Friday photo: Greedy developers built your city

Two rental houses on Capitol Hill

I recently came across these plans by a fantastically wealthy land speculator, seeking to profit by ruining DC’s pristine Capitol Hill neighborhood with a towering building crammed full of tiny rental “microunit” apartments for immoral singles — rather than wholesome nuclear families! This kingpin practices his avarice from posh Fairfax County, within a “resplendent” mansion overlooking the Potomac.

This paragon of greedy, out-of-town developers is, of course, George Washington, the very namesake of Washington city. Cities don’t arise via immaculate conception; they’re built by developers.

John DeFerrari’s book Lost Washington has a much more detailed account of the houses, showing that the NIMBY nightmare of “out of scale” “overdevelopment” was indeed what this city, and all other cities, was built on. (Otherwise, we’d all still be in caves!) Washington wrote to his architect, “Although my house, or houses… are I believe, upon a larger scale than any in the vicinity… capable of accommodating between twenty and thirty boarders.” A later, even greedier, developer popped up (and popped-under) the ruined buildings in the aftermath of 1814’s fire, and the buildings grew to six stories tall. Anti-pop-up NIMBYs might take heart from its fate: it then descended into criminal infamy and was bulldozed for a park.

[The plans in the photo above are from GW’s Albert Small Collection.]

How growing income inequality affects places, part 1: Rich metros are getting richer

graphs from Emerging Trends 2015

No, it’s not just you: prices are increasing faster in gateway cities than in “nonmajor markets.” Graph from ULI/PWC’s 2015 “Emerging Trends.”

One of the over-arching trends in the post-industrial economy is that the rich are getting richer, to a great extent because technology makes it easier to increase returns towards a few, at the expense of the many. Researchers have recently found that a substantial proportion of wealth inequality is due to higher housing prices — so, it stands to follow that the places which house rich people would also get richer.

Earlier, I wrote that previously accumulated human capital advantages means that “The most valuable places are becoming even more so: they account for not only an outsized share of wealth but also the gains of recent years.” This appears to be taking place both between metro areas and within them.

The combination of recession and recovery have had very differential impacts on metro areas, according to the Brookings MetroMonitor. Metro economies whose wealth was tied to housing or manufacturing have lagged, while those tied to technology and energy have grown substantially. (Necessary caveats: This map shows change in gross output, which is heavily influenced by population — both baseline and growth. Thus, it may overstate growth in smaller, faster-growing metros and understate growth in larger, slower-growing metros. Also, the fossil-fuel extraction industry has done very well recently, explaining one-third of Texas’ relative gains, but past performance does not necessarily predict future results.)

GMP change in recent years

So, to some extent, differential price gains are related to income gains — after all, property prices generally track local incomes. Yet prices in first-tier cities, as shown in the graph above, are increasing even faster than incomes, and some form of the hated “speculation” may be at fault. Property in these so-called “gateway cities” is an increasingly popular investment for institutional capital — the money managers who store wealth for the rich. Institutional investors have raised their allocation to real estate by over 50% since 2010; super-low interest rates on cash seem to be behind a surging interest in “alternative asset classes.”

Gateway cities’ large markets and great name recognition means that their real estate values are more stable, transparent, and liquid than smaller cities’ markets. Investors are willing to buy property in gateway cities at lower yields, and thus higher prices (from CBRE’s 2nd half 2014 capitalization rate report):

CBRE 2H2014 cap rates east

Buyers in Baltimore expect 7% yields on their investments, while buyers in DC expect 4.75%. That doesn’t sound like a huge spread, but it’s a 47% difference — a building earning $1M a year in income would command a price of $14,285,714 in Baltimore, but $21,052,631 in DC.

Note that the list is bifurcated: Boston, DC, and NYC, the gateway cities, are all 5% or under, and everywhere else is 6% or up. Investors are willing to pay a lot more money to get the same income in larger (and more reliable) markets, and so prices get bid up.

The same factors that draw equity (ownership) investment to gateway cities also draw commensurate amounts of debt investment — amplifying equity’s effects two to four-fold. Leverage creates a vicious cycle, as we saw during the housing boom: Banks lend based on comparable sales; higher comps mean higher prices are justified, which results in more debt, which raises comps even higher for the next guy.

Friday photo: The first sprouts in a freshly plowed field will be weeds

Country road again

An ecological analogy for retail:

Many of the plants we call weeds originally evolved in tough conditions, where there is annual glaciation, periodic flooding, or severe fires – extreme events that leave exposed, bare earth. It’s in these devastated conditions that our weeds are at home. They germinate first and grow the fastest. And through these characteristics they have found important roles in re-establishing healthy ecosystems… Once the weeds are established, longer-lived plants, less adapted to disturbance, germinate and the process of succession begins. The process may end in a grasslands, woodlands or forest, depending on the soil and climate. Indeed, the weeds create the conditions of their own inevitable demise – inevitable unless of course the disturbance recurs.

The “weedy species” that so many bemoan, the token dry-cleaners and fast-food joints that sprout in brand-new buildings, are one key to building a retail market. Over time, better adapted shops will take root — and given enough stability, species will evolve into very specific ecological niches. These new species will both adapt to their environment, and also change the environment around them. The key is to give the habitat time to evolve by avoiding excessive disturbance — a condition ecologists call “disclimax.”

Cultivating biodiversity requires striking the right balance between stability and renewal. The goal should be less to conserve individuals than to maintain the health of overall communities, to not seek out stasis forever but to manage change for the long term.

Gradual change within human communities also helps to sustain and build linkages, according to a paper by sociologist Katherine King: “A gradual pace of redevelopment resulting in historical diversity of housing significantly predicts social relations.”

CNU conversations: Striking before the neighborhood’s hot

DeKalb Market, Long Island University

Yet more thoughts from our (apparently quite long) lunchtime conversation about community-building.

We talked extensively about how, but where would these strategies have the greatest impact? It’s important to jump off the price escalator — to opt out of the gentrification process — early on, before outside capital floods into the neighborhood.

The “tipping point” in neighborhoods is always tied to outside money. First, an urban neighborhood is “discovered” by suburbanites looking to spend their extra $20s in cute restaurants, then by institutional investors looking for $2 million investments, and pretty soon the whole place jumps the shark. But if the small dollars are ever going to have a chance to win the game, they’re going to have to start early on — or else console themselves to small, subsidized slices of the neighborhood, post shark-jump.

“Favored quarter” locations in gateway cities are probably too far gone (more on this in a future post). Even the immediately adjacent areas have probably been bid up too far to be affordable without turning to outside capital. A Place Corp takes a substantial investment of time, rather than money, so the key is not to overpay.

One approach that can work where explosive change appears inevitable is what I’d call a “waterfall TIF.” This uses redevelopment revenue from a “sacrificial” area — for instance, an underutilized industrial corridor separating a gentrifying area from a stable area — to shore up the affordable housing stock in adjacent areas. Two examples:

  • The Hill District in Pittsburgh is a historically poor, African-American neighborhood overlooking downtown. The Lower Hill was demolished for urban renewal, displacing 8,000, but it was never fully developed, except for one arena. A recently adopted TIF to develop the site will direct property tax revenue “into two separate accounts: one for infrastructure needs in the Lower Hill and one for reinvestment in the Middle and Upper hill.”
  • In Houston, the Midtown TIRZ spent $15 million to purchase 34 acres of the adjacent Third Ward, including hundreds of vacant lots, which was then handed to nonprofits and thus taken off the market.

By the time the usual affordable-housing resources, like TIF funds and inclusionary units start to flow, it’s already too late — prices will already be on an upswing. For maximum effect, resources need to start flowing before new construction and new investment create new amenities, which raise property values. Of course, this requires neighborhood organization (and probably capacity-building) beforehand, to identify areas about to undergo change, and to plan for the process.

Think of it as an approach comparable to Transferable Development Rights, which have preserved many rural communities, just applied to urban communities instead. To use the photo as an example, imagine if some of the value created by the Downtown Brooklyn rezoning (affecting the sites in front of Flatbush) could also have steered capital funds towards rehabilitating and expanding NYCHA’s Ingersoll Houses (at back right).

Friday photo: Vanquished twin cities

Pittsburgh various

Vanishing twin syndrome” is an eerie phenomenon wherein one fetal twin seems to absorb another. Its counterpart, in the annals of American cities, might be called “vanquished twin syndrome”: where one city annexes another, then proceeds to obliterate any trace of its core through concerted redevelopment.

Three of the more notable examples are cities settled at confluences, which naturally offer a choice of multiple townsites on various riverbanks.

Denver faced Auraria across Cherry Creek, the Allegheny River separated its eponymous town (pictured above) from Pittsburgh, and the fork of the Milwaukee and Menomonee rivers fostered three towns — Juneau (east), Kilbourn (west), and Walker’s Point (south).

Yet as these towns were absorbed into larger cities across the way, the old downtowns of Auraria, Allegheny, and Kilbourn all declined into Skid Rows, offering a uniquely cheap combination of deteriorated, frontier-era buildings within a short walk of the principal downtown. Shunned and looked down upon by the ascendant city’s downtown elite and starved for resources (namely the intra-city transportation links that funneled commuters to the principal downtown), they became prime targets for urban renewal.

Kilbourn was wiped out early on, by a City Beautiful government complex. Allegheny’s center was leveled by Alcoa in the 1960s. Auraria was demolished for a university campus in the 1970s.

In a weird twist on the theme, Minneapolis absorbed its rival St. Anthony — but proceeded to tear down its own birthplace, while neglecting its rival for so long that it remained standing until the adaptive-reuse age could rescue it.

Friday photo: Bonsai, artificial limits to growth, and humility

Phipps: bonsai since 1960

Cities are living things that require supporting infrastructure: physical infrastructure, social infrastructure, green infrastructure. They also need room to grow and change.

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. This 55-year-old Scotch Pine at the Phipps Conservatory would, on a managed plantation, have a trunk one foot wide — wider than the magazine at right, about half the diameter of the planter this tree lives in — and be 60-80′ tall.

However, bonsai require a lot of care and feeding just to survive, including extensive pruning to thwart natural growth instincts. Without that pruning, the tree gradually consumes all of the soil’s nutrients and starves. All this intervention turns what should be a robust, independent tree into a fragile hothouse flower, subsisting on life support. At this juncture, even if it was freed from its constraints, this tree could never match the size of its wild counterpart. It’s a neat inversion of the usual relationship between man and nature, but like seeing a bored tiger at a zoo, it’s also a bit sad to see.

Natural systems also impose limits on their own sustainable growth, of course. Cycles see growth culminating in decline and death, then renewal and evolution. But nothing that’s alive stands perfectly still.

Those who propose to stop growth should have the humility to acknowledge that doing so will change the very nature of growing things. By giving themselves free rein to change the city, they are placing a tremendous burden on the resources of future generations.

“Missing Middle Housing”: missing in action for 30 years

Housing completions by # of units in building

Missing Middle Housing” refers to a broad spectrum of smaller-scale multifamily building types that occupy the middle ground between single-family detached and large apartment buildings. At its edges, the term can cover rowhouses and 5+ unit apartments, but in my mind, the core of the “missing middle” are “plexes” — two, three, or four flats on a single city lot. Small apartment buildings like these line the side streets of most of America’s walkable urban neighborhoods: two- and three-flats in Chicago, Polish flats in Milwaukee, three-deckers in Boston, or brownstones in New York.

Census data show that 2-4 unit buildings have almost evaporated over the past generation. As recently as the early 1970s, over 1/4 of multifamily units built were in small buildings. Now, it’s only about 4%.

Despite the steep mid-1970s recession, over 10X as many units were built in small multifamily buildings as today. In boom years, 14X as many were built. It was during the Reagan era that these buildings broadly fell out of favor.

2-4 unit buildings have been a relatively small share of all multifamily construction in the postwar era. Since the 2008 recession, they’ve practically disappeared — with only a few thousand units built nationwide every year:

Housing completions by # of units in building

Next up: Wait, you mean today’s apartment boom isn’t actually that big?