By John Lang — News, events, development
The City of Morgan Hill invited the Urban Land Institute San Francisco Technical Assistance Panel to help address the following key land use questions:
What are the most important considerations, from both a quantitative and qualitative perspective, that the City should consider when making vacant industrial land policy decisions? What are the policy considerations that should be included in the Industrial Preservation Conservation?
What are the most important criteria that the City should consider when deciding what to do with vacant retail designated land and existing retail center? What policy recommendations should be included in the Retail Concentration Policy?
The panel consisted of the six experts: Lynn Sedway, Principal and President, Sedway Consulting, David Baum, Principal, Municipal Financial Services, Steve Chamberlin, Founder, Chamberlin Associates, Greg Matter, Managing Director, JLL, Josh Shumsky, Managing Director, Newmark Knight Frank and Pam White, Partner, Guild Retail Partners.
Overall Theme. Morgan Hill is experiencing most dramatic inflection point of our time. The unprecedented times caused by the COVID-19 pandemic creates uncertainty as to what is next, and therefore, we cannot rely on past trends as the future may look very different.
A Jobs and Housing Balance study is also important to understand for higher level jobs and housing
Financial Tool Considerations: David Baum, Principal, Municipal Financial Services
Morgan Hill’s assets include an excellent AA credit rating and its strong reliance on its property tax. 30% of the General Fund comes from the City’s property tax revenue. Morgan Hill won’t see a drop in property taxes until 2020-2021 when the County Assessor does Prop A appeals to write down values of property. Morgan Hill’s other key sources of funding include its sales tax followed by Transient Occupancy Tax. The latter two are strongly affected by COVID-19. The City should consider the following potential tax revenue measures.
Tax Revenue recommendations to consider:
Parcel Tax
Increase Property Tax. The City could issue a new property tax that would require a ballot measure and a vote of 50% plus 1 vote for approval.
Sales Tax Increase
Morgan Hill’s current sales tax is at 9%. It could increase its sales tax by ¼ to ½. Gilroy is at 9% and San Jose has a 9.25% sales tax.
Utility User Tax
Morgan Hill could add a tax to its electricity, water, gas telecommunications. Other cities like Gilroy and San Jose have imposed similar taxes.
Property Transfer Tax
Morgan Hill has a current one transfer tax but could increase the transfer tax rate.
Business License Tax
Warehouse space dominates in Morgan Hill. Morgan Hill has 0% vacancy. Morgan Hill could have a targeted business tax on new warehouse development.
Industrial Preservation: Steve Chamberlin, Chamberlin Associates
Users, not buildings, drive change. Morgan Hill has done a terrific job of capturing the quantitative information such as market rents and occupancy rates. Morgan Hill needs to capture the qualitative things by asking important key questions. These questions will help the city understand its market and where it’s going.
Recommendation: Ask the following key qualitative questions:
Where did you come from?
Why did you move?
What alternative did you consider?
How did you choose this location?
What would you change to make it perfect?
Where did you/your employees live?
How much will your firm grow in the next 5 years?
What could the City do to help your firm?
Where did you come from?
Brokerage Market Perspective: Greg Matter, JLL, Managing Director
Morgan Hill has 6.5 million square feet of industrial product. Most industrial space is used for manufacturing and warehouse. Morgan Hill has 0% vacancy. JLL used its Industrial Momentum Index to identify how demand will look at in the future. According to JLL’s Industrial Momentum Index, Morgan Hill is well positioned with its community fundamentals, but consumer demand is lacking in the advanced industry spectrum. Overall, it fairs “average” in comparison to other cities in Northern California. Morgan Hill needs to develop substantial industrial to balance its industry real estate.
E-Commerce
Morgan Hill can tap into the e-Commerce emerging trend. Currently eCommerce accounts for 50% of demand in the US market and 80% of the demand in Silicon Valley. Morgan Hill needs to capitalize on the e-Commerce market demand to build speculative product to capture advanced industries, but it must have facilities available.
COVID-19 has accelerated the increase in e-Commerce
83% purchase are made online
Retail sales have jumped 68%
Grocery and food and beverage delivery have spiked
Managing the shift from brink and mortar retail to e-Commerce
An distribution center in Morgan Hill would reduce vehicle miles traveled by delivery vans by 1.6 million miles (assuming 75 vans to service local population).
Localized last-mile distribution also helps minimize road infrastructure degradation
With a localized lass-mile distribution there is an environmental benefit by taking 561 cars off the road. Less miles traveled decreased greenhouse gases.
Transportation cost- $2.4 million annually= $8 per square feet in annual rent saving
Morgan Hill cold impose impact fees/community benefit fees on certain uses
Retail Overview, Josh Shumsky, Managing Director, Newmark Knight Frank
Retail is adapting not dying. COVID-19 has changed the retail environment. Retail will continue to grow and adapt. Adaptation occurs in several ways, mostly in its omni-channel retail strategy and approach in both the e-Commerce presence and the brick and mortar retail sector.
Retail’s required adaptation has been accelerated by COVID-19, forcing retailers to re-think their business models
Certain categories are especially challenged such as gyms and entertainment, At the same time, there is pent up demand fueled by the current shelter in place with a significant amount of new groups that are coming back and looking to expand.
Customer Demand Drivers
The City’s lack of population density with prior caps on growth allowed certain retailers to service Morgan Hill from Gilroy and South San Jose retail stores.
Morgan Hill should think how to expand the Trade Area (Expanded) to draw outside consumers. The right location and tenant mix will draw form outside of Morgan Hill.
The ease of access for commercial sites in addition to Highway 101 adjacent sites are poised to attract outside customers to spend within the City.
Retail Demand Drivers Site specific versus customer specific
There are several retail demand drivers that are considering for site selection, including:
Freeway Orientation
Traffic Counts
Visibility
Signage
Strong Demographics
Cost to Open
COVID-19 has furthered enhanced the pressure to rely on second generation retail space which is more affordable. It will be challenging to get ground-up retail investment until the retail vacancies are absorbed. If the goal is to increase investment in Morgan Hill, land-use designation flexibility is key. Retail anchor space is being re-purposed throughout the Country. Developers and retail owners have a finite amount to invest. Retailers have choices of where to invest. Use flexibility and community support will enhance Morgan Hill’s ability to compete for that investment. While retail rents are a key driver to tenant-decision making, rents will not supersede demand fundamentals (traffic counts, visibility, strong demographics, etc.)
Is Morgan Hill Over Retailed? Pam White, Principal, Guild Retail Partners
The TAP evaluated existing retail centers in terms of their vacancy and development opportunities and vacant commercial parcels. Given the limited amount of time available, the TAP chose to focus on retail uses as the aspect of commercial development. The TAP evaluated the viability of the existing Cochrane Plaza Shopping Center and the China Bay commercial parcel on E. Dunne and Biederman. Below is the TAP’s reactions to both examples:
Cochrane Plaza Shopping Center
While there may be a significant amount of vacant or underutilized space lease constraints often restrict redevelopment
250,00 SF of retail space; two large anchor tenants (Hobby Lobby and Wal-Mart) and inline retail shops and multiple property owners. The Center has a significant amount of vacant or underutilized space.
Vacant space in center is not conductive to redevelopment given the parking field and location within the center. Existing eases often restrict redevelopment (too expensive to buy out long-term leases).
Use restrictions in anchor leases limit redevelopment especially if parking is perceived as limited. While there are vacancies in the center, the above issues will challenge the redevelopment of the Shopping Center. Morgan Hill demographics (low resident count) and high cost of construction make vertical-mixed-use not viable or sustainable for Morgan Hill.
Vacant Commercial Land
When looking at vacant land for retail uses as opposed to other commercial uses, the TAP used the China Bay Site on E. Dunne- Biederman (15.76 Acres) as an example. This site is zoned commercial and while this is one of the larger available commercial vacant properties and appears developable, the site has several challenges:
Demographics both within the community and local (low resident count)
Lack of car counts along the local streets
While grocery anchor centers remain in demand nationwide, Morgan Hill is over grocer-ed
Vanishing retail concepts nationwide and few new concepts
Re-purposing of vacant retail/boxes will continue
The TAP suggested looking at other uses (i.e. not retail) for part or all for this site.
The City should also consider driving hotel development and regional tourism.
Hotels offer numerous benefits:
Increased productivity of existing businesses
Draw people to Morgan Hill community via restaurant and wineries
Revenue Generation: when patrons stay in Morgan Hill hotels, so do their sales tax
Overall Recommendations
Quality design is important to all communities. Ensure developers to place importance on design. Morgan Hill could benefit from creating more awareness of wineries by creating an easy to find website and directory. Look flexibility in uses and understand to continue to drive those uses and sales tax to the city
Q&A Section:
Greg: You have mentioned that advanced industry is lacking. For this community we are seeking those kinds of jobs. You mentioned that having distribution/warehouse, is one of those paths to get there. Question: Is there a way to get to advanced industry without it?
A: When analyzing and doing at a site selection we look at community characteristics. Morgan Hill does not score high enough in the density of the population; and its workforce is not substantial enough to necessitate for R&D and Office component. It is an evolution of the community. It does have a highly educated community, density is not there, developers are not going to come in to develop specialized buildings on a speculative basis. Look at Fremont and Newark as examples, where they have enabled and allowed a warehouse/distribution component as a piece of the industrial puzzle, which gets developments to occur. Pacific Commons in Fremont is another great example of where they built speculative development. Pacific Commons built over a 1 million square feet, and the first tenants were Amazon last-mile and a Facebook facility for R&D and other retail spaces. They were able to leverage both an eCommerce component and a distribution component to get other uses and other occupiers. It is a challenge, but City can attract. Buildings won’t be built with only one component and on a speculative basis.
David: You talked about ways City could increase revenue. Historically this community has not passed sales tax measures. What are the types of fees that could be attached to that type of development? Impact fees must have a nexus.
A: I talked about tax measure. If you do an analysis of your fees, certainly you can find ways to generate some impact fees if they are aligned with cost of service. Someone that is experienced, should look at fee schedule and restructuring those fees to meet real cost.
We have a downtown which many feel could be right for a lane reduction program. Reducing it to one lane, each direction. The assumption is that this will reduce traffic but will also slow it down and create traffic interest in the downtown. Do retailers understand focus vs. high traffic counts?
A: Good example is Los Gatos. They have a similar issue with cut through traffic during the summer, which cripples their downtown. Morgan Hill traffic is peak trip generated. This could be a mistake and harm the downtown. Traffic in Morgan Hill makes downtown a focus. It makes commuters see and experience the downtown. If you reduced it to one lane more folks will use Butterfield. As a retailer it would pose a challenge and may be a reason not to pursue a space downtown.
Can business license on warehouse square footage be implemented without a ballot measure?
No. because business license is a tax.
On the example you used you provided for the less miles warehouse that generated $2.4 million, how big was that facility used for the example?
A: The modeling was based on a model that I did on a 3,000 SF facility with 75 vans or 150 round trips per day, specifically to service Morgan Hill. This would not be a distribution center to service broader Silicon Valley, so that would have been to bring a less-miles operation locally to service your community.
As e-Commerce grows, it seems to me that there will be a shift from storefront to warehouse, how do we ensure that we don’t end up with large uninviting facilities?
A: In regard to eCommerce and its growth, as it compares to retail. You will see a lot of the big box retailers, the 1.2 million sq. footers, those go out to Tracy/Stockton because they can fulfill the region a bit better than Morgan Hill. Morgan Hill does not look anywhere like Tracy when it comes to the distribution market, and it doesn’t have the access to the population that the Central Valley has. In fact, some of the latest deals have been further north, like Sacramento and a good chunk of the North West. I do not think there is a great threat for big box or large distribution centers to overwhelm Morgan Hill, nor Gilroy or South San Jose. These would be strictly to service the community, similar to that of the US Postal Service, UPS and FedEx.
How can we as a City explore the application of Mixed Use Flex zoning or flex zoning to residential to incentivize and facilitate home businesses and generate new potential revenues?
A: Ultimately as we look at flex zoning related to home businesses. It will become more critical with the unemployment rise that we’ve seen recently as a result of COVID-19, it is important to have flexibility in zoning. There are a lot of home businesses. I don’t think these types of businesses will have an impact on retail centers. I currently work with a retailer, that does have a home business that wants to expand. Having a home business really helped him get into the industry. It can lead to a larger footprint.
Shifting the conversation back to retail. We are a little concerned that we might see quite a bit of vacancies in our shopping centers. We have some concerns that our shopping centers are a little bit older, some of them, prior to COVID-19 had a healthy amount of vacancies already. What do you see from a market perspective? What is the conversation out there? And what would be your best recommendation for us? Our Economic Blueprint already identifies retail concentration as one of the key strategies to focus on. How do we make sure that our shopping centers remain healthy and thriving instead of watering down the retail throughout the entire city? Any thoughts?
A1: In addition to retail vacancies, we are seeing large shopping malls that are really on the verge of going out of business or growing out of business. There has been quite a move to reuse a portion of malls for other uses, like housing or entertainment. I think Morgan Hill finds itself in that situation. Where there are many smaller retail centers that may be repurposed to higher and better uses in this climate.
A2: There are some older centers that have historical vacancies. The first place starts with the ownership of those centers and, they have to be aggressively seeking new tenants and be flexible in working with the city but some of those owners for whatever reason, maybe they are large and have income streams and they don’t want to put the capital in. It starts with a dialogue with city staff and the owners of these shopping centers. Owners need to be open to new ideas, or even selling the centers. If you have a center that is having a difficult time maybe adding residential uses could be an option, as an example. Cities have to remain open to that because I don’t think any of us on this panel see a large growth in retail coming in the next few years, eCommerce changed that. Both the city and shopping center owners have to remain open to other uses.
A3: The conversation of location, location, location has changed and now has added an element of foot traffic, foot traffic, foot traffic. It’s how do we get people to the projects and ways to do that may not be with additional retail users, it could be flexible zoning or horizontal mixed use, it could be various aspects that will ultimately design something to get people to drive and stop in these centers. Back to the question of downtown and traffic counts. They are important. There are elements a retailer will utilize, like a college admissions counselor might say if you check all these boxes, then we might look at your application. If you don’t, then we won’t. I think that right now, looking at this piece, it’s important to understand that foot traffic is not generated just by anchor retail but by uses like hotels.
Reference Materials
Technical Assistance Panel Presentation (pdf)
Urban Land Institute Briefing Book - City of Morgan Hill (pdf)