The crisis sharpened the segregation tax, with effects that will reverberate for generations

This sharp illustration of “the segregation tax” comes courtesy of DePaul’s Institute for Housing Studies. Calumet City has a housing stock comparable in age to that in Park Ridge or Des Plaines (areas whose development started in the 1920s, but mostly occurred in the 1950s); Harvey’s is mostly post-war. Similarly, Chatham, Auburn-Gresham, and Avondale all are principally 1920s bungalows and two-flats, with Logan Square having a large fraction of pre-WW1 houses and flats.

Prices in the mid-2000s boom rose substantially in all neighborhoods, fed by ample access to both prime and subprime loans. Even “during one of the hottest housing markets ever, our numbers were showing black buyers still experienced [home equity] losses,” notes Scott Holupka, pointing to disadvantageous subprime loans and inflated prices in segregated neighborhoods.

But the picture in the aftermath of the 2008 crisis has been terrible for majority-Black areas on the South Side, like Calumet City, Harvey, Chatham, and Auburn-Gresham. The “boom” has left huge numbers of Black homeowners underwater, without access to a ready market of creditworthy buyers, and in neighborhoods with sinking home values. On the White or Latino-plurality North Side, values didn’t fall as far during the bust, and have rebounded further since.

These diverging fortunes show that simply achieving milestones like buying a home, or graduating from college, isn’t enough — a deed or diploma’s value is socially constructed, and subsequent policies can do much to determine their future value. A study by Demos finds that the subsequent returns to education and homeownership matter just as much as equalizing access to such wealth-building opportunities:

Eliminating the racial disparity between Blacks and Whites in… would reduce the wealth gap by:
– Homeownership rates: -31%
– Returns on homeownership: -16%
– College graduation rates: -1%
– Returns on college graduation: -10%
– Incomes: -11%
– Returns on income [nil]

Note that equalizing incomes today won’t necessarily have an impact on the wealth that Black families will be able to pass on to future generations: “Even with equal advances in income, education, and other factors, wealth grows at far lower rates for black households because they usually need to use financial gains for everyday needs rather than long-term savings and asset building.”

Mel Jones, in a recent Washington Monthly article, points to how the widening wealth gap presents a particular disadvantage to young Americans of color:

You can’t discuss wealth inequality without talking about race; within the American context, they are inseparable. So the fact that Millennials of color feel the impact of a precarious financial foundation more acutely is not a surprise. For black Millennials in particular, studies point to a legacy of discrimination over several centuries that contributed to less inherited wealth passed down from previous generations. This financial disparity stems from continuous shortfalls in their parents’ net worth and low homeownership rates among blacks, which works to create an unlevel playing field.

Whereas many white Boomers may have used home equity loans to help pay college tuition bills, many black Boomers have negative equity to invest in their children’s education, in their own health, in getting their grandchildren a solid start. The accumulated disparities will cascade down to future generations.

Policies to more equitably distribute the returns on homeownership will have to act on both sides of the crosstown divide — not only lifting up the disadvantaged, but also moderating the outsize gains enjoyed by the “favored quarter.” Economic development should occur more equitably across regions, to help boost demand. However, this difficult task will be easy compared to better integrating the favored quarter, bringing more people closer to high-opportunity places.

“Build all the new housing in downtown’s backyard” isn’t working out well for DC

Construction around Navy Yard Metro

Part three of my multi-part series about housing production in DC went live on GGWash this week. Further installments will examine the impact of so much new housing construction on how central-city neighborhood planning — and begin to examine alternative forms that new housing besides central-city high-rises.

Part 1 – DC built 13% less housing over the past decade than its own citywide plan calls for: In 2006, DC adopted a Comprehensive Plan to guide its development efforts. At the time, the District’s population had just started to perk up after six decades of decline, and the plan reasonably foresaw that growth could continue into the future. The District’s population has indeed grown substantially, but its housing stock isn’t keeping pace.

Part 2 – The lion’s share of DC’s new housing is only going in one part of the city: Over the last decade, DC has built 13% less housing than its Comprehensive Plan calls for. Of the new housing that is going up, most of it is confined to the central city even though the plan recommends only 30% go there. Meanwhile, most parts of the District are building little or no new housing.

Part 3 – Most of DC’s new housing is in high-rises, which most people can’t afford to live in
At first glance, the District’s central-city housing boom might seem to be completely benign: as long as new housing is being built, does it matter where it is? But by funneling almost all new residences into central-city high-rises, the District is all but requiring that new housing be built with only the most expensive construction techniques, on the most expensive land. Potential residents need more choices.

How growing income inequality affects places, part 2: The favored quarter gets richer, the wrong side of the tracks still suffers

The same divergence in fortunes appears to be accentuating price differentials between metropolitan sectors (essentially, “sides of town”). In an economy where the rich are getting richer than everyone else, the rich side of town is also increasing its comparative advantage over everywhere else.

LA office rents

This split was apparent during a recent trip to Southern California. The region might still be “polycentric,” but where one side of town — the Westside favored quarter — now completely dominates local wealth creation. What were merely lopsided prices before have now become absurdly imbalanced, with mediocre buildings on the Westside commanding top rents while perfectly nice areas, like Long Beach and Pasadena, are lagging badly.

In cities where houses or offices on the “right” side of town are scarce, such real estate becomes a privilege only available to the wealthiest people — who, as we’ve noted, are getting wealthier, and in large part because of their houses on the “right” side of town. Even though real estate prices generally track local incomes, the favored quarter of Los Angeles now has prices that track only the exploding incomes of the ultra-rich.

This Redlands ISEA animation of LA-area housing prices from 1988 to 2011, over the course of several cycles, illustrates the “flight to quality” that has occurred during the three busts (mid-90s, early-00s, 2010). At the start, high-value areas are relatively well dispersed across the basin, with only the inner city (particularly the near south and east) suffering from low prices. But, over time, the cumulative advantage of being near the beach increases over time — especially because prices don’t fall as much during the busts, but grow by just as much during the booms.

The trend is perhaps in sharpest relief in high-Gini areas like LA, but is broadly occurring across the country. Joe Light reports in the Wall Street Journal that lower-priced houses are lagging even as prices nationally rebound:

Between January 2006 and May of 2015, the median value of homes in the bottom third of the market has dropped 13% to $101,900, according to Zillow. The median in the middle third is down 6% to $172,600, while in the top third it is off 4.5% to $325,800… The [disinvestment] cycle has been hard to break in large part because low-wage workers have seen little, if any, income growth during the recovery—putting them in weak position to qualify for mortgages.

Recently, Rolf Pendall at the Urban Institute identified the most and least privileged neighborhoods in metro areas nationwide in the 1990, 2000, and 2010 censuses. Over those two decades, the most privileged neighborhoods saw home values rise by an extra $80,000, and their residents actually benefitted from that gain — their homeownership rate is twice as high as in the least privileged neighborhoods. (Since fewer than half of households in the least privileged areas are homeowners, their property value gains accrued to someone else.) Privileged neighborhoods also stockpiled human capital: the growth in their college attainment rate was four times higher than in the least-privileged areas.

This has tremendous implications for intergenerational social mobility, which is closely tied to income, human capital, and wealth. Not only do wealthier families have more private resources for their children, but in a country where schools are largely funded with local property taxes, wealthy communities have more public resources for their children. Three generations ago, legal segregation awarded suburban nest eggs to white families while denying black families the same opportunity — resulting in a “titanic wealth gap” between the races today. (Furthermore, generations of zoning have sought to freeze this status quo, and perpetuate the original injustice)

Thus, the “segregation tax” that penalizes property values in majority-minority communities creates a vicious cycle both for families and for communities, and one that is only getting more pernicious — sadly illustrated recently by the events in Ferguson, Missouri.

Locally, stagnant housing prices in Prince George’s County have contributed to an ongoing foreclosure crisis. Stagnant housing demand from the “underwater limbo” is compounded by its relative isolation from the favored quarter’s jobs engine, and the area’s ongoing “segregation tax” discount. For example, in 1965-1975, the Levitt firm built two large “Levittowns” in suburban DC — Belair in north Prince George’s and Greenbriar in south Fairfax. Even though these are the favored and less-favored sides of their particular counties, near-identical ranches recently sold for an average of $300K in Bowie and $440K in Fairfax.

(An even more striking dynamic can be seen in the Philadelphia area’s twin LevittownsLevittown, PA has property values twice as high as Willingboro, NJ. What’s more, over the 2007-peak-to-2012-trough cycle, Levittown property values declined by only 25%, whereas Willingboro values declined by 50%. And yet, all of the Levittowns began as mostly or exclusively white.)

Meanwhile, formerly moribund downtowns adjacent to job-creating Favored Quarters are finding some success reinventing themselves as the easiest place to add new residential, away from the fierce FQ NIMBYs. The boom in downtown LA’s residential and retail market diverges sharply from its flatlining office market — which still suffers from 20%+ vacancy even though dozens of office towers have been converted to other uses. Downtown Atlanta and Dallas are similarly benefitting from escalating prices to their north.

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. (Yet another greedy developer, Alexander “Boss” Shepherd, is memorialized with a statue right outside the Wilson Building.) 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.”

Friday photo: Be careful what your zoning asks for

In the Penn Quarter neighborhood, as Mark Jenkins wrote in the Washington Post, “arts spaces are mandated by zoning, yet the arts scene is hard to find. Nearly a dozen exhibition spaces populate the area… most don’t have access to the street and aren’t clearly identifiable from outside. They are in lobbies or tucked away in office building interiors.” Here’s one, Terrell Place at the prime corner of 7th & F, that’s not entirely hidden — but also not exactly shouting its noble story to the public. Yet it’s somewhat striking in that it wastes what could be prime retail space across from the National Portrait Gallery and the Verizon Center arena.

The “arts” designation for the “Gallery Place” neighborhood was intended to foster a vibrant community of commercial art galleries alongside working artists, all in the shadow of the Portrait Gallery. Yet instead, there are scarcely any commercial galleries, which require considerable staff investment, and instead many pointlessly large office building lobbies which feature above-average displays of plop art. Perhaps some lawyers and lobbyists have their lives slightly enriched by walking past these paintings, but the general public now derives scant benefit.

The designation is so broadly written that at least two suspiciously spacious bars on E Street — Penn Social and Hill Country Barbecue — both owe their existence to the “arts” requirement. I’m glad that Penn Social has room to spare; it’s a reliable go-to for large events that might not otherwise fit into such a convenient downtown location. But was that really the intent of the zoning?

The situation illustrates the difficulty of trying to define great places, which depend upon a lot of “we know it when we see it” subjectivity, through legal means like zoning. Now that quality retail has emerged as the prime placemaking amenity — anywhere can have open space, but retail’s a lot more difficult — it’s also become something worth subsidizing for its placemaking value. Yet before you can subsidize something, you have to define it.

Doing so will be fiendishly difficult for public entities like municipalities, which will also run into arguments about whether retail is a public good or a private good. However, it should be easier for private entities seeking to cross-subsidize across revenue streams.

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. (Maybe it helps that Illinois law requires only 75% of units to force an en-bloc sale.) 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”

A condominium next to the Huntington Metro has put itself up for sale via an RFP process, with an 80% approval threshold and a requirement that replacement units be built and offered to current residents first.

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.

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.”

(“Four-handle” is bond-trader slang for “4-5%”.)

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).

Will Mayor Bowser recommit to Sustainable DC & MoveDC?

[updated 1 April]

In a recent speech to District Department of Environment employees, Mayor Muriel Bowser offered some warm words about Sustainable DC — but fell short of a full-throated endorsement:

The decisions that we make are often, I would always say, 50 year decisions… The decisions we make around transportation options, whether we put something someplace or not — again, 50 year decisions. What is clear is that we’re making decisions right now that affect the next generation, and shape the options for the generation after that.

We have to be very careful in government about how we distribute our resources, and how we take care of the community. We inherited it, and we have to leave it better for the generations that follow us…

I inherited the past successes… I inherited some good things, and one of those good things was Sustainable DC. And so what I know Tommy [Wells] will do with me is make recommendations on all the things we should keep, all the things we should push harder on, the things we have to add, and if there are things we have to change or delete we should do that too…. I was elected for a fresh start, not a start all over, and so we want to make sure that we’re building on the successes of your hard work… and push the District even farther.

Mayor Gray leaves behind a substantial legacy of ambitious plans, particularly Sustainable DC and national award winning direct descendant Move DC. Both began with citywide public involvement, set ambitious performance goals, and have started to guide real implementation efforts that would, if continued, really advance the long process of creating a truly sustainable District.

Just to put one of those performance goals into a global perspective, Sustainable DC has twin goals of increasing the District’s population by 40% and shifting 75% of commute trips out of cars — baseline goals that MoveDC started with, and crafted an implementation strategy around. Alex Block points out that this is certainly doable, but it isn’t easy.

MoveDC capacity targets

To do so will require more than doubling transit capacity, almost tripling bike capacity, and cutting car capacity by 7%. It would avert over one milion VMT every weekday — which (with current emissions factors, which assume today’s technology) would cut 580 tons a day from DC’s carbon emissions, more than 3X as much as the reviled Capitol Power Plant puts out.

Smart growth policies like MoveDC are a fine example of acting locally while thinking globally, as these are local policies that would have global consequences. The National Research Council & TRB estimate that a national shift towards denser development — including shifting more population growth into the District from the suburbs — would cut CO2 emissions from driving by 11% by 2050, even before any change in vehicle technology. That’s 132 million metric tons of CO2 each year, an amount exceeding all coal emissions from DC, Maryland, Virginia, and West Virginia. Or, put another way, smart growth cuts driving, which could cut as much CO2 as shutting down all of our region’s coal power plants.

Of course, we will absolutely need to do both — and much more — if we’re to have any hope of avoiding a certain existential threat to DC’s future. But only smart growth and energy efficiency cut emissions over the long run, and pay for themselves in the short run.

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.

New economic geography: fewer centers, more edges

from a plane
There’s obviously no room to build anything, anywhere.

October’s Economist Survey on the global economy by Ryan Avent included a shout-out to his Piketty-informed thoughts on housing prices. In short, the productivity gains from current technology have increased inequality between people and places. The returns on specialized skills are worth more in an era of cheap communication and transportation, great cities aggregate many people with such specialized skills –and furthermore, agglomeration effects appear to be growing even as communications costs decline. Even virtual reality won’t be able to replicate the everyday, subtle reinforcement of ambition that great cities provide; as Paul Graham writes:

The physical world is very high bandwidth, and some of the ways cities send you messages are quite subtle… A city speaks to you mostly by accident—in things you see through windows, in conversations you overhear. It’s not something you have to seek out, but something you can’t turn off.

Ideas have become so complex that those with specialized skills need to gather around others with complementary skills just to understand topics, much less to achieve the discovery or innovation stage. And, well, interesting people like one another; not for nothing has “assortative mating” taken off, spawning study of managing “the two-body problem” in fields like academia and medicine. (Hint: bigger cities, with bigger labor markets, are more likely to solve the problem. This has become a boon to universities recruiting in large metro areas, while those in small college towns struggle. The eight metro areas with 3+ R1 universities [Boston, New York, Philadelphia, Washington, Raleigh-Durham, Atlanta, Chicago, and Los Angeles] have a considerable advantage in this regard.)

In short, there are fewer centers and more edges. Scarcity being what it is, the centers (and only the centers) are winning more capital, and the edges are losing.

The result has been a highly uneven reallocation of wealth, whereby some places are winning in the form of skyrocketing property prices. These high prices create a substantial drag on the economy: increasingly high rents in the most productive locations steal from the most productive. This steers:

  1. Capital towards landlords, enlarging a rentier class (as Piketty notes) and starving more productive sectors.* This creates a vicious circle, as the NIMBY cartel further tightens its regulatory capture over the land use regime, and extracts ever-higher rents.
  2. Labor towards less costly, and less productive, places, creating economic losses. One recent study quantified that economic loss to the United States in 2009 at 13% of GDP — equivalent to sawing off the entire state of California.

—–

This might be worth unpacking further at a later date: Just reforming land-use regulations, or even entirely repealing the “shadow tax” of zoning, still won’t do enough to produce sufficient affordable housing. Even if zoning is reformed to “make more land,” that land’s still subject to construction’s “hard costs,” which are just too high nowadays.

Construction costs have risen faster than inflation, and far faster than stagnant workforce incomes. Slides 5-6 of this presentation [PDF] by Thomas Hoffman from Enterprise points out that even with free land, even the cheapest construction now costs 50% more than the affordable rent for a low-income family.

Sure, embedded within construction costs are other perhaps-useless regulations, but housing affordability in gateway cities is a problem with many root causes, and with many solutions as well.

—–

* Rent or mortgage principal paid, aka “housing service expenditure,” does not have a multiplier effect on GDP because it’s not factored into GDP. However, it’s worth noting that in 2000, HSE amounted to nearly $1 trillion, which supported only some of the 1.1 million jobs in real estate (NAICS 531). Reducing rental prices would take investment income from landlords and give them back to consumers, who would probably spend in other sectors that generate more jobs per dollar.