My Turn: Pederson Hill development well-intentioned, but risky

  • By WIN GRUENING
  • Friday, June 10, 2016 1:01am
  • Opinion

Recent discussions of a plan by the City and Borough of Juneau to build a cluster lot subdivision on Pederson Hill were greeted with mixed reactions. City officials characterize the project as an important step in mitigating the high cost of single-family homes in Juneau. However, local developers view this as unwarranted competition that ultimately will not achieve its objective of lower cost housing.

The proposed development is located off Glacier Highway between Auke Lake and the Brotherhood Bridge. By CBJ estimates, it would include 86 small lots of 5,000 square feet each and cost the city $6 million to fully develop with paved streets, sidewalks, curbs, gutters and utilities. With a 30 percent contingency added, the costs rise close to $8 million. To break-even on the project, the city would need to sell lots for $80,000 to $100,000, depending on the final project cost. After buying the land, then adding the cost of site prep, building materials, labor, permitting, taxes, bank fees and selling expenses, local builders question whether it is possible to make a reasonable profit and meet the city’s goal of a $300,000 sales price for a small “down-sized” home that would appeal to potential homebuyers.

Private sector developers question how the lots would be marketed and initially sold. If too many are made available and sold at once, it could negatively affect the existing market and potentially discourage as many housing units as it purports to create. City officials respond that smaller lots aren’t available now and adding some will not compete with existing properties.

The housing “crunch” in Juneau has been well documented and endlessly debated over the years. CBJ has spent hundreds of thousands of dollars studying the issue. And to be fair, city officials have moved ahead on a variety of fronts to attack the problem — which is a very complex issue.

While many of these initiatives are laudable and show promise, it is a big step for our municipal government to get in the business of residential lot development. There’s a great deal of risk and, more importantly, the timing could be totally wrong. The Pederson Hill project study was completed in 2010. During the four-year period from 2008 through 2011, residential building permits were at an all-time low (averaging fewer than 30 units annually) and our population was growing at 3.5 percent. These were compelling numbers when the city evaluated available options to increase the housing supply.

But much has changed since then. Our population has essentially leveled off — showing little or no increase since 2013. Yet, housing activity has jumped dramatically. In 2013 and 2014, 121 and 205 units were permitted, respectively — almost 50 percent of those were single-family dwellings. During the 2014-2015 period, 316 new dwelling units were constructed.

Despite this, the average home cost has continued to rise, primarily because the costs of labor, shipping and materials have also risen. The least disruptive way to lower costs is to increase the supply naturally as the economy allows. Arguably local developers and builders are doing just that although it may take several years for costs and vacancy rates to moderate.

The Pederson Hill project seems even riskier because we don’t yet know the effect of lower oil prices on our local economy. With budget cutbacks and job losses on the horizon, does it make sense to develop a large single-family subdivision now? At this point, CBJ hasn’t conducted a market study to determine the potential demand for this type of housing in a West Mendenhall Valley location.

Another consideration is that demographers nationwide have begun seeing shifts in how younger people view housing. Home ownership is no longer the sure investment it once was and choosing to rent gives younger people added flexibility and avoids the responsibilities and expenses of home ownership. Indeed, the demand for multi-family units in Juneau seems to support this. In fact, CBJ is considering partnering on a 90-unit multi-family project in the Switzer area that could also raise concerns if it competes with the private sector.

Given the risks and unanswered questions on these types of ambitious projects, a more cautious approach makes sense. If the city feels it is imperative to experiment with residential housing options, why not participate on a smaller scale in a public/private partnership with an entity like Tlingit-Haida Housing Authority — reserving a portion of the project for their housing programs that wouldn’t compete with the local market.

In the future, the Assembly might consider a policy authorizing business activity of this size and type only after a formal review of impacts on local businesses. However well-intentioned city planners may be, the decision to develop residential lots or housing for the general public must be considered carefully to minimize any competition with private enterprise.

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