‘Coolness Factor’ Draws Developers to East Austin, Tex.

Source: The New York Times

AUSTIN, Tex. — About five years ago, a young bartender in downtown Austin told Josh Delk that she was renting a house on the other side of nearby Interstate 35, in the lower part of a rambling East Austin neighborhood that stretches from the Colorado River north to 12th Street.

The neighborhood was perceived to be a place to avoid after dark, so the fact that she rode her bike to and from work, often in the wee hours, was eye-opening. At the time, Mr. Delk, a vice president with the commercial real estate firm Transwestern Development Company, was overseeing the construction of apartments in a trendy area south of the river and was courting her generation.

“I said, ‘You’re my demographic,’” recalled Mr. Delk, who had witnessed fits and starts of development in East Austin over the years. “And I thought, ‘Has East Austin finally arrived?’”

He and other developers quickly discovered the answer. Bar and restaurant operators were expanding downtown’s vibrant Sixth Street entertainment district into East Austin. Millennial renters and single-family home rehabbers were moving in and gentrifying the predominantly Hispanic neighborhood. The Lance Armstrong Foundation’s move into a converted East Austin warehouse had also generated interest among creative companies looking for new locations. (It is now the Livestrong Foundation.)

In 2014, Transwestern acquired property at Sixth and Comal streets and last year completed a 346-unit apartment building with ground-floor retail and restaurants. It also developed and then sold a 94,500-square-foot office building occupied by Condé Nast and the concert and event promoter C3 Presents, among others.

“This is a creative neighborhood,” Mr. Delk said, “and edgier companies are positioning themselves appropriately.”

Developers have built hundreds of apartments in the area, and more are on the way. They’re primarily targeting blocks on either side of Sixth Street in proximity to the Plaza Saltillo commuter rail station at Fifth and Comal streets. Developers have also added about 140,000 square feet of office space, and they’ve proposed adding some 770,000 square feet in the coming years, according to the Austin real estate brokerage Aquila Commercial.

“The main reason people are coming to the east side is for the coolness factor,” said Jay Lamy, a principal with Aquila Commercial who represented C3 Presents and is an investor in the neighborhood. “If we can keep the residential, retail, restaurants and hotels coming, it’s only going to fuel the desire for more companies to locate here.”

The most ambitious project proposed to date, however, has been the most contentious. The Endeavor Real Estate Group, a local developer, and Capital Metropolitan Transportation Authority, Austin’s regional public transportation provider, have joined to turn an old 11-acre rail yard into a “transit-oriented development” — a dense mix of uses near public transportation — at Plaza Saltillo. The plan calls for 800 apartments, 120,000 square feet of office space and 110,000 square feet of stores and restaurants. Columbus Realty Partners, a Dallas-based apartment developer, is also a partner. The developers have agreed to lease the rail yard from Capital Metro for about $200 million over 99 years.

The commuter train began operating in 2010. Four years later Capital Metro selected Endeavor to develop the Plaza Saltillo site after the recession delayed earlier building plans. Capital Metro began formulating its proposal in the late 1990s, said Gerardo Castillo, a senior vice president and chief of staff for the organization.

“We’ve incorporated a lot of community feedback from over the years into the overall vision of the development,” Mr. Castillo said over the lunch-crowd din of a Tex-Mex restaurant two blocks north of the station. “Planning has always been about ridership, mixed-use development enhancing the community and linking land use with transportation.”

The burgeoning bar and entertainment district along East Sixth Street that helped bring about development in lower East Austin has also started to attract some of the city’s South by Southwest music festival events, which is coming up in March. Credit Drew Anthony Smith for The New York Times

The Austin City Council last week held the first of three required votes on the plan and gave it preliminary approval. The Council, however, sided with neighbors who were unhappy over the Austin Planning Commission’s decision to allow the office building next to Interstate 35 to rise 125 feet, more than double the height prescribed for the neighborhood, and reduced it to 70 feet.

Still, the Council anticipates that developers and residents may reach a compromise that could allow the office building to rise more than 70 feet. Capital Metro has said that maintaining it at 70 feet could reduce additional lease revenue by $36 million over the life of the lease, or a net present value of $4 million.

Residents are also questioning the size of the developer’s affordable housing component, which, at 141 units, is a little less than 18 percent of the project. Some residents and rival developers were under the impression that 25 percent of the apartments would be designated as affordable.

Endeavor officials declined to comment but have publicly stated that the affordable component remains consistent with its original plan, and Capital Metro issued a letter to the council last week confirming it.

The Condé Nast offices in East Austin. “This is a creative neighborhood,” one developer said, “and edgier companies are positioning themselves appropriately.” Credit Drew Anthony Smith for The New York Times

The expectations of a greater number of affordable housing units could stem from confusion over city policy, some say. In return for the ability to build denser housing near transit stations, developers are required to designate 10 percent of the project as affordable, said Jerry Rusthoven, acting assistant director for the Austin Planning and Zoning Department. The city then has the option of buying up to 15 percent of the project to increase the total affordable housing component to 25 percent. As of mid-February, the city had not committed to exercise that option at Plaza Saltillo.

Additionally, a special planning district around Plaza Saltillo allows for greater zoning flexibility, Mr. Rusthoven said. Still, residents want confirmation that Endeavor is doing all it should in return for its density and height bonuses.

“There is never going to be an opportunity to develop 11 acres so near downtown Austin again, so we have to make sure we get the maximum benefit to the community and the city,” said Jose Valera, chairman of the East Cesar Chavez Neighborhood Planning Team in East Austin, a volunteer group organized in 1999 to represent resident views on development.

Mr. Valera argues that a 125-foot office building at Plaza Saltillo will encourage other developers to seek a waiver of the 60-foot height restriction. And developers say that skyrocketing property values in the neighborhood will require the development of denser projects to generate returns.

Property prices have climbed to around $350 per square foot from $160 per square foot in 2012, according to Mr. Delk and Mr. Lamy. The average office rental rate in East Austin is around $30 per square foot, up from $10 per square foot in 2011, according to Aquila Commercial. That’s still some 20 percent cheaper than downtown rates, Mr. Delk said.

“We’re almost out of developable sites downtown,” Mr. Delk said, “and the only direction to grow is east.”

Mr. Valera acknowledges that some residents are in favor of the Plaza Saltillo development and that East Austin growth will continue. Even so, he laments the speed at which gentrification is transforming the neighborhood.

“This used to be the part of Austin that was perceived to be dangerous or undesirable, but if you grew up here, it was just your part of town,” said Mr. Valera, sitting in a Seventh Street burger joint and tavern that generations ago housed his great-grandfather’s tortilla factory. “Change has always been happening, but in the last few years, it seems to have happened so fast.”

Josh Delk, a vice president with the commercial real estate firm Transwestern, at the Arnold, a new housing and retail development in East Austin, where property values are booming. “We’re almost out of developable sites downtown,” Mr. Delk said, “and the only direction to grow is east.” Credit Drew Anthony Smith for The New York Times The roof of the Arnold apartment development, at East Sixth and Comal streets, which is east of Austin’s downtown entertainment district, on the side of Interstate 35 that was once perceived as dangerous. Credit Drew Anthony Smith for The New York Times Downtown Austin, as seen from East Sixth Street in East Austin. Credit Drew Anthony Smith for The New York Times