Developers Want Malls to Become Warehouses or Offices. It Is a Slog.

By Esther Fung Updated Jan. 19, 2021 8:40 am ET
Gwinnett Place Mall in Duluth, Ga., has seen many plans, including a conversion into a cricket stadium, come and go.
Many developers look at failing malls and envision modern office campuses, bustling warehouses or residential buildings. But some are finding that converting these shopping centers isn’t so easy.
Repurposing a mall is expensive. New owners typically need to shell out hundreds of millions of dollars on construction and labor, developers and brokers say.
Razing and redeveloping a space that spans dozens of football fields is filled with potential land mines. The new investor may own the mall but not the department stores or parcels in the parking lot, which means an owner needs their approval. Owners will also need to seek rezoning and entitlements permits that can take years, during which economic conditions can deteriorate.
Consequently, many recent conversion efforts have gone awry, forcing the owner to sell the property at a discount. In other cases, local government authorities have lost patience and bought the owners out. Brookfield Property Partners LP has made converting all or part of malls one of its prime real-estate strategies. In 2018, the firm bought the two-thirds of mall operator GGP Inc. it didn’t already own, valuing GGP’s property portfolio at around $15 billion. The acquisition reflected Brookfield’s confidence in the mall-conversion strategy, but the real-estate investor has often struggled to make this approach work. Brookfield last week handed over its North Point Mall in Alpharetta, Ga., to a lender, despite having secured rezoning approvals to add hundreds of residential units to the site in 2019. Yet with the two-story property losing tenants in recent years, its value has sunk below its loan balance of roughly $200 million—thereby making little economic sense for Brookfield to continue repaying the loan and investing in the mall’s redevelopment.
The property firm in July canceled plans for the redevelopment of a former Vermont mall after securing permits to tear down the property. Brookfield said at that time that the long-term nature of the development’s next phase didn’t fit with its funds mandate. Analysts said that office and retail tenants are turning more cautious about signing new leases, which made redevelopment projects like this less of a sure bet. An investor’s ambitious plan to turn the struggling Gwinnett Place Mall outside Atlanta into a 20,000-seat cricket stadium didn’t work out, either. The 1.7 million-square-foot mall thrived in the 1980s and ’90s but later suffered from competition by neighboring malls and went into foreclosure in 2012.
Moonbeam Capital Investments LLC purchased the mall in 2013 for $13.5 million. The firm, which specializes in buying nonperforming loans backed by commercial properties, planned to build apartments and offices after demolishing a department store at the mall. But Moonbeam ran out of money and didn’t proceed, according to a person familiar with the matter.
In 2019, an investor proposed buying the site and turning it into a cricket stadium, hoping to appeal to the region’s large Indian population and its enthusiasm for the British sport. The investor, Philadelphia-based businessman Jignesh Pandya, hoped a stadium would be a part of a proposed U.S. cricket league. But the sale fell apart when the two sides couldn’t agree on terms, according to a person familiar with the matter.
In December, county officials agreed to purchase the mall from Moonbeam for $23 million rather than see this valuable site go unused by the community. It couldn’t be determined if Moonbeam, which didn’t respond to requests for comment, made money on the sale after including investment costs.
Not all conversions fail. Some dying malls have become warehouses, prized by logistics companies since they are located near major highways and have ample parking fields. In rare instances, tired shopping centers draw technology firms seeking a site for their headquarters or an office campus.
Local governments often step in to buy the mall to prevent further decay and make the site more palatable for future investors. While local authorities rarely pay top dollar for failing malls, some sellers have broken even or squeezed out a profit if they picked up the malls cheaply after the 2009 recession.
In Norfolk, Va., the Norfolk Economic Development Authority purchased Military Circle Mall and called for investors to submit plans for the site. The city said this month it has shortlisted four groups, including one with entertainment companies and the musician Pharrell Williams.

Car-Safety Regulators Urge Tesla to Recall Around 158,000 Vehicles

Federal regulators are asking Tesla Inc. TSLA 2.23% to recall about 158,000 vehicles over safety concerns in what would amount to one of the biggest safety actions by the electric-vehicle maker.
The National Highway Traffic Safety Administration asked Tesla in a Jan. 13 letter to recall some Model S luxury sedans and Model X sport-utility vehicles. NHTSA asked for the recall because the cars’ touch screens can fail after a few years of use, affecting safety functions such as defogging and back-up cameras.
Some car safety recalls run into millions of vehicles. Though modest by historic numbers, the action would represent a relatively large recall for Tesla, which has far fewer cars on the road than some rivals. The Silicon Valley car maker delivered nearly 500,000 vehicles globally last year, roughly 205,600 of them in the U.S., according to market-research firm Motor Intelligence. Tesla doesn’t break out its sales by region.
Tesla doesn’t have to recall the vehicles, though NHTSA said in the letter that if the car maker doesn’t take the action it has to provide an explanation for its decision. The agency can then escalate the matter to a public hearing and eventually seek to force a recall through the courts.
Sam Abuelsamid, an analyst at Guidehouse Insights, said the recall request was significant and could cost $300 million to $500 million to address.
Tesla in 2018 recalled 123,000 Model S cars over a finding that cold weather could corrode some bolts, potentially leading to power-steering failures.
Tesla’s stock has been flying high in recent months, boosted by growing investor confidence in Chief Executive Elon Musk’s vision of the mass-appeal of electric cars. Tesla last year became the world’s largest car maker by market capitalization and this month became America’s fifth largest public company. The company’s stock is up more than 700% over the past year.
NHTSA’s latest recommendation would affect Model S cars built between 2012 and 2018 and Model X SUVs made from 2016 through 2018, the agency said.
Regulators say the car’s console touch screen, known as its media control unit, can fail when its memory chip runs out of storage capacity. That can happen over time, NHTSA said, as drivers turn on the vehicle. It would take about five to six years on average for the fault to occur, the regulator has determined.
When the touch screen fails, it affects vehicle functions such as defrosting, the driver assistance system and turn-signal functionality, NHTSA said.
The regulatory agency said that Tesla has tried to rectify the issue through over-the-air updates, but it believes the efforts were insufficient. As a matter of federal law, vehicle manufacturers are required to conduct recalls to remedy safety-related defects, the agency said.
The request to recall around 158,000 cars for an issue linked to its computer chips comes as the auto industry struggles with a broad shortage of semiconductors that has been disrupting production world-wide.
Tesla didn’t immediately respond to a request for comment. Mr. Musk has emphasized Tesla’s focus on safety and complained in the past that the company receives outsize attention for incidents that other auto makers also face.
In its letter to Tesla, federal regulators said other manufacturers had issued recalls for issues similar to those caused by the failing touch screens.
As part of the agency’s investigation, NHTSA said Tesla provided data showing that roughly 12,600 of its cars already had experienced the problem, with models made between 2012 and 2015 having a failure rate around 15%. The company also confirmed to the regulator that all of the touch screens eventually would fail, the letter said.
Write to Rebecca Elliott at and Ben Foldy at

Big Real-Estate Firms Turn Buyers of Their Own Shares

Some publicly traded real-estate companies have found a buyer for their shares, despite empty offices, deserted hotels and reeling shopping malls—the companies themselves.
Real-estate owners, including SL Green Realty Corp. and Healthcare Trust of America Inc., say stock-market investors have significantly undervalued their property holdings compared with what they could fetch in the private market. While some of these companies authorized buying back their own shares even before the coronavirus pandemic, they are betting that with a vaccine rollout under way, travel, office work and mall shopping will bounce back after a terrible year for major property types.
Brookfield Asset Management Inc. took this strategy one step further last week, when it offered to buy the nearly 40% stake in Brookfield Property Partners LP it doesn’t already own for $5.9 billion. Brookfield Property, which BAM spun off about eight years ago, is one of the world’s largest real-estate investors and owns the giant office and retail complexes Brookfield Place in New York and London’s Canary Wharf.
The stock market “doesn’t properly value or appreciate the quality of the assets that we own,” Brian Kingston, managing partner of BAM’s real-estate group, said last week.
Shares of public mall and office companies last week were trading at average discounts of 20% and 32%, respectively, to the net asset value of their underlying property, according to real-estate analytics firm Green Street.
“When shares are trading at pretty major discounts, it’s easy to justify share buybacks and possibly privatizations,” said Dirk Aulabaugh, Green Street’s global head of advisory services.
The stock repurchases helped prop up share prices last year but weren’t enough to keep the overall sector from succumbing to the pandemic, which caused hotel, retail shopping and office demand to fall. The real-estate investment trust sector fell 7.5% in 2020, according to Green Street, compared with a rise of 18.4% including dividends for the S&P 500 index.
SL Green, the largest owner of Manhattan office buildings by square footage owned, last month increased its share-buyback program by $500 million, bringing it to $3.5 billion. But its share price sagged, nonetheless. As of Jan. 8, SL Green’s shares were trading at a 41.2% discount to net asset value, close to its biggest ever which was earlier this year, Green Street said.
Buybacks aren’t risk-free. They will be a poor investment if the commercial-property market is slow to recover and these companies’ share prices keep falling.
Still, low interest rates are likely to fuel additional stock buybacks, as well as privatizations and merger-and-acquisition activity, analysts say. In one recent example, Blackwells Capital last month offered to buy Monmouth Real Estate Investment Corp. for $3.8 billion in an unsolicited bid for the owner of industrial property.
Toronto-based BAM spun off Brookfield Property as a separate company in 2013, and the new company’s shares have mostly struggled since then. Its shares were hurt by higher leverage than its peers, a large development pipeline and the high management fees it pays BAM, according to analysts. The company also made an ill-timed bet on malls just as online retail was taking off.
BAM’s leaders hoped that property diversification would appeal to investors. Instead, Brookfield Property never traded better than its worst-performing asset, Mr. Kingston said.
In recent months, BAM executives said they realized winning favor in the public markets for Brookfield Property was going to be a long haul. BAM held back on making its privatization offer earlier in the pandemic even though it might have gotten a better price because the market was so volatile, Mr. Kingston said. In late June, Brookfield Property’s shares fell below $10 a share, though they have recovered since then.
BAM’s proposed bid of $16.50 a share was a 14% premium to the $14.47 closing price of Brookfield Property on New Year’s Eve.
Some analysts believe Brookfield Property shares would face even more pressure if the company stays public. Its dividend isn’t sustainable given its high debt, uncertainty about the commercial real-estate recovery, and the company’s plan to invest heavily to redevelop malls, said Mark Rothschild, an analyst with Canaccord Genuity.
“This company was going to have major issues over the next two years,” Mr. Rothschild said. “Brookfield is to some extent cleaning up a mess” with the privatization plan.
Full Article by Peter Grant of WSJ

Rental Home Construction Climbs as Purchase Prices Surge

There haven’t been so many single-family homes under construction in the U.S. since 2007, yet many of these new houses won’t be for sale.
Investors are building tens of thousands of houses expressly to rent in a bet that Americans will keep flocking to spacious suburban living even if they can’t afford to buy homes.
The Covid-19 pandemic sparked a race for space among Americans, and home prices have surged to records. The gains have outpaced wage growth, straining affordability despite historically low borrowing costs.
Homeownership is unaffordable for average wage earners in 55% of U.S. counties, up from 43% a year earlier, according to Attom Data Solutions, a real-estate analytics firm. Meanwhile, single-family landlords have reported record occupancy and fast-rising rents since the pandemic began.
Individuals, family offices, pension funds and Wall Street’s boldfaced names are shoveling billions of dollars into build-to-rent projects. Home builders are embracing the business of selling houses wholesale to landlords, and even teaming up with them to build neighborhoods that blur the line between houses and apartment complexes.
“Every institutional investor is considering this space,” said Trevor Koskovich, who heads investment sales at the property-deal adviser NorthMarq and recently represented the seller of five gated rental communities around Phoenix. They fetched $235.5 million from a Chicago investment firm.
The 943 one- and two-bedroom houses have their own street addresses, include slivers of outside space and share swimming pools. Their developer, Christopher Todd Communities, has teamed up with the builder Taylor Morrison Home Corp. to replicate these rental villages across the Sunbelt.
A Phoenix-area rental development that Christopher Todd Communities sold to a Chicago firm.
“Our confidence in this opportunity has only increased over the last year,” said Sheryl Palmer, Taylor Morrison’s chief executive. Darin Rowe, who runs the home builder’s rental business, expects the portion of new U.S. homes that are sold straight to investors to exceed 5% over the next few years, up from the historical average of 1% or so.
From clustered cottages to cul-de-sac McMansions, more than 50,000 houses were built specifically to serve as rentals during the 12 months ended Sept. 30, according to John Burns Real Estate Consulting. That tally—well above the 31,000 average over the past four decades—is likely low since it misses one-offs in which end use isn’t specified by building permits as well as houses in typical subdivisions that are sold to investors, said Rick Palacios Jr., the consulting firm’s head of research.
Executives at LGI Homes Inc., LGIH 2.33% for instance, have said that bulk sales to landlords would account for as much as 10% of the builder’s 2020 home sales, or as many as 900 houses.
The build-to-rent boom was sparked a couple of years ago, when the megalandlords that emerged from the housing crisis were looking for ways to grow after they soaked up the flood of cheap foreclosures.
Big companies including American Homes 4 Rent AMH -0.84% and Tricon Residential Inc. TCN -2.41% took to buying houses on the open market. But there is competition from regular house hunters for a limited number of desirable properties at the lower end of the market.
“The banks and lenders stopped providing financing to the lower middle class and so home builders stopped building entry-level homes,” said Thibault Adrien, whose Lafayette Real Estate began buying foreclosed homes a decade ago. “The last way to increase our exposure was to build our own.”
It was counterintuitive for businesses built on deeply discounted properties to start paying more than replacement cost to add houses, said Mr. Adrien. But after testing the strategy outside Tampa, Fla., Lafayette went all in.
Building made it possible for investors to outfit houses with their preferred fixtures and finishes at the onset. Plus, landlords found that renters were willing to pay premiums to move into brand-new houses.
“Imagine if consumers could only lease old cars, not new cars,” said Mr. Palacios. “That’s how single-family rentals have been.”
Lafayette teamed up with the private-equity firm Carlyle Group Inc. and has about 1,200 houses recently completed or under way.
American Homes 4 Rent, which owns about 53,000 houses, formed a $625 million venture with J.P. Morgan Asset Management to add to what was already the most prolific output of new rentals. American Homes 4 Rent has built 2,500 houses in more than 60 neighborhoods and has dozens more subdivisions in development.
Its Celery Cove subdivision outside Orlando, Fla. is representative, with 37 three- and four-bedroom houses that lease monthly from the $1,700s.
Tricon has a similar, $450 million partnership to build rentals with the Arizona State Retirement System. The Toronto firm said it is considering raising another fund, which could have $1 billion of spending power, to buy homes from builders.
Those homes are generally indistinguishable from owner-occupied properties and can be bought and sold one by one. Many investors are opting for projects that are closer to apartment complexes.
Investors and lenders said hybrid projects, such as Christopher Todd’s, can be financed more favorably than the same number of scattered homes while having advantages over apartments, such as being able to lease units as they are ready rather than waiting for an entire building’s completion. Developers can also adjust plans if demand falls short.
“That really mitigates some of the risk,” said Ivan Kaufman, chief executive of Arbor Realty Trust Inc., ABR 0.14% which has originated about $1 billion of loans to build-to-rent projects over the past two years.

Londoners Searching for More Space During Covid Are Buying Up English Country Manors

The pandemic is having an unexpected side effect. Suddenly, Britons are eager for the space and grandeur of a country manor house. They are breathing life into Britain’s prime country house real-estate market after a malaise in that sector that has lasted for more than a decade.
Sales volume of country homes priced between $4.1 million and $5.5 million was up 70% between May and November 2020 compared with the five-year average, while sales of homes between $5.5 million and $6.8 million were up 78% in the same period, according to Chris Druce, senior research analyst in Knight Frank’s residential research team.
“It has been a complete shift,” said Philip Harvey, a buying agent and senior partner at Property Vision. “We are incredibly busy. People are making decisions. They are bringing forward five-year plans and focusing on lifestyle. They want to be safe, and they want their families to be happy.”
The Hermitage, some 100 miles west of London, has five bedrooms and two bathrooms, and comes with a coach house and 0.7 acre back yard.
Mr. Harvey’s optimism is echoed by the latest Knight Frank prime country house index, which monitors the performance of rural real estate. It found that homes priced between $4.1 million and $5.5 million have enjoyed the strongest bounceback, with sales price growth of 2.9% during the third quarter of 2020. The homes priced $5.5 million to $6.8 million rose by 2.4% in the same period, while property costing $6.8 million and up increased by 1.4%.
Country houses that are within commuting distance of London have done particularly well: In the $2.7 million and up sector for country homes in the south and southwest of England, approximately one to two hours commute to London, price growth hit 8.4% and 8%, respectively, in 2020, according to Savills.
The Manor House is a landmark country house dating from the Queen Anne era (1702 to 1707), and features large reception rooms, high ceilings, fireplaces and wall paneling. The property has eight bedrooms and five bathrooms, is 6,386 square feet, and is set in 23 acres of grounds which include a tennis court and swimming pool, and a series of outbuildings. In the county of Wiltshire, the house is 80 miles west of London. Agent: Savills
These price rises mark a reversal in fortune for the prime market. In 2019, the sales prices of country houses in the $4.1 million to $6.8 million bracket fell by around 1%, according to Knight Frank, while those priced at $6.8 million and over were down by just over 5%. The long-term trend was even worse: The average sales price of prime country homes worth $2.7 million or more was down 18.7% between the peak of the market in 2007 and 2019, according to Savills.
As a result, buyers can get a lot of house for their money in the English countryside, including the 9,462-square-foot Tormarton House, listed with Strutt & Parker at a guide price of $8.88 million. This Georgian country mansion in South Gloucestershire is 106 miles west of London and just 12 miles from Highgrove, the country home of Prince Charles. The house, on 10.31 acres, has 11 bedrooms, five bathrooms, and its former stable block has been converted into an office.
Savills is currently listing Belvedere, a landmark, castellated Georgian home overlooking the estuary of the River Exe, in the county of Devon, 170 miles southwest of London. The eight-bedroom, four-bathroom property is set on 13 acres and it has a large wine cellar, indoor swimming pool, sauna, and gymnasium. Belvedere measures 7,743 square feet, and is listed for $6.83 million.
The change in mood is good news for Mark Venn, 51, whose country house has been for sale since November 2019. Triscombe House—which is in the county of Somerset and 174 miles southwest of London—has been a full-time home to him, his wife Deborah Venn, 46, and their son Andrew, 13, since 2010. They bought the property as a fire-damaged wreck in 2003. After overseeing the landmark house’s restoration, it was used as a holiday home before the couple decided to leave London for good and move in full time.

The Big Thaw: How Russia Could Dominate a Warming World

Climate change is propelling enormous human migrations as it transforms global agriculture and remakes the world order — and no country stands to gain more than Russia.

by: Abrahm Lustgarten on Full Article Here

A soybean field in Russia’s remote Far East that is farmed by a Chinese entrepreneur named Dima. As the planet continues to warm, vast new stretches of Russia will become suitable for agriculture. (Sergey Ponomarev for The New York Times)

IT WAS ONLY November, but the chill already cut to the bone in the small village of Dimitrovo, which sits just 35 miles north of the Chinese border in a remote part of eastern Russia’s Jewish Autonomous Region. Behind a row of sagging cabins and decades-old farm equipment, flat fields ran into the brambly branches of a leafless forest before fading into the oblivion of a dreary squall. Several villagers walked the single-lane dirt road, their shoulders rounded against the cold, their ghostly footprints marking the dry white snow.

A few miles down the road, a rusting old John Deere combine growled on through the flurries, its blade churning through dead-brown stalks of soybeans. The tractor lurched to a halt, and a good-humored man named Dima climbed down from the cockpit. Dima, an entrepreneur who farms nearly 6,500 acres of these fields, was born in the Liaoning Province of northeastern China — his birth name is Xin Jie — one of a wave of Chinese to migrate north in pursuit of opportunity in recent years. After Dima’s mostly Chinese laborers returned home this year amid the COVID-19 pandemic, he has been forced to do much of the work himself. Bundled against the wind in a camouflage parka, he bent to pick a handful of slender pods from the ground, opening one to reveal a glimpse at Russia’s future.

A great transformation is underway in the eastern half of Russia. For centuries the vast majority of the land has been impossible to farm; only the southernmost stretches along the Chinese and Mongolian borders, including around Dimitrovo, have been temperate enough to offer workable soil. But as the climate has begun to warm, the land — and the prospect for cultivating it — has begun to improve. Twenty years ago, Dima says, the spring thaw came in May, but now the ground is bare by April; rainstorms now come stronger and wetter. Across Eastern Russia, wild forests, swamps and grasslands are slowly being transformed into orderly grids of soybeans, corn and wheat. It’s a process that is likely to accelerate: Russia hopes to seize on the warming temperatures and longer growing seasons brought by climate change to refashion itself as one of the planet’s largest producers of food.

Blumberg Joins Rush of Property Firms Raising Funds for Distressed Deals

Blumberg Capital Partners is joining the growing number of real-estate investment firms raising capital in anticipation of a wave of distressed commercial properties hitting the market as a result of the pandemic.
The company, based in Coral Gables, Fla., is planning to raise $1 billion next year to buy high-quality office buildings primarily in Florida, Texas and other states with low taxes and costs of living compared with states like New York and California. The fund managed by Blumberg’s American Ventures division will be the company’s fifth distressed fund since 1992 but the first one it has raised in the past decade, according to Philip Blumberg, founder and chief executive.
“In this market we expect discounts of up to 35%,” Mr. Blumberg predicted. “It will be the best buying opportunity since 2010.” Numerous other investment companies also think that historic opportunities await because of the havoc wrought to the commercial property market by the pandemic. Their thinking is that prices will plummet because fear of contagion has kept people away from malls, airports and office buildings. Other companies that have raised or are raising distressed funds include KKR & Co., Kayne Anderson Real Estate and Terra Capital Partners. Heavyweights like Brookfield Asset Management and Starwood Capital Group are sitting on billions of dollars in cash and capital commitments that could be used for that purpose. So far, there have been few distressed property deals in the nine months since the pandemic hit. But that isn’t surprising this early in an economic downturn, analysts say. Distressed sales didn’t start until more than one year into the financial crisis of 2008 and didn’t reach their peak until mid-2010, according to data firm Real Capital Analytics Inc. “It’s not something that happens overnight,” said Jim Costello, a Real Capital Analytics senior vice president.
Signs are growing in the current crisis that landlords owning billions of dollars worth of commercial property are having trouble paying their debts. In November, 8.2% of loans that were converted into commercial mortgage-backed securities were 30 days or more delinquent, compared with 2.3% one year earlier, according to Trepp LLC.
Stress also is showing at banks, by far the largest commercial-real-estate lenders. The risk ratings that banks assign to commercial-property loans have been steadily rising, particularly for loans backed by retail and hotels, representing a deterioration of credit quality, according to a Trepp analysis.
“Thirty percent of lodging loans are now in categories which have risk ratings indicating that banks expect some level of loss,” said Russell Hughes a Trepp vice president, in an email.
Loans backed by office buildings have performed better than retail and hotel loans during the pandemic. Office tenants typically sign leases of at least 10 years and most have stayed current on rent even if most of their employees have been working from home.
But Mr. Blumberg pointed out there are signs of distress among office building landlords as well. Tenants are dumping millions of square feet of sublease space on the market in many cities, putting downward pressure on rents, he noted.
“It’s going to be a tough year for landlords this coming year,” Mr. Blumberg said.
The new Blumberg fund will seek to buy properties with values of more than $50 million that are priced below what it would cost to replace them with new development. It will target markets in Sunbelt states that will benefit in the coming years from increasing demand from tenants leaving higher-cost states, Mr. Blumberg predicted.
“We anticipate that trend continuing for years,” Mr. Blumberg said.

‘Startup City’: Accelerated Growth Strains Austin

AUSTIN, Texas—A few years ago, some blocks of Austin’s South Congress Avenue featured a castle-themed wax museum and comic book shop, a neighborhood bar with $1 taco deals, an auto shop and, in season, a Santa Claus on horseback.
Then, as at so many other places in Austin, the construction cranes came.
Those blocks recently reopened with a strip of modern urban buildings with shops offering national brands from Lululemon to Le Labo perfumes. The $2,000+ private membership club Soho House and an Hermès store are on the way. Office tenants include accounting and consulting firm Deloitte and private-equity firm Tritium Partners LLC. The project’s developer, Andrew Joblon, said he saw a need for national luxury brands in a place where more well-paid executives were coming. To Brad Somers, a manager of the Twomey Auto Works that was there 28 years before its lease was terminated, it was another reminder that some longtime Austinites can’t afford their own city any more. “It pains me to drive by it,” he said. Austin has tried hard to hang on to its particular culture over years of booming growth and popularity, which have attracted money and energy to the city but also brought rising rents and traffic congestion.
But the pace of change is accelerating as companies and remote workers relocate to what they see as the next tech metropolis, in some cases fleeing California. “Austin is a startup city,” said J.D. Ross, a general partner at venture-capital firm Atomic, who moved to Austin just a month ago from the San Francisco Bay Area. “Everything is growing quickly. The airport is adding new gates every year.”
Austin is now one of the fastest-growing cities in the U.S., with a population of about a million, versus 675,000 in 2000.
Oracle Corp. is the latest company to announce a headquarters move to Austin, after a flurry of software and venture-capital firms in recent months. An Apple Inc. campus and Tesla Inc. factory are under construction on the city’s north and south sides. Tesla Chief Executive Elon Musk recently confirmed he too has moved to Texas.
Gov. Greg Abbott said he expects Tesla’s presence in the region will ultimately be far bigger. He said he is talking with Mr. Musk about the potential relocation of Tesla’s headquarters to Texas.
The pandemic also has spurred moves to Austin. Some New Yorkers and San Franciscans, now working remotely, have come for lower rents, great bars and year-round warmth. Between April and October, the Austin metro area saw the highest ratio in the country of arrivals to people leaving, according to LinkedIn.
The arrivals have provided the economy with a boost as local businesses struggle with fallout from the pandemic. But they also are bringing the city more of the same high costs and gridlock they are escaping.
Those issues aren’t new. It has been 20 years since the onetime town of college professors, state employees, musicians and plentiful beer adopted the slogan “Keep Austin Weird.” Riffs on that have sprung up in other cities seeing fast growth and an influx of California cash, such as Portland, Ore., and Boise, Idaho, as they too try to hold on to local flavor and affordability.
But what is playing out in Austin now is on a sped-up timeline. The prospect of the once laid-back city turning into another San Francisco, crowded and ultraexpensive, feeds intense political wrangling over zoning, density, transportation and city social programs.
Many tech leaders and workers say clustering is good for innovation, and they wanted to move to Austin because others were. Some new arrivals say they wanted to be in a city with a socially progressive reputation, but also like limited regulations and the lack of a state income tax.
City and state leaders, often at loggerheads, have celebrated the relocation of people to Austin while disputing whose policies provide the draw.
Mr. Abbott noted that high-profile businesses have made or planned moves to other Texas cities as well, such as Hewlett Packard Enterprise Co.’s recent announcement that it is moving its headquarters to Houston. The Republican governor credited the state’s business-friendly policies. “Regulations are a hindrance to innovation,” he said. “The leaders of these organizations are not coming to Austin for socially liberal reasons.”
Austin Mayor Steve Adler said the city’s values are a natural fit for startups. “It’s progressive socially and a really entrepreneurial, innovative, creative, welcoming place. A place that’s risk-tolerant, where it’s OK to be different,” said the mayor, a Democrat. Mr. Adler has said he moved to the city in the late 1970s to attend the University of Texas because it was his least expensive law school option.
In recent years, more people have moved to Austin from elsewhere in Texas than from out of state, according to census data. The city is relatively young, with many families and children. Still, the influx from Silicon Valley, in particular, has caught the attention of locals.
Charlotte Sanders, a real-estate agent at Kuper Sotheby’s International Realty, said that over the past six months, more than half of the homes she has been involved with were sold to Californians. She said she gets one to two new clients from California a week, including hedge-fund managers, tech employees and celebrities, and now “the Oracle people are starting to pour in.”
Patrick McKenna, a tech investor, moved to Austin from San Francisco last year to be close to the next wave of startups. He dreamed of upgrading from an apartment to a house with a pool, within walking distance to shops and restaurants.
He bid on two homes and lost. Fifteen minutes into a tour of another home, he turned to his real-estate agent. “I said, ‘This house is going to sell today,’” he recalled. “She goes, ‘This house is going to sell in the next hour.’”
He made an offer on the spot: $1.3 million, all cash, for the 2,500-square-foot home, and was willing to close in seven days. He got the house. There were 12 backup offers, he said.
Many longtime Austin residents have struggled to stay in their homes, particularly on the city’s east side, traditionally home to Black and Hispanic families. The area has rapidly sprouted strips of popular bars, apartment complexes and expensively rebuilt houses. Austin is one of the most economically segregated cities in the country, according to a 2015 analysis by the Martin Prosperity Institute, then part of the University of Toronto.
Elsewhere in Texas, “you also see neighborhoods that are gentrifying and families that are experiencing displacement amidst that, but what’s unique about Austin is the pace at which it’s occurring,” said Heather Way, a University of Texas professor who grew up nearby and co-wrote a 2018 study on gentrification in the city.
Many believe a solution lies in more housing and better transit, saying Austin wasn’t built for what it has become. Last year, after years of political battles over the city’s 1984 housing code, City Council members moved to adopt a more density-friendly update.
Greg Anderson, director of community affairs at affordable-housing nonprofit Austin Habitat for Humanity, vowed he would cut his hair only when the update was done. It stalled again in a court dispute. Mr. Anderson’s hair is down to the upper part of his back.
While his personal strike is unusual, his passion over the housing-code rewrite is not. Urbanists and housing proponents such as him see the overhaul’s primary changes—allowing more types of housing, greater density and supplementary units in houses—as the way to save the city from increasing unaffordability.
They say they are keen to avoid the mistakes of San Francisco, which became expensive in part because it made it so hard to build housing. Opponents of the code rewrite consider it a threat to single-family neighborhoods and an acceleration of the development that is changing the city.
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Written by: Elizabeth Findell and Konrad Putzier