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CC WS 2021 08 09CHANHASSEN CITY COUNCIL WORK SESSION MINUTES AUGUST 9, 2021 Mayor Ryan called the work session to order at 5:00 p.m. COUNCIL MEMBERS PRESENT: Mayor Ryan, Councilwoman Rehm, Councilwoman Schubert, Councilman McDonald, and Councilman Campion. COUNCIL MEMBERS ABSENT: None. STAFF PRESENT: Laurie Hokkanen, City Manager; Charlie Howley, Public Works Director/City Engineer; Kelly Strey, Finance Director; Don Johnson, Fire Chief; Kate Aanenson, Community Development Director; Bob Generous, Senior Planner; Sharmeen Al-Jaff, Senior Planner; MacKenzie Young-Walters, Associate Planner; Jerry Ruegemer, Park and Recreation Director; and Rick Rice, IT Manager. PLANNING COMMISSIONERS PRESENT: Mark von Oven, Laura Skistad, Doug Reeder, Eric Noyes, Erik Johnson, Kelsey Alto ECONOMIC DEVELOPMENT COMMISSIONERS PRESENT: James Ebeling, Eric Anderson, David Kessler, Ryan Soller, Jim Sanford PUBLIC PRESENT: Cathy Bennett Urban Land Institute Minnesota Sam Newburg Urban Land Institute Minnesota Evan Doran Urban Land Institute Minnesota Ra’eesa Motala Urban Land Institute Minnesota Mark Kunkel Urban Land Institute Minnesota URBAN LAND INSTITUTE WORKSHOP WITH PLANNING COMMISSION AND ECONOMIC DEVELOPMENT COMMISSION Cathy Bennett reviewed the PowerPoint presentation. • Noted that national trends on work from home differ based on age, progress in career • 30% of workforce is unable to work from home. City Council Work Session Minutes – August 9, 2021 2 • Retail sector was changing before the pandemic but it accelerated rapidly. Last year, we thought 60% of retail outlets would remain empty. Things don’t seem as bleak now, although stores in those spaces may be different. • Grocery sector changes expected to be more permanent. • Nationally, there was a 10-15% reduction in commuting. In Minnesota, the average commuter was stuck in traffic only 9 hours in 2020 vs. 52 in 2019. Traffic seems to be increasing again and we don’t know where this is going. • Huge growth in: delivery services and bike sales. The panelists introduced themselves. Question 1: Recent trends in retail sector that cities should consider? Sam Newberg: the first wave was Greenfield development, the second wave is redevelopment. Think of St. Louis Park – more mixed-use developments. That wave is approaching/has reached Chanhassen. Expect to grow up more than you grow out. Maple Grove and Woodbury, as examples, are experiencing the same. There’s a concept of the “15-minute city,” where you can get everything you need within a 15-minute trip. This concept got more attention during the pandemic as people were less willing to move about. Thinking of retail – 95% of online Target orders are picked from a store shelf, not a warehouse. So the shift to online sales is true, but it isn’t all from a warehouse. Retail hasn’t gone away and it won’t, but it is changing fast. In- person shopping is coming back, spending is back up. Of course we don’t know what the Delta variant phase of COVID will be like. It’s a little too early to say what particular stores might be looking to expand. Note that as the city increases housing and density, more retail demand will be created too. As for office, many companies have pushed off their return to the office. Impact to the market is anyone’s guess. There will surely be less office space overall. Working from home is here to stay and will be a part of our lives going forward. Wouldn’t foresee new office building built in Chanhassen in the near future. Evan Doran: Renters want the same things that owners want – the 15- minute city is a very prevalent concept. That occurs in a downtown environment, whether that’s downtown Chanhassen or Minneapolis. Question 2: How are the changes in retail or office markets going to impact the industrial market? Ra’eesa Motala: Industrial is the darling of commercial real estate right now. The onset of COVID pushed pricing to the next level. Two years ago, $5/square foot is up to $6 or $6.50 with 4 to 4.5% increases per year. What’s unique and interesting about our market is that we’re not a port city but we have large number of Fortune 500’s. We saw two years of e-commerce growth in a single quarter. We’re in a very tight spot. Serious need for cold storage – food. Cold storage City Council Work Session Minutes – August 9, 2021 3 is very hard to spec out and build without a tenant in mind. Clients’ issues with cities right now is that cities want the use to be attractive and that pushes these uses to the edges. Makes the 15- minute city from a workplace perspective. Outdoor storage is huge for industrial and it’s almost impossible to find. The last mile struggle is up in the air right now – not sure what Minneapolis and St. Paul are planning to do with 280 corridor. Recycling plant in Minneapolis is looking for a new home and it will likely be somewhere farther away. Vertical warehousing is a new conversation – instead of building out, build up to create more useable spaces. This allow cities to grow jobs and tax base and retain users. Retail is definitely impacting. More retail is looking to backfill to deal with supply shortages. Retail struggles to keep up with demand. For office, there’s always a need for headquarters or flagship office. Very difficult to ascertain who wants to go into work and who doesn’t and how much space they need. Medtech leading trend in work from home, whic h will drive desire for more amenities in housing, especially multi-family. Chanhassen has good opportunity to retrofit. Ra’eesa asks cities to give a chance to explain their use and not get stuck on the “ugly” use, try to work together. Blackstone purchased a $665 million portfolio of industrial last year. They are now the largest landlord in Minneapolis. Kate Aanenson added that we have a number of food storage users in Chanhassen now. We have seen some want to expand and be unable to find space in Chanhassen. Mayor Ryan asked Ra’eesa to expand on the incentives that are worthwhile to companies. She shared an example of a city in South Carolina that offered grant money that went into job training rather than asking for tax incentives. Another way is to have the city create shared amenities for an industrial user and the city to share in a co-working space. Mark Kunkel shared that industrial is so hot that pre-sales by investors are occurring before a tenant has been identified. Industrial market seems to have a long wind at its back. Ra’eesa said we have 5M square feet under construction in the Twin Cities. The vacancy rate is about 4.3%. There’s even a trend of businesses who own buildings selling and going to lease because they can command such prices for their buildings. With Blackstone acquisition of Welch Property portfolio, they are the largest landlord by 4X. Industrial rents will continue to go up. Question 3: What role does housing play and why it is important? Evan Doran: High quality housing is an important component to an attractive city. Renters move every 16-18 months. Doran sees 12-month lease with 18-month renewal and then they move somewhere new. Consumers are thinking hard about where they really want to live. Rents are increasing, although not as much as single-family homes. Rental gives folks the opportunity to “cycle” within a community – come here while they look or build, or free up a single-family home while they can stay in the community. Chanhassen is in an interesting space – has unique identity. Close to city, but also a suburb. Sometimes they see that cities make the mistake of overlooking multifamily housing because they assume it’s not a good fit for their community. City Council Work Session Minutes – August 9, 2021 4 Shared example of Shakopee project, which is 32 units per acre. A project in Hopkins is 80-100 units per acre. Doran likes to understand goals of the city for the parcel they are looking at, make sure the project is a good fit and can be a financial success. Doran builds high amenities – gyms, pools, etc. but they need higher density to justify those amenities, usually meaning at least 100 units in a project. Flexibility is key, not being too rigid on density or zoning. Demographically, Doran has a barbell, meaning 45% of their renters are 50+ who are choosing to rent rather than own. Another 40% are millennials, young people. There’s a demographic loop that’s very important to understand impact on city. Rent ers are looking for city stuff too – bars, gyms, restaurants, salons. They create demand for those services to a greater degree. Construction costs – $3M in lumber on 321 units two years ago and at peak this year $8M in lumber on 305 units. Lumber costs have come down a bit but will remain high at $550-600 per board foot. Other material inputs have risen, too. This will mean higher rents. Local amenities are key to driving rents. Will need the density to make it pencil (numbers work). Density can be a scary word – encourage everyone to see and feel actual projects to understand how it doesn’t have to be and can fit so nicely. Renters are “trying on” Chanhassen and may become long-term residents. James Ebeling asked how projects go in communities that are not as walkable and connected. Evan responded that they can create it, to some degree, citing an example in Maple Grove. Creating retail is really tricky, because you need higher numbers than you can create with one project. Also, people do want multifam ily housing in areas that are not “hustle and bustle.” Cities should understand what their selling points are, what people are looking for in your area. If you have a nice piece of developable land, think about the long-term uses before you make decisions on individual parcels. People want to live, work, and play in close proximity right now. Mark von Oven: Who are our competition? How are we different, good or bad? Evan Doran: When we look at sites, we are city agnostic. We look at the site specifically and what’s right around that site – trails, transit, restaurants. Looking for vibrancy and ability to generate rents in the $2/foot range. Can the market support that or can we bring it? Can’t really build on less than 2.5 acres. How do the returns on investment compare to other sites and what’s the best opportunity. Mayor Ryan: Is the flexibility on density and zoning based on the written polices or through conversation? Evan Doran: Both, we do look at the zoning policy and comp plan. Basically, the more certainty the developer can get, the more willing we are to do due diligence. Established support for density is a great start. If your highest density in code is 15/units per acre, that’s a bad start. If we see tolerance for 40-50, we get more interested. Cities like Chanhassen will only have a few City Council Work Session Minutes – August 9, 2021 5 high-density projects in a market cycle so they shouldn’t worry about getting too much high- density development. Question 4: What are the investment metrics needed to make quality development financially feasible? Mark Kunkel: It’s yield on cost. Right now, that target is 6%. Investors are solving for an internal rate of return as they deploy their capital. Small, family-based investments value stable returns that protect their capital. Foundations and endowments take a little more risk. The far end of the spectrum has highest appetite for risk. They need to beat the market. Very simply, all the capital today is funneling into two property types right now – Multifamily and Industrial. No one is investing in office except the distressed properties market. It’s on pause. Industrial and Multi-family are red hot. Retail and Grocery is a nervous user. Hotels are taking a pause. So all capital is going into two funnels – Multifamily and Industrial. People who manage capital need to deploy it in order to make money. Investors look to balance risk and reward. Low teens to 20% or more return is possible right now. Different terms of capital too. Build, stabilize, and flip within 5 -7 years is common right now. Cathy Bennett: What does all that mean to a city when the developer is asking for assistance? Mark K unkel: Dig into the capital source. That’s the terms you have to meet if you want the project. It helps if the investor and the capital have worked together before. You want to know that the return is sufficient to keep the project on track. If that margin is too close, the deal can get squeezed out. Developers come to cities in “gap” situations. This is where TIF can be very helpful. Seeing more and more in affordability spectrum. We need more housing, that’s for sure. Not really seeing affordable housing without assistance. ESG investors have mandates to invest with other mandates than return. They will accept a lower yield to accomplish other goals. This is a very new type of investing. Questions from the group: Eric Anderson: The Economic Development Commission is looking to understand how outside opportunities view Chanhassen. How can you get candid feedback without developers posturing? Evan Doran: The challenge is you have to have a database on who shows up, what do they ask for (variances, density changes, incentives). You’ll never know who doesn’t come to your city/who passed without talking to you. Doran comes in with soft approach and looks to see what they are getting back from the city in terms of our asks and questions in order to evaluate cert ainty available in a project. There’s a perception that developers are “all money” but in reality, we’re under a lot of pressure to manage costs, be accountable to investors, make a certain return. If those pieces start to fall apart, need to walk away before too much sunk cost. City Council Work Session Minutes – August 9, 2021 6 Ra’eesa Motala: Sometimes cities get too ambitious with requirements. Projects have to meet underwriting. Cathy Bennett: Be clear about your expectations up front, be consistent from step A to final, be a partner in getting the development done. Developer is investing in your community and if cities can use that lens, can be very helpful. Evan Doran: Be educated about the inputs that we’re working with. City should not surprise developers with additional requirements like parking stalls, affordability components. If you have an unclear policy on a cost lever, we’re less certain about whether a project will work. Really think about your asks and preferences and how they will impact the project’s viability. Laura Skistad: What are you seeing as the need for parking? Evan Doran: 1.5 covered stalls per unit mostly plus more on the outside. We see two people per unit, with two cars, regardless of size of unit (1, 2, 3 bedrooms). One-size-fits-all policy doesn’t always work – we understand our client base and what they need and what we need to be successful. Ra’eesa Motala: We (MSP region) don’t yet live in a place where there is great walkability or transit so we do see need for parking still. Parking standards and requirements are a big deal to industrial users too. Cathy Bennett: Developers really study parking. They need the parking to work in order for their project to work. Their clients and tenants have expectations they need to meet. Evan Doran: We wouldn’t build a project without parking even if you let us. We know what our renters want, they want their car parked inside in the winter. They might love to take the light rail some places, but they still have cars. Sam Newburg: Building parking costs money. If you do a small infill project that doesn’t need additional parking, could make something work that doesn’t otherwise. Agree that 1.5 per unit is reasonable for Chanhassen. Are you putting in electric charging stations in Chanhassen? Evan Doran: Minimum installation is 20% of parking for electric cars. Higher elsewhere. See this trend taking off rapidly. More up-front costs fo r us. But it’s much cheaper to do it at the beginning than later. But it’s really a no brainer for where the world is heading. If you want to have a debate over parking, make it over electric parking. If you can be a city who is pro-electric car charging, you’ll be ahead of the game. Laura Skistad: Do you charge more for those stalls? Evan Doran: Yes, we meter those stalls so they pay for usage directly. City Council Work Session Minutes – August 9, 2021 7 Ra’eesa Motala: Electric parking spots have won/lost projects before. Lucy Rehm: Can you talk more about ESG (Environmental, Social, and Governance) investors and trends in energy? Mark Kunkel: ESG is not mandated. It’s also not very common. ESG investors are charting their own course. Different focuses for investments. Do see growth in use of LEED and green roofs, var iable-flow refrigerant systems. Expensive up front but tenant saves money in the long run. Easy to hire LEED consultant or look at scorecards online. LEED Gold and Silver are not that hard to achieve. Starting to see more ESG investment in diversity and inclusion. Probably will be federal mandates coming but so far they can self-define. Evan Doran adds that the LEED certification/sticker itself can be expensive, even though meeting the goals might not be. Thread that needle. Cathy Bennett: What other trends are there for cities to be aware of? Evan Doran: So many, which ones will stick? Work from home in multifamily, more workspace be it a spare bedroom or den. Stronger demand for three-bedroom units. More work-from-home pods in common space. Looking at cold storage on site. Already have package management systems. People get so many boxes! Do landlords want to be responsible for grocery deliveries? More demand for services – concierge, cleaning. Need to be able to charge for it. Dog washing stations. Apps like Amenify or Rise – book community amenities in your building. REtech or PROPtech. Ra’eesa Motala: More functional. Higher clear height, more automation, loading and access. Cold storage. Vertical warehousing is really going to have an impact. It’s functional. Can be pricey on front end but long-term benefit is real and cool. Laura Skistad: Are you seeing Microliving? Evan Doran: We’re not pursuing but have been a few proposed. COVID hasn’t lent itself to thinking that would be a good option. Rents in MSP are not high enough to drive that kind of demand. Cathy Bennett: But because it’s in other markets, it may come here. May be a trend, may be a way to address affordability. Too soon to tell. Mark Kunkel: Microliving and co-living are popular on the coasts. It will be come here. Shared kitchen, living room, and then 2, 3, 4 secure living suites. Probably will start close to universities. Leases sometime have a 30-day out. Interesting experiment. New version of Murphy bed where the bed raises into the ceiling to create more floor space. City Council Work Session Minutes – August 9, 2021 8 Mark von Oven: Quick fire, if grocery is the old anchor, what will be the new anchor? Sam Newburg: Tough! I don’t think grocery is going away as quickly as people think. Mixed use development with open space. Evan Doran: Physical use spaces – rock climbing! Mark Kunkel: Food, fun and fitness. Coffee. Food not going away. Ra’eesa Motala: Food locker – package delivery of food, retail. Mayor Ryan: Is it the city’s responsibility to market itself or will developers find us? Ra’eesa Motala: Depends on what you’re trying to attract? For industrial, it might help but mostly we’re seeking out the sites we want. We then appreciate the cooperation and ability to work together. Evan Doran: Echo. Common question for cities. Be clear about where you’re headed. Comp Plans can be fluffy – what do you really want? Who are you going to be, where are you trying to go? Does our project fit your direction? More clarity to your vision. We want to work with people who want to work with us. Ra’eesa Motala: And can back it up. Every city says they’ll work with us, but need that clarity. Mark Kunkel: Tour projects. If you like something, approach that developer. FUTURE WORK SESSION SCHEDULE The meeting adjourned at 6:50 pm. Submitted by Laurie Hokkanen City Manager Prepared by Kim Meuwissen