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San Jose's Loss Could Become A Win

Imagine this scenario: A major symphony orchestra woos an internationally renowned conductor to become its next music director. After extensive, high-tension negotiations, the conductor at last accepts the job. The day after, however, the orchestra discovers something disconcerting: The conductor is tone deaf. Truth be told, she does not care much for music. After the inevitable flap, the conductor withdraws from the contract, citing unspecified "unsuitable conditions." Given this situation, should the orchestra feel disappointed or relieved? At the risk of over-simplification, the above situation is similar to the collapse of negotiations in March between the San Jose Redevelopment Agency and the Palladium Co., a New York-based retail developer. The official reason for ending 14 months of talks was that the city and the developer together "concluded after careful and detailed review that the market at this time does not support the large, mixed-use project we originally envisioned," according to a statement by Ken Wong, Palladium's western region manager. Although plans for the project remained sketchy, the developer had proposed 500,000 square feet of retail space, a 350-room hotel, 350,000 square feet of office space and 1,000 residential units spread over a five-block area. Estimates of the construction cost ranged from $750 million to $1 billion. That development sounds appealing for downtown San Jose, which lost much of its original downtown to urban renewal during the 1960s. The city has been rebuilding its downtown almost entirely through redevelopment projects for the past 20 years. That said, the city is better off without this particular project and this particular developer. I think that the "poor market" excuse claimed by both the developer and the city was a fig leaf. True, the office market has tanked the regional office vacancy rates are now about 16% in Silicon Valley as a whole and the hotel business is still suffering from the chill induced by the September 11 attacks. It is also true that the retail market in downtown San Jose is very limited because the city has a small, if growing, base of full-time residents and office tenants who would be the primary patrons of downtown merchants. The large amount of retail proposed by the developer, equal in size to a regional mall, could not compete with real suburban malls less than five miles away. A grocery store, a drugstore and a handful of other businesses that serve locals would do more for downtown right now than one more mall or power center. Not all parts of the project looked like a bad idea, however. The demand for housing remains strong in Santa Clara County and prices are actually rising on single-family homes in some areas, despite the recession and the "tech wreck." San Jose Mercury News reporter Mike Zapler in a day-after story, suggested several additional reasons why Palladium's big feet got cold in California. Among the factors that made the developer chafe, according to Zapler, was the potential difficulty in assembling the five-block property that has at least 40 separate parcels. Conceivably, some of the properties needed to be acquired by the redevelopment agency through its eminent domain powers. Zapler also suggested that the city and the developer were at odds over a subsidy, although neither side has ever mentioned a dollar figure. On the other hand, mayoral spokesman David Vossbrink observed that the city has paid subsidies and condemned property in the past, so those issues may not have been deal breakers in themselves. So what was the true reason for Palladium's departure from San Jose? One clue is that Palladium expected to build this enormous project all at once. That approach makes sense for a developer that wants the city to hand it a big piece of land so that it could build quickly, lease quickly, and then sell to an investor at a healthy mark-up. That is the attitude of a suburban developer, not a genuine urban developer. Palladium is a suburban developer in the sense that the company's idea of development is the old-fashioned, greenfield approach: Build a huge project all at once that defines the character of an area and creates a "destination" where one did not previously exist. Palladium calls itself an urban developer, I suspect, because downtown areas are fashionable and because cities with suffering downtowns are prepared to assist, and sometimes subsidize, such projects. A city, however, is more than a passive staging area for an arrogant mega-project that will define and dictate the character of the city around it. If you want to develop a large portion of a downtown area, you must contend with the reality of cities. Cities are messy and complex. They have many parcels and many landowners. There are historic properties that make master planning difficult, especially when developers want to lay out huge floor areas for national tenants like Gap or Borders or Tommy Hilfiger. There are city officials who are very particular about what they want built in a particular area. My guess is that Palladium did not want to go through the trouble, expense, time and uncertainty to put this large assemblage together and entitle it. When the developer realized that San Jose would be a slow grind, it found a gracious way to withdraw. The city is currently talking to CIM Group of Los Angeles, which was the runner-up when San Jose officials first chose Palladium. CIM currently is rehabbing a group of buildings on Hollywood Boulevard in Los Angeles. Neither life nor real estate development carry guarantees, but I suspect that CIM, if it takes the deal, will fare better than Palladium because of the former's willingness to embrace urban realities and work with them. CIM and other experienced urban developers have a good sense of pitch. They can hear the music of the city. Palladium, in comparison, was tone deaf. There is nothing to regret in Palladium's departure except some lost time, maybe, and the annoyance of having negotiated with a conductor who could not carry a tune.