Costs and delays imperil Portland’s South Waterfront

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Monday, September 01, 2008

Southwaterfront PHOTO BY DENISE FARWELL

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.”
SWaterfrontChart.png
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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