shops on the first floor anyway.
Neal: That's all true, and I agree with you about Fifth Street and the alley. Is there a more vibrant place in town than that? Maybe Autzen Stadium on game day. But day to day, it's tough to top the alley, and our proximity to it at the Butterfly is very good. One of the other goals of this project is to strengthen the connection between urban downtown core locations such as the Butterfly and other great nearby properties like the market district and the riverfront district.
Ziegler: This is far from your first mixed-use project, where you get retail on the first floor with living above it. What do you think is making that a growing style of building? It's not just here, it's happening everywhere.
Neal: I don't think it's always been desirable. There have been times when some of our projects were compelled to have first-floor retail in locations that weren't well suited for it. That's been a problem nationally, with zoning requirements sometimes forcing community-minded developers to do things that really aren't in the community's best interest. But in the case of this location, I think the city has it exactly right. It's ideally suited for an active ground floor with a variety of retail uses.
Ziegler: Right, you're next to the Tiffany Building, which is exactly that: a couple floors of apartments above first-floor retail. That's very much the vibe of the neighborhood.
Neal: Yes, and the U.S. Bank Tower is the same: ground-floor retail. Everything on Broadway has ground-floor retail. So to have that in this location, right next to the Farmers' Pavilion and everything else going on in the park blocks, seems like an ideal fit.
Ziegler: You mentioned it's a relatively small lot, not quite three-quarters of an acre. Building in a space like that can be tricky. What does that do to the general process, the timeline, your costs? How does building on a smaller lot compare to a larger development?
Neal: That's a big topic, so I'll give a short explanation to start, and if you want more, you'll let me know.
Ziegler: Oh, yeah.
Neal: There's a laydown area because of the space I mentioned, where we're going to continue the line of the existing plaza, meaning the space between the Farmers Market Pavilion building on the east side and Oak Street that has a line of trees. We're going to continue that into the southeast corner, which will serve as a laydown area and also as the location for the crane. It's the only place the crane could go, and the most useful place for it. More space will be needed, and typically what happens nationally is developers are allowed to take up a certain amount of the adjacent street or alley space. It will be necessary to do that here as well.
Ziegler: We hear a lot of debate about building downtown, particularly residential, around the multi-unit property tax exemption, or MUPTE, and how much it helps. You're a builder. Do incentives like that help, or is there something that would help more?
Neal: The city has a variety of tools at its disposal to stimulate development, and you've identified one. The MUPTE program is meaningful because it lets a developer delay paying property taxes on the improvements, not the land. You continue paying property taxes on the land throughout the 10-year MUPTE period, and after the 10 years, you pay on the full appraised value of the building. Does it help? Of course. But MUPTE alone isn't necessarily enough to take a project from operating in the red to operating in the black. Even though it offers a considerable, meaningful subsidy, it's not enough in every case.
Ziegler: Let's move on to the idea of building in the general downtown area, maybe even near the university. You've done more than a few projects in the area. What if someone is hoping for slightly less dense housing, or owner-occupied housing: townhouses, row houses, condos? Is there anything that could foster that kind of growth in that same area? Do the same tools work well for that?
Neal: If you're asking whether we considered condominiums for this site, we did, and the risk profile of condo development, especially introducing something like 100 of them into a market like Eugene, is quite high. A condo developer has to look at how long it will take to sell all the condos in a building. For a 100-unit building, our data indicates it's not reasonable to assume more than about 20 would be absorbed per year, and a five-year timeline to sell all those condos is just too long. No reasonable developer would take on that kind of financial risk knowing going in it will take that long to sell the inventory. But I like the idea of smaller-scale condo projects, and I agree it would benefit the city to have more of them. The only ones undertaken anywhere near downtown in the last 30 years, I think there are two: the Tate, done about 20 years ago and very successful, and the Midtown at 16th and Pearl, just down the street from my office, where I live, incidentally. I was very involved with that project.
Ziegler: Ah, you know it well, then.
Neal: Yes, and we sold those 40 condos in less than two years. That's a reasonable timeline. So when you ask whether that might work for a developer with some public support, I'd root for that type of project, to create an option for home ownership for Eugenians who want to live in the downtown core or close to it. I hope that within the next decade, we see some of those projects come into being.
Ziegler: Yeah, I can imagine. But you also see it in the interest rate environment, and the condo market always seems to be more of a roller coaster than the typical single-family housing market. It's easy to see why you'd want to go a little smaller.
Neal: Yes, you might say the condo market is fraught with peril in a lot of ways. First, it costs more per square foot to build to condo standards than to market-rate housing standards. Second, insurance costs for condos are considerably higher. Third, the litigation history involving condos is robust. Many people in the condo industry have noted it seems to be par for the course that you'll get sued almost no matter what, and insurance companies have adjusted their premiums accordingly to that claims history. It's just very expensive.
Ziegler: Talking about market-rate rental housing, we've seen some increase in that in the downtown area. I'm thinking about projects like the new Riverfront project that's recently been built and is still being developed. I've heard a lot of people say that's key to the redevelopment. However, the current market rate can be rough for a good chunk of the people who live here. Is it feasible to build enough apartments to get to a point where more of Eugene could afford to live close to downtown, renting apartments?
Neal: You're referring to the Hartwood and the Portal. Those are the two projects completed within the last few years in the Riverfront District.
Ziegler: Yeah, the two most recent.
Neal: They're beautiful buildings. I've toured both, and the Hartwood filled up pretty quickly. The Portal isn't full. If you're asking how much demand there may be for housing downtown, I think that's an open question.
Ziegler: Say more building does well. More building is obviously happening with yours, but people are always saying, let's build more downtown, get more people living here. Say that happens, and what always happens with supply and demand, rents start to drop a little. Is there a point where it becomes untenable for folks in your seat, the builder, where you'd have to hold off because market rate has become no longer viable for what it costs you to build?
Neal: You mentioned earlier the high cost of funds, which refers to the interest rate and how much higher it is now than it was for a long period starting right after the Great Recession of 2008, which went on for so long. We got a little too accustomed to those low interest rates, and now it's challenging, not just because of the interest rate but also the high cost of labor and materials. So are rents high enough at this time to make a project viable when costs are that high? It's borderline, frankly, and that's why the city is interested in taking measures to close the gap between cost and market value for projects like this, as it just did with the 1059 Willamette St. project, which is finally going to start construction within a few months.
Ziegler: Thinking about another area you've got experience building in, student housing. First off, is there anything from your side, the developer side, that makes student housing different beyond the location? I look at it now and it's a lot different than the dorm rooms my friends and I were in 20-plus years ago. We won't get too specific. What is it that's different about student housing versus apartments?
Neal: The main differentiator is how they structure the units. Most student housing complexes have three, four or five bedrooms and multiple bathrooms, so those don't fit very well in a market-rate environment where you have families or a couple of individuals who want to room together to save money, or because they appreciate each other's company, or whatever drives people to room with one another. If you had to assemble families into apartment units with three, four or five bedrooms, that doesn't work very well, and it certainly doesn't work well for couples or people who choose to room together. That's the main differentiator.
Ziegler: One thing I always wonder about, we see enrollment at many universities starting to dip a little. It's getting harder on colleges. That would make you think demand for student housing complexes could go down. Would it be hard for them to reenter the housing market as anything other than student housing?
Neal: If I follow your question, I think you're asking whether I think they're overbuilding student housing right now. The answer is I absolutely think that.
Ziegler: Yeah. So what would be the consequence of that, if it proves there isn't demand for the supply, to use that term again? What's going to happen? Will we see these buildings convert, try other ways of enticing people in, or is this just going to be a lost cause?
Neal: That's the big question, and I don't know for sure how to answer it because I don't have a crystal ball. But I can figure there are a few possible outcomes involving repurposing the buildings. How do you repurpose something purpose-built for student housing? What are the alternative uses? We can rule out a few right off the bat. Office space, no way. That segment is already hurting a lot, has been ever since COVID, and I don't see that changing much. If it did, the last place you'd want to do it is where these buildings are, given the amount of reconfiguring it would take. Could you make it into market-rate housing? That's the most obvious option, but for the reasons we just discussed, it's not a great fit either.
Ziegler: If you're a family who needs three or four bedrooms, you'd probably rather be in a single-family home in the suburbs.
Neal: That's true. It would be a rare family that would choose to locate there unless the price was so low it became essentially private-sector affordable housing. And I mention affordable housing because that's another thing they could pivot to at some point. There seems to be plenty of demand for that, so that could be the future of some of those projects. Not all of them can be winners. How many will be losers? We don't know.
Ziegler: You've tended to build in the more urban area of Eugene, and this new project is downtown. Many of your others have been in the university area or pretty close in, the kind of urban-style living someone might enjoy. What do you think is the future of the downtown area?
Neal: Are you talking about the downtown core? It's important to define your terms.
Ziegler: Yeah, I think either the downtown core or the greater area, maybe the area for folks who bike-commute into their downtown job. That general area, I guess, and if you see a difference, please tell me about both.
Neal: Let's start with the downtown core. For starters, there haven't been any new market-rate housing projects in the downtown core in over half a century, with the exception of a few that received public subsidies to help. A couple that have been pretty successful are just outside the edge of the downtown core, specifically the High Street Terrace on the east side and Broadway Place on the west side. Those are doing well, from what I understand, and it's nice to have those close to downtown. But for downtown to be more vibrant and have a feeling of comfort, so people feel they can go down there and see a place that's clean and safe, a lot of effort and thought is currently going into how to crack that nut, and some promising things are underway. One of our citizens just donated something like $140,000 to create a workforce that will spend a lot of time with a physical presence downtown, personally interacting with people who are unhoused in that area to try to help them out, and to try to minimize or eliminate the bad behavior some of those people engage in too regularly. But there are those who think that if we have more general citizens of our community, working people and families living downtown, just the presence of those populations in great numbers will tend to discourage those undesirable elements from hanging out in the downtown core by their very presence. So the Butterfly project represents a very nice start in that direction. If we fill that building with 100 units, maybe 200 or a little more people would now be living downtown, where almost none live now in market-rate housing. That would be a tremendous advantage for our city, and hopefully the start of a movement that gets more people living in and around downtown.
Ziegler: Dan, thanks for inviting me into your lovely office here, just off Pearl Street, and letting me sit down and take some of your time today.
Neal: Hey, it's been a pleasure, Zac. Thanks for taking the time to ask about this. I think the more these topics we've addressed today are out there in the public, and the public has a chance to reflect on what we're trying to do, the more good things will happen, which will eventually transform our downtown into the vibrant, safe and clean area we all very much want it to be.
Ziegler: That was Dan Neal, the founder of Paradigm Properties. This has been Oregon Rainmakers from KLCC. I'm Zac Ziegler. Thanks for listening.
