SEPTEMBER 2008: FEATURE, ECONOMIC DEVELOPMENT
PHOTO BY DENISE FARWELL
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AN INCOMPLETE TRUTH
Rising costs and long delays mean peril for some parts of
Portland’s South Waterfront.
By Abraham Hyatt
As development in Portland’s South Waterfront sags under
the weight of the economy, the final design of the project
— long heralded by the city as a major component of its
economic future — grows increasingly uncertain. The city
has been dealt a double blow: On one front the swiftly rising
cost of construction has outpaced the project’s many
delays. On the other front, the economic slowdown is putting
the future worth of the properties — and therefore their
tax value — at risk.
And without those taxes, the city cannot build what it
promised.
The potential for a bustling commercial, research and
residential hub along the banks of the Willamette River is far
from dead — four condo towers, a streetcar expansion, and
a building by Oregon Health & Science University have all
been completed; other buildings are under construction or are
expected to break ground soon. Homer Williams and Dike Dame,
South Waterfront’s primary commercial developers, says
economic issues may slow but not change future construction
plans.
But the city cannot say the same about its projects — all
of which were considered crucial in kick-starting the
area’s economic engine. Portland had about $195 million
— $126 million of which comes from public sources —
to pay for much of the first phase of the project, which
includes the streetcar extension and road improvements (both
finished), and the yet-to-be built affordable housing. But what
about future projects like public transportation, and highway
and street improvements? How much will they cost and where will
the money come from?
There’s no official answer. The Portland Development
Commission, the city agency that oversees the South Waterfront
project, won’t have an estimated cost until late this
fall. The Oregonian did its own analysis and found the price
tag for transportation and parks projects alone would be $230
million. (Patrick Quinton, a senior manager for the project at
the PDC, confirmed that figure was “in the ball
park.”)
Whatever the cost, it’s guaranteed to keep climbing.
According to data compiled by the Bureau of Labor Statistics,
the cost of diesel and steel has increased, respectively, 186%
and 81% since 2003, the year the Portland City Council,
developers and OHSU signed the initial agreement on South
Waterfront. That pace is not expected to significantly
slow.
Over the next 20 years, the city will have to determine what
and how much to cut from its share of the projects. With each
new annual budget, Quinton says, Portland will look for what
money is available for the project and, after balancing the
city’s and the PDC’s other needs, dole out what it
can.
“The budget is the No. 1 determining factor [for the
project],” he says. “There are things you’ll
be able to do with that amount of money and there are things
you can’t.”
It was in the midst of another economic slowdown in 2003 that
the city of Portland, OHSU and developers signed off on the
South Waterfront deal. The promises were big:
5,000 jobs, thousands of residents, $1.9 billion worth of
development. Critics argued the city should be spending the
money on existing problems rather than a new project but
then-mayor Vera Katz — who declined to be interviewed for
this story — and the city council pushed the deal
through. It was, everyone said, a historically unprecedented
economic development project.
The project was off and running. Roads were improved.
Contaminated land was cleaned up. OHSU built a 16-story
research center that also houses a health facility and retail
space. Developers finished three condo projects. The city
extended a streetcar line from downtown to South Waterfront and
began working on a park and a greenway that will border the
river. It’s also spent about $2.2 million on
pre-development and land for affordable housing. And then there
was the tram — a huge step forward for the project but a
massive financial setback for the city. Bungled planning and
engineering delays, along with the rising cost of steel, pushed
the cost from what was expected to be $15.5 million to $57
million. The delay caused by the tram pushed other projects
back, too. The city also lost money by waiting several years
— as property values escalated — to buy land for
affordable housing.
The city made it through those problems. But there were
casualties: The neighborhood park is unfinished, as is
affordable housing and the greenway. Even so, it’s far
too early to say that the dream is dead. Contractors are
marching ahead with new buildings. One thousand jobs out of the
promised 5,000 have materialized. The tram is widely used and
the city has continued to move forward on its share of the
project.
But as Portland struggled with some of the early stages of
South Waterfront, construction costs were going up. Diesel
fuel, which is involved in the creation, delivery and use of
nearly everything on a construction site, rocketed from a
national average of $1.19 in 2004 to what the federal Energy
Information Administration predicts will settle around $3.64 by
the end of this year. Steel, gypsum and copper have increased.
And even though the economy is headed down, those prices are
expected to stay the same or continue increasing.
There’s another problem lurking below the surface: Over
the past four years, the producer price index for construction
materials — that’s the average price for materials
used in building — has far outpaced the consumer price
index to a degree unseen before. According to Ken Simonson,
chief economist for the Associated General Contractors of
America, the discrepancy is particularly disconcerting for
public agencies since they’ve traditionally used the
consumer index as a way to project future project costs.
According to Simonson, agencies are now trying to fund
enterprises that cost far more than anticipated — and are
unsure of how to predict future expenses.
To predict South Waterfront’s future, Portland not only
has to watch construction costs but it also has to watch the
condo market. Because condo towers, at this point, are
essentially the only tax base that exists. Condo sales in the
past few years were booming and so tax revenue from South
Waterfront has been strong — almost three times higher
than what was expected. In the next three years developers will
finish several more residential projects and the city is going
to need every tax penny those buildings generate.
If the economy stays weak for several years, however, it could
stall the appreciation — or even in a worst case, lower
the value — of private property. The city’s ability
to pay for future development would evaporate. Some numbers are
already dropping. According to S&P/Case-Shiller data,
Portland home prices fell 5% between May 2007 and May 2008.
“We’re really relying on market conditions,”
says the PDC’s Quinton. “That’s the unknown
right now. Five years from now is where we’re focusing
our attention.”
Homer Williams, fellow South Waterfront developer Dike Dame
— of Williams and Dame Development — and former PDC
executive chairman Mark Rosenbaum are optimistic about
what’s going to take place in that time period. They
embody the “South Waterfront is an investment that will
take years to succeed” attitude that city leaders and
developers have espoused from the beginning.
Despite the potential funding problems that exist, that
optimistic opinion has a lot of validity. Critics of the city
decry the final cost of the tram, but OHSU wouldn’t have
built at South Waterfront if not for it. Investment by the city
in its projects has spurred other growth. According to
Williams, the city’s first push created a momentum that
already has carried the entire project, private and public,
well past the live-or-die phase.
“What maintained the economy before everything went
crazy? Baby boomers,” Williams says. “There’s
still 80 million of them out there ready to make life changes.
That’s what’s going to keep driving South
Waterfront.”
But those boomers have yet to show up and buy more condos.
Sales have drastically dropped since last year. OHSU’s
current fiscal woes mean it won’t begin its next building
for another four years. Potential commercial development at the
north end of the project remains just that — a
possibility. And if that $230 million estimate for
transportation projects is right, Portland has an enormous
hurdle to clear before it can take its next steps.
Regardless of the success that Williams and other foresee,
it’s unlikely the city will be able to avoid making cuts
to its projects. According to Quinton, what and how much will
be decided during deliberations in city council chambers. That
doesn’t pre-empt the much-promised economic development
on South Waterfront from occurring. But it does mean the grand
dream once envisioned by city and business leaders will be
measured out in budgetary teaspoons rather than backhoe
buckets.
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