One (faraway) city sees its authentic retail as “basic infrastructure,” even amidst gentrification

Singapore Hawker Center

A case study (quite literally) about the struggle to maintain authenticity through small-scale retail operations is profiled in this week’s Economist. In Singapore, the government somewhat inadvertently nurtured one of the world’s most exciting food cultures through its “hawker centers.” Anthony Bourdain explained their history in “The Layover“:

The hawker centers of Singapore were a shrewd strategy to incorporate and control what was once a chaotic but pervasive culture of street carts. To control the health, safety, and traffic aspects, vendors were brought inside these covered structures still open to the air, but in stalls with regulated running water, refrigeration, and strict rules of food handling.

In short, they’re food courts with one key twist — they’re government-owned, often located within HDB public housing estates. Today, rising rents and rising living standards both threaten the culinary treasures that are so integral to Singaporean culture:

The main problem is that Singaporeans have grown used to paying prices that the market can no longer bear… The government, says Dr [Leslie] Tay, “has committed to providing cheap food for the masses”. With tiny flats and cramped kitchens, and with the number of two-working-parent families steadily rising, plenty of Singaporeans count on hawker markets for their sustenance. But with the first generation of hawkers retiring and their replacements paying market rents, food prices will certainly rise.

And as the masses change, so will the food. Some Singaporeans lament that a recent influx of immigrants from northern China has made their traditional Teochew or Hokkien [ethnic groups from southeastern China] favourites harder to find.

The article arose from a blog post by Dr Tay where he recommended instituting non-market mechanisms for allocating space in the government-owned markets: “Wouldn’t it be great if the officers can just recognize his status as a Heritage Hawker and help him get a stall at pioneer hawker prices?” (Pioneering stalls were subsidized in an attempt to entice hawkers off the streets, and today those rents are 90% below market rate, according to the 2015 case study by Tan Shin Bin for NUS’ Lee School.)

Indeed, but would you necessarily trust a government to make good decisions about what constitutes “good food”? Perhaps not, but plenty of America’s most successful public markets (like those in Milwaukee and Seattle) are run by nonprofits. An early effort at a nonprofit hawker centre in Singapore failed, but the government has signed new management agreements with cooperatives and “social enterprises,” as recommended by a 2012 panel.

A prior experiment in renting out a hawker center to a for-profit operator failed, and won’t be repeated; Minister Vivian Balakrishnan, whose ministry runs most centers, maintains that “Hawker centres are social infrastructure – and not an opportunity for property speculation or rent seeking by commercial entities.” Instead, nonprofit managers will get the opportunity to reinvest surpluses into social development and entrepreneurship, and prioritize operators that provide affordable food and heritage cuisines.

400 year old bonsai

A 400-year-old bonsai. Growth this restricted does not happen naturally.

“Social infrastructure,” as Minister Balakrishnan put it, provides a useful frame for talking about “authenticity.” Cities are living things that require supporting infrastructure: physical infrastructure, social infrastructure, green infrastructure. They also need room to grow and change.*

How can cities simultaneously build physical infrastructure (transportation, housing, workplaces) while also supporting and fostering social infrastructure, and regenerating ecological infrastructure? The answer might seem simple, but unlike physical infrastructure, social infrastructure is itself also living — and a somewhat fickle, slow-growing, and slow-rooting species at that. These make them tremendously resilient, but also slower to adapt than other forms of infrastructure.

As Singapore’s experience indicates, the answer probably lies with the social enterprise sector. How could those be structured? One potential answer’s coming up.

* The exception that proves the rule are bonsai — “the most unnatural nature that exists.” Trees can survive when confined to tiny boxes that constrain their growth. However, bonsai require a lot of care and feeding just to survive, including extensive pruning to thwart natural growth instincts.

CNU conversations: Can we build authentic, small-scale communities that subtly adapt to change?

A few thoughts on a CNU 23 presentation by Russell Preston and Matt Lambert about their ongoing work on defining and fostering authenticity within New Urbanist places. Other thoughts will be forthcoming, as I write them up.

Once and forevermore

Do design and development really disrupt enduring neighborhoods? This block in Guangzhou, China, changed tremendously, but in some ways didn’t change at all.

1. Role of design
Flexible, adaptable buildings allow uses to change in their natural cycles. Crucially, notoriously fickle uses like production and retail must be given room to adapt. Not only do shop concepts and merchandise change, but the volume of these uses needed rises and falls with economic cycles. Tactical urbanism has shown us that design details may not be quite as important as broader questions of scale and program. Such a “stage set” approach may be especially appropriate in an era where programs frequently change.

2. Small scale
To the extent that smaller, more “honest” enterprises can be designed around, perhaps the best physical model relies on creating adaptable space along many smaller frontages — a fractal approach, as it were. More marginal businesses have long turned to side streets and passages to be near, but not in the middle of, the retail action.

Since these frontages are inherently not as valuable, they can remain affordable even amidst higher rents for premier locations nearby. Just as coach houses are “naturally affordable housing,” consider the value of alleys, passages, and even enclosed arcades as “naturally affordable retail.”

Another CNU 23 session, ostensibly about pedestrian malls, featured examples of pedestrian-only ancillary passages where smaller retailers thrive just off Main Street. Beth Anne Macdonald spoke about Division Street in Somerville, N.J., where commerce has thrived after the street was turned into a pedestrian mall in 2012. Division (like Bethesda Lane, which Tim Zork presented at the same session) was intended as shared space but ended up being car-free 24/7 — a testament to that type’s tremendous flexibility. Despite its Spartan design of concrete and streetlamps, Division is thoroughly programmed year-round.

Downtown in the distance

Kensington Market in Toronto has a built environment that’s a terrible jumble of everything, but it gets the scale — and thus the feel — just right. It’s car-free on summer Sundays, thanks to gates that cost just $180,000.

Similarly, I’m setting up a walking tour in October of how retail is thriving away from the main streets in Georgetown, along its alleys, side streets, and the pedestrian-only C&O trail. The neighborhood’s historic scale — its small blocks and small spaces — and relatively flexible zoning permits this natural shift between uses. That these processes can work illustrates two chapters in “Death and Life”: small blocks and aged buildings.

Of course, financing these spaces can be a challenge. Yet this country is plagued with throwaway retail space, much of it ancillary to upstairs office and residential. Whether the ground floor of an apartment complex is given over to “amenity space,” or to small retailers who may or may not reliably pay rent, shouldn’t be of much interest to the bankers — and, arguably, many of the apartment tenants might well prefer the latter! Designing the public and private spaces with the flexibility to accommodate whatever uses might be demanded could prove a greater challenge.

At the Louisville NextGen meeting, the one example of a new-construction informal street market that I could think of was a set of buildings in Downtown LA’s Fashion District. They appeared to have been built largely as paid parking garages, for which there are many local comparables, but had clear-span ground floors to accommodate small wholesale clothing retailers. It was awesome.

3. Policy and non-market structures
Market prices for prime space in gateway cities have — due to high outside-investor interest — reached heights that stifle innovation and organizations that evaluate their impact in primarily non-market means. Furthermore, not all institutions are lucky enough to have purchased their property “back when it was cheap.”

The 5M model (final program & renderings) has promise — identifying “community anchors” more broadly than just non-profits, offering free or discounted space to these community serving entities, and profiting by selling ancillary services. The other innovation is that this project’s pro forma has been turned on its head: the community space is accepted as a given at the starting point, and the market-rate buildings sized accordingly. (Since every development in San Francisco is discretionary, you might as well ask for the moon.)

But what about the next community that comes along? Will tomorrow’s fresh ideas and institutions have similarly protected spaces? Is this model flexible enough to accommodate new institutions, or shifting missions among the existing institutions? Rather like rent control, this approach privileges those who showed up at the right time, excludes newcomers — and leaves the question of capital renewal unanswered. Could a similar space, like [innovation] District Hall, be continually refreshed with new concepts and competitions on a regular basis?

(We had a detailed conversation about a potential corporate structure to ensure long-term community affordability on the following day. Notes about that conversation are forthcoming.)

4. Chinatowns, new
At least some suburban communities have successfully retrofitted smaller scale uses into strip-mall suburbia: the “ethnoburbs” that Asian immigrants have settled across North America. Even shiny, new buildings still foster small businesses, due in part to high density, tiny footprints (see above), management that understands the business models, and perhaps other factors that could be identified.

Meanwhile in ethnoburbia

San Gabriel, Calif.

These retail centers can be built in a more transit-oriented manner; the vertical malls cropping up around Flushing have a mind-boggling spatial complexity. The vertiginous skyscrapers of Hong Kong, clustered around mass transit, have organically evolved 3-D pedestrian networks so intricate that they defy description, but which host all sorts of authentic communities.

5. Chinatowns, old
These neighborhoods appear to maintain a remarkably stable level of economic diversity — of activities, of economic groups — and appear, from the outside, to have stable populations. Yes, some of this stability is real, and partially results from capital that gets locally recycled, through local institutions.

But what looks like stability from the outside also hides considerable turbulence under the surface. There’s constant upheaval among the community’s participants, as high in-migration balances out community members “lost” to assimilation. By and large, assimilation (as institutional racism declines/morphs) has undermined most of American cities’ other mixed-income ethnic enclaves, but since Han Chinese easily outnumber every other ethnic group in the world, there will always be a inflow of migrants — or will there?

Another less-than-replicable factor behind Chinatown’s staying power is a lack of effective enforcement (“It’s Chinatown, Jake”). Thus, things don’t quite happen to code; it’s cheaper, but somebody might get hurt. Whether that trade-off is worthwhile is your judgment call, but it does illustrate that over-regulation might be a factor in driving high costs.

6. Community change and the word “authentic”
It’s worth thinking through a bit more about how “authenticity” (see this discussion by Sharon Zukin) like any other aspect of community character, will move in cycles. Every community changes its participants, and is changed by its participants. The people who come after us have different experiences, and what we do shapes how they understand the world around them. This feedback loop can either result in a virtuous, or a vicious, cycle.

The pace of change also matters. Change is literally a fact of life, but violent upheaval is rarely welcomed. Many communities today are upset by the roller-coaster ride that property markets have put them on, with prices rising much faster than social infrastructure can adapt.

What appears “authentic” and novel to us will seem workaday or fake to someone else. It’s exactly that interplay, exchange, and evolution that makes cities — and especially American cities — such interesting and exciting places. It’s a tough edge to surf on, to simultaneously embrace and resist change, to honor established practices while inventing new ways, but it’s a worthwhile endeavor.

Redeveloping multifamily: condos are forever, co-ops perhaps less so

“A diamond is forever, a suburban R-1 zone nearly so” – Jonathan Levine, “Zoned Out”

And what’s even more permanent than an R-1 zone? A condominium.

Dearborn Park, Chicago

See those townhouses tucked among the trees? Hope you like them, ’cause they’re there, forever. (CC photo of Dearborn Park, Chicago, by Doug Nichols)

The saga of the Frontiers West condominium along 14th St. NW — as told by Lydia DePillis a few years ago — recently came up in conversation. A few years ago, multiple developers attempted to buy the entire complex, but ran up against an implacable foe: consensus. “Redeveloping any one of the parcels,” DePillis reports, “would require unanimous consent from the owners of all 54 units—so just one person could doom any deal.”

Frontiers had been built as public housing in 1977, an attempt to revitalize a neighborhood still deeply scarred by riots a decade earlier, and was sold off to tenants in the 1990s. (Jack Kemp introduced a Thatcher-esque scheme to sell public housing to tenants during the Bush 41 administration.)

Frontiers West’s unusual backstory created an unusually wide “rent gap” (the difference between value as-built and value as highest and best use) at that location. However, condominium ownership is over 50 years old in America, and thus the first stick-built condos are probably running up against their expected service lives. For those buildings, the economics of depreciating structures will soon run up against appreciating land values, and associations with structural problems (and in good locations) will have to face tough decisions. Says one condo owner outside Vancouver (probably the most condo’d city in North America), “We don’t have a system that allows people to understand what to do at the end of their unit’s life.”

It’s not necessarily impossible to buy every single owner out. MetroWest in Fairfax is being built on what was a low-density subdivision, where every owner consented to the sale. In a single-family situation, it should be possible in most cases to buy most of the parcels and leave a few “nail houses” outstanding.* Eminent domain, as at Atlantic Yards in Brooklyn, is also an option in situations where legal justification can be found.

Steven J. Smith found one recent example of a 30-unit condo — a singularly awful 1970s building in Chicago’s Lincoln Park — that had been re-assembled. But for other examples, he points overseas to Singapore and Japan — both even more urbanized than the USA, but also both societies where achieving political consensus is easier (their effective one-party rule being the prime example).

Singapore took Thatcher’s idea of council-flat ownership to an extreme, encouraging Singaporeans to purchase their public housing units with their social pension funds. (It’s also a clever way of locally recycling capital to fund their ambitious housing scheme.) Now that some of these buildings have become attractive redevelopment opportunities, the government has begun a “selective en-bloc redevelopment scheme” (or SERS, in the acronym-happy Singaporean government-speak) for scores of 1950s-1980s concrete-slab tower blocks, provided that 80% of owners consent. It helps that HDB flats are technically not owned, but instead are tied to 99-year leases; this gives HDB the authority to do things like impose anti-speculation rules to keep prices stable between the time redevelopment is announced and all individual contracts close.

Speaking of unique authority, this is one area where the greater legal flexibility granted to cooperatives, rather than condos, can come in handy. Whereas New York condominium law requires 80% approval for an en-bloc sale, its cooperative law only requires 2/3 consent to dissolve the corporation. For the particularly obstinate, District of Columbia law also permits cooperatives to kick out individual members through a simple majority vote.

Northern Virginia again offers a local example, where the Hillwood Square co-op in Falls Church sold itself after a two-thirds vote:

“They were faced with the prospect [of] spending a significant amount of money to upgrade the property’s underground infrastructure… ‘Hillwood was one of the most complicated as well as the most rewarding land deals we have had the opportunity to represent in our careers,’ [broker Mark] Anstine said in a joint statement”

An interesting application of a cooperative scheme to urban redevelopment challenges could involve capitalizing new cooperatives with existing smallholdings, or redeveloping part — but not all — of a co-op. A co-op, as a stock corporation, has relatively few restrictions on its property holdings and financial activities — especially compared to a non-profit condominium association, which typically would have to distribute excess funds to members.

Land assembly for major projects in Japan, like Roppongi Hills, can be undertaken by pooling properties together into a “Redevelopment Association.” By guaranteeing equity participation in the new development (and new on-site replacement housing), this approach ensures that landowners share equally and fairly in property value gains — thereby removing individual owners’ worry that they sold out too early/cheaply.

Cohabitation Strategies included an equitable-growth idea similar to this strategy — what it called “Cooperative Housing Trusts” — in MoMA’s recent “Tactical Urbanism” exhibit. These community land trusts could aggregate and sell otherwise unusably-small quantities of air rights, and reinvest the proceeds into permanently affordable housing. (It was the one interesting idea in the entire exhibit, IMO.)

* No examples come to mind off-hand, but this is a common practice in shopping mall redevelopments. Department stores that own their own land have been excluded from many redevelopments that engulf them, as with the aging JCPenney at North Hills in Raleigh:

Raleigh, North Hills on iMAPS

The opposite situation was bound to happen someday, and of course it’s flailing-about Sears that is leading the way. It’s not just subdividing its boxes and adding new subtenants like Whole Foods, but in at least two cases (at Aventura, North Miami’s fortress mall, and Metrotown outside Vancouver) it’s going rogue and doing its own mini-de-malling without permission from its “landlord.” Sears’ footprint at Aventura will shrink almost 90%, to just 20,000 feet — maybe their agreement with Simon requires that they not abandon the site entirely.

NIMBYs: loss aversion and, geography of, and rhetorical fallacies of

Not all change is bad.

It won’t rank high in the annals of “speaking truth to power,” but it’s interesting to read Washingtonian writer Marisa M. Kashino’s take on DC’s systemic housing underproduction: “But the District hasn’t shown much nerve when it comes to making big changes… Which brings us to the unusual power wielded by the city’s NIMBYs.” (City magazines usually aren’t known for taking their wealthy readers to task.)

But Megan McArdle, writing for Bloomberg View, says this is an unlikely scenario. Writing about the current back-and-forth regarding DC’s zoning, she says it’s been “Two steps forward, sure, but such little steps, and now we’re looking at going backward again.” But why are zoning fights so inherently difficult? McArdle points to cognitive biases: “At the heart of the matter is loss aversion: people will fight harder to preserve something they have than they will for a potential gain.”

Three related thoughts on NIMBYs:

1. History doesn’t offer much encouragement. In theory, a clear majority of citizens would benefit from abundant housing, but they rarely voice broad support on behalf of their minimal gains — and certainly rarely can drown out the fewer but louder voices who could lose benefits under the current system. For example, Red Vienna democratically chose to tax the rich to build mass public housing, but it took an abominable housing crisis (and the World War-spurred collapse of an empire) to force the electorate into action.

2. It’ll be interesting to see how similar politics plays out in other policy arenas — a thought that came to mind when listening to a recent talk about the feasibility of “deep decarbonization,” i.e. reaching the -80% CO2/2050 goal necessary to stabilize a changing climate. Although the study found that total energy services costs will increase only slightly — by about 1% of GDP by 2050 — it found that, within that energy services budget, the balance will shift from fuel providers to capital.

A clean energy economy will build renewable power plants (i.e., cap ex) which cost more upfront, but thereafter will throw off energy with very little ongoing costs. In the case of “negawatts” from efficiency, highly efficient or even net-zero buildings cost more up front, but cost much less to operate and maintain. This is a huge contrast from the existing system, whereby fuel providers extract huge rents from the rest of the economy.

Geographically, this shift should benefit most places, since green power is widespread — somewhat like Portland’s Green Dividend. However, the relatively few places that currently live off of fossil-fuel “resource rents” will lose out, and will fight back. Even though just three small states produce almost 60% of US coal, their representatives’ passion for coal far outweighs the millions who would benefit if coal pollution were reduced.

3. One of the NIMBYs’ favorite rhetorical fallacies is “the shill gambit,” an ad hominem attack that proclaims any non-NIMBY to be a secret, Astroturf-esque “paid shill” for development interests. (Some people can’t conceive that there are non-monetary, non-selfish reasons to hold a given position.) This contemptible lie — which slanders the opponent’s ethics to “poison the well” and thus avoid an argument on the merits — is readily leveled against pro-density forces even when it’s demonstrably false, including SFBARF in San Francisco or, of course, against yours truly.

This particular lie isn’t unique to arguments about development, of course. Naturally, conspiracy theorists of all stripes like to paint their opponents as all part of the same conspiracy that’s out to get them. It’s especially common among “alternative medicine” quacks, who love to call anyone who questions their arguments pharma shills — a label some have embraced with the hashtag #shillarmy. In an indication of how tired and un-useful the argument is, it’s been banned on parts of Reddit. If only such moderators were active elsewhere.

Housing market myths: USA’s biggest landlord says outsiders not to blame for high SF, NY, DC rents

Conference calls announcing corporate quarterly earnings don’t usually turn up explanations about why the Rent Is Too Damn High, but then again most companies don’t own 100,000 apartments across America, clustered in the biggest and most expensive cities. These are the folks who are raising your rent, and the reasons why don’t have anything with the usual bogeymen.

So, forthwith, some annotated comments by David Santee, chief operating officer of Equity Residential, from their 2014 results call.

Lofts 590, Crystal City

Equity Residential owns this building, and most of the thousands of apartments in Arlington’s Crystal City neighborhood.

 

1. California’s multi-year drought wasn’t solved with a few days of rain this winter — and, as the state legislature’s own analysis says, the generation-long drought of housing starts won’t be solved with a few new towers here and there:

“San Francisco continues with epic pace with significant acceleration in Q4 [2014]. In one of the most under-housed cities in the country, deliveries are minuscule and simply don’t seem to be relevant.”

Indeed, San Francisco is in such negative territory with housing (and water, for that matter) that more than doubling San Francisco’s population (which would still leave it half as dense as Manhattan) might only have kept housing price inflation in line with the national average. Note that’s not “falling housing prices,” since that’s rare, just “not increase quite as fast.”

2. New York City’s too-damn-high prices can’t be blamed solely on a handful of zillionaires snapping up shoeboxes in the sky. Instead, the blame lies squarely on everyday New Yorkers, or rather on the buoyant economy they’ve created and surprisingly limited new construction they’ve permitted.

New York City specifically Manhattan remains stable, with only slight concentrations of new deliveries on the upper west side… However, with population in the metro achieving the new high of 8.4 million people, a pick up in business and professional service jobs, and the continued growth in jobs away from financial services, New York should produce four-handle revenue growth supported by an expected 155,000 new jobs in 2015.”

3. The era of “boomtown DC,” the city of Fox News nightmares where Barack Obama used government debt to hand out Obamacare-regulation-writing jobs like candy, appears to be ending. Or maybe it never existed: much of the District’s population growth turns out to be just the usual machinations of a large metropolitan area rearranging itself — in this case, as with many others, centripetally.

The district itself continues to see outsized population growth and 25% of our district move-ins were from folks moving closer in from Virginia and Maryland…

Not that this particular phenomenon is unique to DC, of course; Equity boss Sam Zell has noted a broad-based “increasing demand for housing in the urban markets.

The centripetal pattern also applies to the usual flow out from cities, which has been stanched in recent years:

The recession diminished this flow. Fewer than 23,000 young adults left New York annually between 2010 and 2013. Only about 12,000 left Los Angeles—a drop of nearly 80% from before the recession. Chicago’s departures dropped about 60%.
Young adults who moved to the three cities for school, internships or early jobs—or simply because it seemed cool—may now be stuck, said William Frey, a demographer at the Brookings Institution… In tough times, finding well-paying jobs may be easier in big cities, offsetting their relatively high costs of living.

This would be a terrific smart-growth opportunity to capture more population in resource-efficient, highly-productive, low-footprint urban areas — if only said cities were more affordable!

——-

While I’m quoting at length, and because it’s marginally relevant, Old Urbanist wrote up this useful comparison to how America’s zoning system systematically creates bountiful affordable housing… for cars:

American states and cities have engaged in onerous mandatory inclusionary zoning for cars (parking minimums), zoning exemptions (e.g. not counting garages toward FAR limits and allowing parking, but not housing, in mandated setbacks), tax exemptions (only 16 states maintain a personal property tax that covers automobiles) and fringe benefits (the commuter parking benefit), in addition to rent-free public housing for cars (overnight on-street parking).

Abundant housing supply moderates prices, but only drastic oversupply cuts prices

Daniel Kay Hertz assembled a few current examples of how overbuilding in the rental apartment market is keeping rents down.

South Michigan

Market-rate and affordable apartments under construction side by side in the South Loop.

A commenter pointed out that the South Loop multifamily market cratered in 2009 — and more broadly, the downtown Chicago market was flat over the entire 2000-2010 real estate cycle. People who bought some of the first Loop loft conversions have not earned more than the rate of inflation. In 1999, the buildings at 208-212 W. Washington St. were purchased for loft conversion, which was truly unusual then. (I worked just a few blocks east, and was in the market for a condo when it was closing out.) Today, 212 W. Washington St. #2108 is on the market for $395,000, less than the $414,411 that its $319,000 sale price in 2002 inflates to. Other properties in the building have recently sold for less than their 2001 nominal prices. This is despite a “hot” market that’s “running out of condos.

(I brought up this example during the Height Act battle, when some obtuse conservatives claimed that skyscrapers caused, rather than merely correlated with, high housing prices in Manhattan. Well, Chicago builds more skyscrapers, which allows its downtown housing supply to match growing demand.)

More broadly, the entire 2008 financial crisis is one big national case study in house price decline. Namely, it’s the prime example of why house price declines are rare: housing is so highly leveraged, and so central to household wealth, that falling prices really hurt the entire economy. As Ryan Avent writes: “since buyers are heavily leveraged, losses in value are magnified, raising the risk that price declines become crises.”

In a Brookings post-mortem [PDF] on the 2008 crisis, Karl Case (yes, of Case-Shiller) notes that broad housing price declines are rare: “nominal prices never fell over any full quarter between 1975 and 2005,” and that fact gave bankers’ computer models undue confidence in ever-rising prices. Moderate oversupply rarely results in falling prices because housing markets have other ways of discounting — sellers trade time for money and just wait it out:

Another important aspect of housing market efficiency is that prices tend to be sticky downward. In most markets, when excess supply develops, prices fall quickly to clear the market. But housing downturns have been characterized by sticky prices. Sales and starts drop but prices are slow to respond…
Downwardly sticky prices lead to “quantity clearing markets” rather than “price clearing markets.” […] Demand drops. The inventory of unsold homes rises. Prices stick. Output falls. The inventory of unsold property remains high (because a house is a durable good, not a consumable). But household formation rates remain positive, and the new households eventually absorb the excess inventory and output rebounds. Assuming there is upward inertia, prices then rise and ultimately overshoot; demand again slows, starting the next cycle.

For rented real estate, contract rents are only one way to set prices. Other ways of discounting abound: free months of rent, tenant improvement allowances, improvements to fixtures or common areas, bundled services (like utilities), additional amenities, and outright gimmicks can effectively act as “discounts” even while nominal rents don’t decline.

Case also mentions that housing is a heterogenous good, where each property is different. In real estate markets, that usually plays out as a “flight to quality” where prices hold up for the best buildings, and prices fall for lesser locations and uglier buildings. This phenomenon has dampened urban dwellers’ memories of the 2008 crisis — they’re less likely to remember the price decline, since “home values have generally held up better the closer a home is to the city center.”

At a local or regional level, though, housing prices do decrease on a pretty frequent basis, and over-supply is usually why. In “Why Do House Prices Fall?,” a pre-crisis paper written by Daniel McCue and Eric S. Belsky for the Harvard Joint Center on Housing Studies, the authors found that severe overbuilding almost always leads to housing price declines.

“While only about a third of all spells of moderate overbuilding resulted in price declines, nearly two out of every three spells of severe overbuilding resulted in price declines, and eleven of the twelve spells of extreme overbuilding resulted in price declines, all of which were large.” [emphasis added, extraneous definitions omitted]

housing price declines

The graphs do appear to vindicate the notion that market forces alone can, without subsidies, cause housing prices to decline. The housing-permit equivalent of a 300-year flood will almost guarantee that prices will drop by around 15%.

McCue and Belsky note that such overbuilding has basically disappeared from major cities in recent years, though. Instead, these cities have extirpated the rare beast and now systematically underproduce housing. Since nobody can remember prior oversupply crises, they now feel free to deny that such a thing is even possible.

Note that of the three major factors McCue and Belsky tie to house price declines, overbuilding is implicated more often than either employment loss or overheated prices. Just high housing prices on their own rarely led to corrections; because housing prices are sticky, high prices just plateau for a while.

housing price declines

Even in the realm of luxury goods (which some wrongfully claim that housing is), a good old supply shock is always eventually able to bring prices back into line. Here’s the supply and price of Maine lobsters, whose prices collapsed as the recession cut demand for ostentatious restaurant meals, but where growing supply has kept prices down even as demand rebounded: “Lobster, long considered a luxury, is becoming a little more ordinary.”

lobsters

Sadly, San Francisco has underbuilt to the point where it would take a a 26% increase to its current housing stock to get the market back into balance.

Shorts: Critical Masses

Critical Mass I Ching

A few short topics for January, all around the theme of achieving critical mass in three very different markets for metropolitan services.

1. Nathan Donato-Weinstein, reporting for the Silicon Valley Business Journal about Google’s October purchase of buildings along San Francisco Bay:

Google — which like many expanding tech companies is focused on reducing its car and shuttle trips as traffic worsens during the current boom — may be eyeing transit options beyond freeways. Pacific Shores is a half mile from the Port of Redwood City, where a Google pilot project earlier this year tested running ferries from San Francisco and Alameda to the port. The Water Emergency Transportation Authority, which administers the San Francisco Bay Ferry routes, has studied regular public ferry service to Redwood City, with a potential public terminal practically next door to Pacific Shores.
“I know they really liked the ferry and the concept. Their challenge was getting people off a boat and putting them on a bus to Mountain View, and that was taking 25 minutes,” said Kevin Connolly, director of planning and development for WETA. “This might be one way to address it.” […]
A Redwood City terminal would cost about $15 million. But the county doesn’t have ongoing operational funding, Connolly said.
A major built-in user such as Google could help make service pencil out, he said.

I’ve written critically about the peculiar geometries (and thus poor economics) of water taxi transit before. Having high-density development built on landfill immediately adjacent to a deep-water port certainly solves some of those problems — but a ferry does need at least two ports. However, most other Bay Area jurisdictions have incredibly restrictive development policies along their waterfronts, and many of the Bay Area’s most desirable residential areas are well inland (and atop hills, in fact).

Perhaps last-mile bus service would supplement a 101-bypassing ferry on one or both ends. That adds in the time and hassle of a transfer; when combined with a lower peak speed (around 40 MPH) and increased susceptibility to inclement weather, it’s tough to see how it would be a faster, more reliable, or more fuel-efficient option. (2008 figures submitted to FTA, as reported by Wayne Cottrell in Energies, indicate that ferry operators in the USA have a median fuel economy of about 10 seat-miles per gallon of fuel.)

2. General Growth Properties plans a $2 billion investment in street retail, ultimately aiming to have 15% of its portfolio invested on high streets in the principal gateway cities of NYC, Chicago, Miami, Boston, DC, SF, and LA. Even in these high-rent areas, GGP sees “assets with significant unrealized growth potential,” with below-market rents and under-used vertical space.

General Growth Properties investor presentation slide

Many office REITs have focused on CBD office, but these properties have historically been neglected by large retail REITs. Adjacencies matter much more with retail than with office, which creates a “commons” problem that undermines streets with fragmented ownership.

GGP has hinted at two approaches to circumvent this. Like Acadia Realty Trust (an exceptional retail REIT that has redefined itself as a high-street owner), it might hope to aggregate enough properties to create its own mall-like ecosystem, and thus internalize the external benefits of its investment. GGP’s first big investment, an equity stake in the Miami Design District, certainly has that advantage. However, the DD is a singular example unlikely to be replicated elsewhere, so it appears that GGP will instead have to rely upon its high-rent neighbors to similarly aggressively upgrade their properties.

This could be a long waiting game, though, since a lot of urban property isn’t owned by others who need the same quick upside that a REIT does. Micah Maidenberg quotes a skeptic in Crain’s:

“The street-retail business, just like luxury hotels and other sorts of high-end projects, tend not to be a quarter-to-quarter-growth kind of business. It’s more of a long-term hold,” says Jeffrey Donnelly, a managing director at Wells Fargo Securities in Boston.

3. Two few weeks ago, I was visiting my parents in North Carolina and feeling under the weather. While looking up my out-of-area health care options, I came across an instructive article in Milbank Quarterly (by Daniel Gitterman, Bryan Weiner, Marisa Elena Domino, Aaron McKethan, and Alain Enthoven) about why Kaiser Permanente’s integrated group medical practice failed in the Triangle — where I’d previously been a satisfied customer.

My main takeaway from the case study was that, while “prepaid group practices” like Kaiser or GHC in Seattle (not to mention vertically integrated government systems like the VA) do offer tremendous cost efficiencies, they also rely on economies of scale that are difficult to set up from scratch.

The article estimates that KP’s break-even point is around 100,000 members in a metro area. That figure would have been a huge ask, given that the Triangle’s population was well below a million at that time, and spread out across a broad area. KP needs that kind of scale to build bargaining power, both:
– on the cost side, when bringing services in-house (the essential feature of their cost-containment model) or bargaining with hospitals and specialists; and
– on the revenue side, when selling their product to employers and employees who have to be sold on a choice that (a) most would find less convenient and (b) involves disrupting the “stay with my doctor” inertia many customers have.

It’s not a coincidence that prepaid group practices are best established in markets where either government employees or unionized employees bulk-purchase healthcare services. But HMOs are beginning to re-emerge now that the Triangle is bigger and denser, the ACA exchange has made the health insurance market less fragmented, and more doctors have organized into group practices linked to specialists via electronic health records. One new option in this year’s ACA marketplace for North Carolina (and especially valued, since last year only NC Blue Cross participated in the marketplace) is Coventry’s CareLink HMO, which uses Duke Medicine’s primary care network as the in-house practice.