Tag Archives: economics

Renovating Penn Station as an institution, not a building

NYP Cuomo

Beware nostalgia for the old Penn Station. While the railroad station’s current iteration neither functions well nor provides an inspiring space, addressing these problems requires addressing the underlying issues of railroad governance, finance, and operations.

Writing in the New York Times, David Dunlap aims to demolish the myth of Penn Station’s demise as solely an act of civic vandalism. Penn Station’s decline was a symptom of major shifts in transportation finance, travel patterns, and urban development. Railroads were accustomed to their monopoly position and regulated accordingly.

With the rise of direct competitors for both intercity and commuter traffic from airlines and cars (both subsidized by the government), change was inevitable:

In “The Late, Great Pennsylvania Station,” Lorraine B. Diehl said the death knell first sounded in 1944, when President Franklin D. Roosevelt signed into law a bill to provide $1.5 billion in federal financing for new highways, including an interstate system.

It sounded again in 1947, when the Pennsy reported an operating loss for the first time in its long existence. One month later, in March, a United Air Lines DC-6 reached La Guardia Airport only 6 hours 47 minutes after it left Los Angeles.

It sounded again in 1949, when the railroads’ share of intercity passenger traffic fell below 50 percent. And again in 1956, when construction of the interstates began in earnest. And again in 1958, when National Airlines inaugurated domestic jet travel with a run between New York and Miami that took just 2 hours 15 minutes.

Intercity travel and freight were the most profitable business lines for railroads. Commuter trains provided some feed for longer distance trains, but were an otherwise marginal business. In reality, the business was in decline well before 1944; Ridership for transit of all forms declined during the Great Depression (along with the rapid expansion of suburbs and proliferation of the automobile), only propped up by travel restrictions during WWII.

Penn Station’s edifice was torn down because the economic model of American railroads, predicated on their monopoly on metropolitan mobility, collapsed. Looking to monetize their assets, developing their lucrative real estate seemed obvious. For Penn Central, it wasn’t enough to save the company. Still, the loss of the building draws most of our attention.

Even today, we tend to focus mostly on Penn Station as a place, rather than on the underlying tunnels, tracks, and organizations that operate them. Last week, New York Governor Andrew Cuomo unveiled his reboot of the longstanding plans (with a throwback to Gov. Pataki and Pres. Bill Clinton) to redevelop Penn Station, complete with a rebranding.

The full presentation slide deck includes lots of flashy renderings of what’s possible, building off of the same basic concepts as before: relocating Amtrak functions to a new facility within the Farley Post Office building; removal of Madison Square Garden’s theater and a complete redevelopment of Penn Station’s concourses below.

There’s a lot to be said in marshaling the political will to get something done. Cuomo’s presentation doesn’t shy away from that ambition. But ambition alone isn’t enough. Given the challenges in executing complex projects, it’s not surprising to see figures like Robert Moses viewed favorably. But are you executing the right projects?

Slide #6 from Gov. Cuomo's presentation, complete with Robert Moses.

Slide #6 from Gov. Cuomo’s presentation, complete with Robert Moses.

Not only does the focus on the building itself miss the real capacity challenges for Penn Station’s infrastructure, it also elides over the very real challenges for operations and governance. Adrian Untermyer reminds us of the key governance challenges to success for any plan:

In 1970, one railroad controlled the transportation hub. After it went bankrupt, New York State took over trains to Long Island, New Jersey took over trains to the Garden State, and the Feds took on the rest…

Even with a reinvented station complex overhead, the Long Island Rail Road, New Jersey Transit, and Amtrak will still share the mostly same tracks, cramped platforms, and underwater tunnels. It’s unlikely that decades of dysfunction will disappear after the ribbons are cut.

Finding effective governance solutions for both the physical station as well as the underlying railroads that use it is a much bigger challenge. During the monopoly era, before the creation of either the MTA or Amtrak out of the remnants of Penn Central, that kind of vertical integration clarified things. Current governance is muddled.

Lack of integration and coordination among various stakeholders isn’t a new problem. When New Jersey Governor Chris Christie killed the ARC project, some advocates celebrated the demise of a flawed project with the hope for a better one. ARC’s primary flaws stemmed from an inability for the key stakeholders to effectively coordinate investments. Instead of one railroad forcing coordination, Penn Station was a battle between three entities (Amtrak, NJ Transit, and NY’s MTA – each with different priorities and different leadership).

The unwillingness to share turf isn’t just a challenge for Penn Station, coordinating between two states and Amtrak; but even within the MTA. East Side Access, connecting the Long Island Railroad to Grand Central Terminal is an extraordinarily expensive project, opting for a deep cavern terminal station under Manhattan instead of a potentially cheaper and more useful option that would’ve required better coordination and integration between the MTA’s own commuter railroads. Instead of tackling this issues, the MTA opted for the more expensive solution.

Integration isn’t easy. The MTA’s split personality for regional rail dates back to the differences between the PRR and NY Central railroads. The merged Penn Central couldn’t integrate; it’s not a surprise integration hasn’t happened without some larger outside incentive to do so. The past decade of airline industry consolidation in the US shows how hard this can be, even with incentives.

The real challenge isn’t in finding the right design for a new Penn Station, but in reforming the institutions that operate and govern our transit systems.

Zoning restrictions on housing supply catch the White House’s eye

In case you were wondering, the White House grounds are technically unzoned - as is a lot of federal property in DC. Screenshot from the DC online zoning map.

In case you were wondering, the White House grounds are technically unzoned – as is a lot of federal property in DC. Screenshot from the DC online zoning map.

Zoning has been on the national stage in the past few weeks, starting with this paper (just hovering on a link to whitehouse.gov is good to see) based on remarks delivered to the Urban Institute on Nov 20 from Jason Furman, chair of the White House Council of Economic Advisors:

In today’s remarks, I will focus on how excessive or unnecessary land use or zoning regulations have consequences that go beyond the housing market to impede mobility and thus contribute to rising inequality and declining productivity growth.

For more in-depth commentary, I’d recommend the following:

  • Joe Cortright at City Observatory: “these observations show the pervasive and powerful effects of what we’ve called the nation’s shortage of cities.”
  • Matt Yglesias at Vox: “for younger people, for renters, and for the overall cause of social and geographical mobility it’s a disaster.”
  • Gillian White at the Atlantic: Rent seeking “often means that changing zoning laws or other supply-constricting regulations is in the hands of those who stand to collect on those economic rents in the first place, which can make change slow and difficult, if it happens at all.”
  • Paul Krugman at the New York Times: “Rising demand for urban living by the elite could be met largely by increasing supply. There’s still room to build, even in New York, especially upward.”

I had two immediate reactions to the paper: first, it’s great to see the White House recognize the importance of issues like this. Getting an issue like this on the national stage, linking it to a salient national political issue such as inequality is important. Getting someone like Paul Krugman to devote his NYT column to the subject is great to see (note that Paul Krugman is no stranger to urban economics: he won the Nobel Prize for his work on economic geography and agglomeration economies).

Second, given the scale and importance of the issue, the list of administration actions is underwhelming. Affirmatively working towards fair housing, offering incentives to localities to loosen zoning, and HUD’s program to lessen lending risk for multifamily housing development are all good ideas, but seem small in comparison to the scale of the issue.

It’s hard to say if there’s more that could be done administratively at the Federal level. In the absence of additional legislation, it’s hard to make the case for federal interference in an ostensibly local issue like zoning (no matter the national interest). Perhaps there are additional tools available that build on new rulemaking enabled by existing fair housing laws (perhaps involving litigation in the courts as well) in the same vein as New Jersey’s Mount Laurel doctrine.

Even with the national scope of housing supply constraints and their clear impact on the national economy, Pete Saunders at Corner Side Yard is quick to point out that housing demand is far more varied across the US. This presents yet another issue in raising housing supply as a national issue – it’s not a uniformly national issue. Relaxing the restrictions on housing supply only matter in the face of demand pressure – and many markets in the US don’t have the kind of demand to drive up housing costs in the first place.

Dispatch from the battle lines over Globalization: US Airlines take on the Middle East Carriers

Dubai International Airport. CC image from Raihan S.R. Bakhsh

Dubai International Airport. CC image from Raihan S.R. Bakhsh

There’s a fight brewing amongst big international airlines. The old guys are complaining that the new kids aren’t playing by the same rules; the new kids argue that the old guys need to step up their game. The dispute represents a fascinating window into a very public battle over globalization. What are the rules, and who gets to make them?

A coalition of the three major American airlines (American/US Airways, United, and Delta) combined with many of the unions that represent their employees are putting on a full-court press (complete with ads in DC’s Metro), arguing that the Big Three carriers in the Middle East (Emirates, Qatar, and Etihad – often abbreviated as the ME3) are undermining the principles of free and fair competition with subsidies that distort the market. The Gulf air carriers are pushing back against the accusations, arguing they provide a superior product at a lower cost. Vox has a brief article that summarizes the arguments for both sides.

The US carriers outline billions in subsidies to these carriers. They include everything from subsidized development of the region’s massive airports to interest-free loans and infusions of capital from the ruling families – who also own the airlines themselves.  The alleged subsidies support Qatar and Etihad to a greater degree than Emirates (the paper alleges that Qatar and Etihad would not be viable commercial businesses without their subsidies; not so for Emirates). You can find the white paper and presentation here.

ME3subsidies

Summary of the subsidies alleged by the US carriers. Image from the Americans for Fair Skies presentation.

Central to the debate are the United States’ Open Skies treaties with Qatar and the United Arab Emirates. Open Skies treaties deregulate the routes and destinations for international air travel between the two signatories. The US State Department prioritized signing Open Skies agreements since signing the first such agreement between the US and the Netherlands in 1992 (see the full list of agreements here, as well as the text of a sample agreement).

There is an inherent asymmetry in any Open Skies agreement between the United States and Qatar or the UAE; due to the small size of those countries, the agreements only add two or three destinations worth serving for US airlines (indeed, there are only two scheduled flights to Qatar or the UAE from US-based carriers – Delta flies ATL-DXB and United flies IAD-DXB). Gulf airlines, however, earn rights to fly to a wide array of American cities.

Part of the success of the Gulf carriers is due to the geographic advantage of the Middle East hubs. Dubai has long served as a stopover point for refueling along the Kangaroo Route. Now, carriers like Emirates use Dubai as centrally located hub to efficiently connect air traffic between Europe, Africa, India, and Southeast Asia.

However, there’s more to the rise of the Gulf carriers than advantageous geography. For these Gulf states (often, effectively, city-states), focusing on aviation is a deliberate economic development strategy. When you’re talking about state-owned businesses, how do you differentiate between the viability of the various airlines as businesses from the state’s explicit policy of aviation-focused economic development? In their white paper, the US carriers make the case that Open Skies agreements assumed that an open market would provide a superior business model to state-owned airlines (and there is a long history around the world of poorly run state-owned airlines) and that competition would bring this truth to light. However, with the rise of State Capitalism, the US carriers argue, it’s not clear that assumption can be trusted.

It’s the next step in the idea of developing around the aerotropolis. Instead of building your economy around an airport, why not build it around an airline? Dubai’s success in developing their middle-eastern metropolis around a global aviation hub inspired Qatar and Abu Dhabi to do the same – a strategy that not only required the airport, but the airline to feed it.

The Gulf carriers aren’t just looking to their Middle East hub airports, either. Emirates took advantage of struggling Alitalia to earn a fifth-freedom route from Milan to JFK. Emirates makes no secret of their ambitions to offer service around the globe via some key fifth-freedom routes:

President Tim Clark has revealed the first details of what looks like the next step in Emirates’ march to become a truly global powerhouse. On the sidelines of last week’s International Air Transport Association (IATA) annual general meeting in Cape Town, the airline outlined plans to set up a major transpacific operation. Its aircraft would be flying through intermediate points in Asia to destinations in North America. What is making the threat even more serious for Asian and U.S. airlines is that Emirates has another 67 Airbus A380s on firm order, which—like its large incoming fleet of Boeing 777-300ERs—has the range capability to fly from many points in Asia to cities far beyond the U.S. West Coast.

Emirates can choose from several geographic points that offer the necessary aeropolitical framework. The United Arab Emirates (UAE) has an open skies agreement with the U.S. “It allows us to take passengers on a fifth-freedom basis from the West Coast and central points in the U.S. to points in Asia,” Clark says. In Asia, there are open skies agreements with Thailand and Singapore. Emirates also has similar rights for some destinations in Japan.

Bold added. This is the root of the entire debate: a battle over the details of a global aeropolitical framework. A battle over the rules.

When it comes to Emirates, their Dubai hub isn’t the concern from the US carriers. The real concern is these aspirations to cover the globe with fifth-freedom traffic. Delta claims that the ME3’s cheap connections in Dubai make it difficult to serve India directly from the US (and presents strong competition for the European joint venture partners if connecting to India in Europe). Flying to US cities from Europe or Asia directly (e.g. the current New York-Milan service, if expanded to other airports) threatens to undermine direct service to Europe; additional fifth-freedom routes across the Pacific could do the same. Brett Snyder notes the concern about hurting the overall network:

If the Middle East carriers skim the international markets with the most traffic, then the US carriers will have to cut back service. When international flights get cut, the whole network becomes vulnerable. The end result is probably less service for smaller and mid-tier cities. It’s just the way the network effect works.

While the American carriers are asking the US Government to revisit these agreements, the Feds must balance other US interests in the region beyond air travel. Qatar and the UAE host a number of US military facilities. The US has a large trade surplus with both nations, partly due to companies like Boeing selling lots of widebody airliners to the Gulf Carriers. American cargo airlines like FedEx take advantage of Open Skies in a similar fashion to the Gulf carriers, facilitating global cargo movement. In other words, it’s not clear the US carriers have a sympathetic ear from the Federal government.

The PR campaign from the US carriers is an attempt to change policy by influencing public opinion, but it will be an uphill climb with the general public. Counter-arguments from the Gulf carriers ask why the American carriers are afraid of competition. US airlines aren’t exactly earning lots of sympathy from the public.

The PR battle is also getting nasty: Qatar Airways’ CEO accuses Delta of flying “crap” planes without a hint of irony: it’s not hard to buy nice, new aircraft when you can fall back on massive capital infusions (as alleged in the white paper) to buy those expensive aircraft. Lufthansa’s CEO, facing a strike from his unionized pilots, joked that he should hire Qatar’s CEO as his union advisor (unions being illegal in Qatar and the UAE). And while customers might like the product and the price point offered by the Gulf carriers, it’s not clear than anyone in the US would be willing to accept the trade-offs that make that product possible.

The white paper notes that the subsidies documented meet the World Trade Organization definition. However, even though both Qatar and the UAE are part of the WTO, aviation isn’t a core part of the WTO’s agreements.

If aviation were a part of the WTO, there would be a specific process to raise and resolve disputes. In other trade areas, the WTO can authorize the use of ‘counterveiling measures’ against subsidies and dumping, such as tariffs or restrictions on trade volume. But here, there aren’t any specific rules governing aviation – hence the PR campaign.

In essence, this is a battle over the rules. If the story of the aerotropolis is the story of globalization, is this a tide that lifts all boats? Or is it a race to the bottom? Competition is good, but what if the basis for that competition is based on the rules governing labor markets in Qatar or the UAE? Will the fight over the rules of the game lead to improvements in working conditions for migrant labor in the middle east? While the US airlines are certainly acting in their own self-interest, is this battle similar to the public scrutiny over Qatar’s labor practices in advance of hosting the 2022 World Cup? Could this battle over the rules not only find room for fair competition, but also leverage an improved quality of life elsewhere in the world?

Or is all of that wishful thinking?

“Hyperdensity” and providing cities the room to grow

CC image from Alan Grinberg

The first thing crossing my mind when reading Vishann Chakrabarti’s piece in Design Observer (Building Hyperdensity and Civic Delight) was: what the hell is ‘hyperdensity?’ Thankfully, Chakrabarti answers that question in the first paragraph: “density sufficient to support subways.”

The second thing to cross my mind was why he would frame a reasonable kind of urbanism – transit-supportive density – in such extreme terms? Chakrabarti is a principal at SHoP Architects and a professor at Columbia. Hearing someone in that position praise the very real benefits of density isn’t surprising, though the framing of the issue as ‘hyper’-anything seems naive in the face of neighborhood opposition to even minor changes like the allowance of accessory dwelling units.

Contrast Chakrabarti’s position to that of Brent Toderian. Toderian, formerly the chief planner in Vancouver, BC, is a veteran of many contentious civic battles over development and density. His calling card is to focus on mitigating any possible downside of density, re-branding the ideal as ‘density done well.’ Leaving aside any substantive differences between Toderian and Chakrabarti, the difference in framing is significant. Both praise the benefits of density for an urban economy, for climate change, and for city life; both agree that dense environments demand good design to address the challenges that density can present. Yet, Toderian emphasizes that it can be ‘done well’ (implying that it currently isn’t done well) while Chakrabarti emphasizes the need for more density (implying that we don’t currently have – or allow – enough of it).

Chakrabarti isn’t satisfied with the small-scale focus from current planners, and embraces the general focus of the econourbanists:

Today the global economy demands that we embrace large buildings not just for housing but also for many modern office functions; yet many planning professionals remain fixated on smaller-scale development. They tend to ignore that height limitations have held back the Parisian economy in comparison to the forward-looking redevelopment of London, both at Canary Wharf and within its city center, which is now marked by a series of glistening and respectful new towers by Norman Foster, Richard Rogers and Renzo Piano. There is, in fact, a marked correlation between those European cities that have allowed skyscrapers and those that have successful economies.

Chakrabarti also mentions the challenges of building denser cities in today’s regulatory environment of zoning codes and lengthy reviews, risk-aversion from incumbent residents and landowners, and the feasibility of adding new infill development into established neighborhoods without fundamentally altering their character.

Perhaps the single most compelling reason to act is the growing challenges of affordability. This Wall Street Journal article highlights the challenges in New York, quoting Professor Chakrabarti extensively:

In the coming decades, New York could confront a problem many cities would love to have: too many people and nowhere to put them.

The city is expected to add one million more residents by 2040, but there likely won’t be room for hundreds of thousands of them unless a small city of new housing is built, according to a report by a Columbia University think tank.

“What surprised me most was the scale of the problem,” Mr. Chakrabarti said. “It’s a clarion call that we don’t have enough housing.”

At the same time, plenty of other publications about affordability challenges in cities around the world do not even mention the restrictions on and challenges to add housing supply.  At the same time, the fact that many American cities used to have more people residing in the same area will lead them to believe that the city can accomodate more people without exanding the city’s building stock. The reality is that those older population figures included larger household sizes and fail to account for housing stock lost to commercial development from expanding downtowns. Payton Chung looks into these claims for DC:

These conditions were common in District homes at the time. The 1950 census found 14.1% of the District’s 224,142 occupied housing units to be overcrowded (with >1 person per room). By 2011, that figure had fallen two-thirds, to 4.7% (an increase from 3.3% in 2008) — a figure lower than the 5.3% of homes that were extremely overcrowded (>1.5 occupants per room) in 1950.

On average, every apartment and house in DC had one more person living inside — households were 50.2% larger! In 1950, 3.2 people occupied each dwelling unit (for non-whites, it was 4.0). In 2007-2011, the number of persons per household had fallen to 2.13, while the number of housing units had grown to 298,902.

As the city gets reacquainted with the notion of population growth, and begins to plan for a much larger population within the same boundaries, we’ll have to have a realistic conversation about household sizes and housing production. A change of just 0.09 persons per household means the difference between planning for 103,860 units or 140,515 units.* In either case, though, that is one heck of a lot of construction for a city of 68 square miles, of which 10.5 are parks and 7 are underwater. It works out to 2,000-3,000 additional units per square mile — as simple as building a platform and plop 5 DUA suburbia across it, or as complicated as infilling a contentious, built-up city. (More the latter than the former, I suspect.)

That problem can’t be solved with just a few new mega-development sites absorbing all of the demand for urban growth. It requires existing neighborhoods to help absorb some of that demand.

At the same time, Chakrabarti is well aware of the regulatory challenges to merely allowing the market to add density to an already-established city:

At Columbia University, my students and I have been working on a concept I call “cap and trade zoning,” which would allow the free flow of air rights within an urban district, with an understanding that the overall amount of developable area would be capped in relation to proximity to mass transit. This would result in hyperdensity, to be sure, but would also create a “high-low” city of diverse heights, uses and ages. This concept would strengthen small businesses by permitting owners to sell their air rights, while allowing development to occur on nearby lots. Critics may argue that this approach would result in unpredictable development with varying building scales, to which I would reply “Hip hip hooray!” Much of what passes as good planning today is known as “contextual zoning,” a mechanism through which new architecture is tamed into mediocrity by mimicking a false understanding of the scale and aesthetics of existing neighborhoods. Too often this process allows a lowest-common-denominator mentality to trump the wonders of the unpredictable city. Half a century ago, in The Death and Life of Great American Cities, Jane Jacobs relentlessly critiqued the planner’s urge for control; her critique is no less pertinent today.

The concept is good, but what remains to be seen is if it could pass the political test – and if it could adjust the regulatory process (not just the regulatory content) that governs urban development decision-making. Perhaps the first test of the political viability of ‘hyperdensity’ will be if the name helps advance the needed regulatory reforms.

Crowdfunding and cooperatives – more thoughts on Fundrise and alternative models for urban development and finance

CC image from harrypope

Following up on the previous post on the limits and potential benefits of Fundrise:

First, from Payton Chung, an excellent breakdown of the limits and potential benefits of the crowdfunding platform. Payton identifies three general benefits to a Fundrise-like system: ‘slower’ and cheaper money; participation and trust of the investors; and as an opening for even better investment vehicles.

The idea of ‘slower’ money refers to the more patient investment from Class C shareholders who cannot realistically expect a quick flip or immediate return. Such patient capital is particularly useful when navigating projects that do not follow the path of least regulatory resistance – as Payton notes, slower money “eases longer-term thinking about the investment.”

Participation and trust speak to the idea of channeling broad-but-shallow support for development from a mostly silent pool of the community (potentially representing a silent majority). Payton notes that some local control helps gain support, but that support is not limitless. I would liken it to the disparate treatment of chain stores and restaurants compared to locally owned ones. The local retailers might gain more support than a chain, but that support is far from universal or far from guaranteed.

Transitioning to better investment vehicles requires more than just what Fundrise is offering – not just for development, but for long–term ownership and stewardship. Payton cites co-ops as an example:

Fundrise is certainly a great idea, but the lack of community control limits its ability to establish trust in the community development enterprise. Yet it’s an important part of a broader conversation that’s just beginning around using crowdfunding innovations to improve communities. We can try many other tools — some new, some tried-and-true — to give communities greater control and input over their character and future. Cooperative businesses, like the one I founded, are growing all across America, and they play a key role in affordably housing thousands of Washingtonians (including myself).

Second, the idea of an increasing role for cooperatives is linked to the second article: an update on the status of DC’s mandatory inclusionary zoning statute from Aaron Wiener at the City Paper.

The code requires the provision of subsidized housing units for all developments above a certain size. However, in for-sale properties, the requirement to preserve long-term affordability in the units requires some sort of deed restriction to prevent the later sale of a unit at market rates. This both limits the long-term appreciation of the property, but also makes traditional mortgage-based finance difficult. Such a program for preserving long-term affordability might be at odds with the traditional model of housing finance and home ownership. Wiener writes:

The central difficulty in selling the units has been that lenders were unwilling to provide loans for IZ units because those units would remain affordable in the event of foreclosure, limiting the bank’s ability to recoup its money. But recently, the rules changed to allow the units to return to market prices.

Purchasers of affordable units have issues with the system, as well. Cooperative ownership (both market-rate and limited equity) might present a better way to manage permanently affordable units.

Real estate as investment vs. real estate as city-building

CC image from John M.

Fundrise is one of the most hyped developments in real estate in recent years. Is it a major shift in real estate investment? Maybe, maybe not. If nothing else, Fundrise and the surrounding hype/criticism exposes the dual nature of real estate as both an investment and the critical element of how we build our cities.

In last week’s Washington Post, Jonathan O’Connell sought to burst the bubble by soliciting the opinions of various real estate and financial experts on the terms and conditions that Fundrise offers to potential investors:

“I would never recommend this kind of investment for my clients,” said Russell McAlmond, president of Evergreen Capital Management. “It has almost every kind of risk imaginable that one may have with commercial real estate. If it works and they find a tenant, you may receive some kind of return, but by taking huge risks.”

Said Derek Tharp, of Mote Wealth Management: “They may have noble intentions and it may work, but if anybody does do this, this should be money they could otherwise just flush down the toilet.”

The problem with the evaluation of these experts is that the mis-diagnose the purpose of an investment in a Fundrise offering. Emily Badger responds in Atlantic Cities: 

Crowdfunded real estate isn’t an important idea because it may enable the lady next door to make it big like a real-estate developer. It’s an important idea because it changes the trajectory of neighborhoods. The crowdfunding mechanism changes what gets built. O’Connell’s query with wealth investors – who have no reason to be interested in this question – misses this point.

This isn’t to say that the wealth managers aren’t correct; investing all of one’s savings into Fundrise would not be a wise investment. But they approach Fundrise with a fundamentally different mindset than one does if they think of it as Kickstarter for cities. It’s not as if donors (perhaps a more useful term in this case than ‘investors’) are rigorously investigating the potential returns of such investments – Gawker raised more than $200,000 to buy a video of Toronto Mayor Rob Ford allegedly smoking crack, after all.

The combination of common purpose, a large base of donors/investors allows for individuals to risk little individually (some Fundrise shares are as small as $100) while potentially pooling resources at a sufficient scale to have an impact. I suppose one of the wealth managers could make the case that the $100 share would be better invested in an IRA, but that likely misunderstands why someone would buy such a share (or why someone gives money to a Kickstarter campaign, or to a political candidate).

So, will it work? That is, will it deliver quality projects while satisfying the demands of investors (whatever those demands may be – if they exist at all) so that people will still give up their money for new projects? Matt Yglesias is skeptical (for a variety of legal and technical reasons), but notes that if it works, it could do so by slaying neighborhood opposition to new development:

Still, the main reason I want to believe isn’t because I hope for a huge return, it’s about politics. Specifically the toxic local politics that too often loads the dice against change and new businesses. Here in Washington, even a proposal as innocuous as replacing a vacant storefront with a functioning restaurant attracts politically potent complaints about noise and traffic…

The real promise of Fundrise is that it gives pro-growth members of the community a way to become literally and figuratively invested in the success of a project. A building owned by hundreds of local people, rather than owned as part of a pooled investment vehicle marketed to pension funds, is one that’s much more likely to get a sympathetic hearing from local authorities. It’s also one that’s much more likely to inspire people to show up to meetings and hearings and make the case for development and expansion. As George Mason University Law School’s David Schleicher has observed, despite the stereotype of politically powerful real-estate developers, in practice most cities’ legal framework “creates a peculiar procedure that privileges the intense preferences of local residents opposed to new building.”

The other potential benefit isn’t just in cutting through local politics, but in better aligning the dual roles of real estate investment and city building. In a profile of Fundrise in the New York Times, founder Ben Miller put it this way:

They realized that who the investors are and where the money comes from determine what gets built: distant private equity backers who see a deal as simply an investment vehicle tend to put up cookie-cutter projects and strip malls anchored by chain stores — hardly what the community may want or need.

“Who your money is affects what you build, but no one ever thinks about that,” said Benjamin Miller, who also co-founded a site called Popularise that lets developers solicit input from the community. “We’re taking an institutional asset and changing who gets to invest in it.”

In other words, a great deal of real estate development simply follows the path of least resistance. If Fundrise really takes off, it will do so by changing that path on the finance side. The Fundrise management team is also selling themselves, as they are essentially asking for silent partners for these projects. If their investors are to help smooth over an approvals process, they’ll need to feel involved enough in the concept to lend their support – in addition to their cash.

They are selling the chance to help shape the city more than they are selling the chance to invest in it.

Development costs and housing affordability

Vancouver towers along False Creek. Photo by author.

Two competing narratives often emerge when talking about policy responses to housing costs. One asserts that lowering the costs of construction and development will allow those savings to be passed on to eventual users of the real estate; the other asserts that markets set prices, and lowering the cost of development would yield pure profit to developers who will charge what the market will bear. So, which is it? The Vancouver Sun has a series of articles on housing affordability in Vancouver, BC. One of these articles focuses on development impact fees(among other causes) and their role in affordability. The two basic narratives are on display:

“The significant cost premiums of building new homes in Vancouver, compared to Surrey, leads to two observable results,” said Anne McMullin, president and CEO of the Urban Development Institute. “Either the increased costs will inevitably be passed on to homebuyers or the viability of building new market housing will be suppressed. Regardless, the end game is a more unaffordable and less socially sustainable city.”

She says the most obvious way to address affordability is to look at the costs and supply of housing.

“Costs affect supply — if it’s too expensive to build, you’re going to limit the supply. But we still have the demand. There’s always going to be a demand — there are buyers who can afford it.”

But Brian Jackson, the City of Vancouver’s general manager of planning, says market demand drives the price of housing much more than the costs of development.

“If we took $1,000 off the cost of the CACs or we took $1,000 off the cost of the DCLs,” Jackson said, referring to two types of city development fees, “is the developer going to take $1,000 off the cost of selling the house? I don’t think they would – they’re going to get the highest price that they could.”

These two narratives aren’t necessarily at odds with one another. In the short run, a small decrease in development fees (thereby lowering the cost of development) wouldn’t likely lower costs. However, the total fee amounts per unit in Vancouver are substantial – on the order of $76,000 per unit, according to the Sun’s figures. That’s roughly equivalent to the cost of an underground parking space. If you were to remove the fees, would developers merely pocket the difference as extra profit? Recall research on the liberalization of parking space requirements in Los Angeles: removal of these requirements lowered the cost of development in Downtown LA, but the results were not merely additional profit for developers. Instead, the lower development costs allowed developers the flexibility to build for a wider variety of sub-markets and price points.

Instead of the high-cost regulations forcing them to build Cadillacs, lower costs allow them to build a wider variety of products to meet a wider range of price points. If the costs are too high, developers have little choice but to aim for the luxury submarkets.

Markets do indeed set prices; and in the short term, developers won’t necessarily lower their prices. However, the markets are deeper and more complex in the longer run and allowing flexibility to build to those submarkets will produce a wider range of products, not just catering to the luxury set. As that housing ages, it can filter to lower-priced submarkets. Filtering isn’t a set policy so much as it is a description of  how housing markets work.

Note that some of these Vancouver fees might only apply to units in re-zoned developments. However, that raises the question of if there is enough by-right development capacity not just within a city or political jurisdiction, but in areas with demand for market-rate development. Also note that in many places, by-right development is increasingly rare, subject to negotiation and incentives as a part of the approvals process. A profile of New York’s Amanda Burden in last year’s New York Times noted that “there really doesn’t seem to be any true as-of-right development anymore.”

Those development fees aren’t just collected for fun, however. They’re paying for something. However, as is the case with parking, is collecting these fees the best way to accomplish the goals? Over at Human Transit, Jarrett Walker notes some of the perverse incentives baked into development fees, and the unintended consequences therein. Jarrett cites this post from the Pembina Institute, looking at the often-perverse incentives packaged into these fees:

Developers continue to build in sprawling greenfields because it is often cheaper and easier than building developments in walkable, transit-oriented neighbourhoods. Lack of supply means homebuyers are priced out of these locations and are literally “driven” to the urban and suburban fringes, where long and stressful auto commutes are required — and this only leads to more congestion.

Building transit is only one half of the solution. Toronto also needs to make sure we get the right mix of development in the right places to support and use transit infrastructure. Perhaps this current process of examining revenue tools will create an opportunity to do so.

As noted previously, a great deal of development will follow the path of least resistance. These kinds of fees might provide an easy way to fund new infrastructure, but they also add to the overall cost of development. Other tools for capturing that value and channeling it to the needed projects might offer fewer unintended consequences. One such unintended consequence is to push development into outlying areas, or force development to only serve the luxury submarket.

Prescriptive urbanism vs. market urbanism – the tension between demand for more housing and the desire to curate great cities

San Francisco skyline w/ crane. CC image from Omar Omar

Tales from two cities:

San Francisco: From Ilan Greenberg in The New Republic – San Francisco’s Gentrification Problem isn’t Gentrification. Greenberg compares the public debate (often writen, and discussed previously here) in San Francisco compared to more the more familiar narrative in other cities.

Here, the debate is dominated by fierce new champions of the anti-gentrification cause who aren’t concerned so much about the truly poor being forced from—or tempted out of—their neighborhoods. In their view, the victims of gentrification are also affluent, just less so than the people moving in. And the consequences are supposedly catastrophic not only to these relatively well-off people who are living amidst people even more well-off, but a mortal threat to nothing less than the rebel soul of San Francisco.

While the conversation may not fall into the same narrative as other cities, that doesn’t make it more useful. Greenberg notes that the San Francisco conversation can “suck the air out of a reality-based conversation” about affordability.

Greenberg spoke with Peter Cohen, a San Francisco housing advocate:

Sitting in the worn lobby of a hotel patrolled by security guards near Twitter’s new corporate headquarters, and armed with documents showing statistics on skyrocketing rents and rising tenant evictions, Cohen came to talk about disenfranchised people struggling to keep financially afloat and about the legal intricacies of deed-restricted affordable housing. He said he expects to have an uphill climb to reach new residents obsessed with buzzy restaurants and city officials in thrall to new tech business interests, but now also struggles to be heard over the din of middle-class residents moaning about the “gentrification” of their neighborhoods—residents who themselves may have been gentrifiers, or more likely followed in gentrifiers’ footsteps.

Greenberg writes of this narrative as if it were inevitable: “The compact city has a long history of clubby NIMBYism and knee-jerk preservationist politics that torpedoes even the most sensible development projects.” In addition to the outright opposition, fees and a long approvals process increases barriers to new housing supply in the city.

Some opposition to new development is that it makes the city dull. This isn’t the first time such arugments have come up. Inga Saffron, also writing in The New Republic made the same case that gentrifcation brings monotony. Writing specifically of San Francisco, Charles Hubert decries the “homogenization” of the city.

Part of the challenge is that rebuffing that monotony probably requires more development to meet the demand, not less. It’s a somewhat counter-intuitive proposition. Another challenge is the notion that cities do not (or should not) change, when history says otherwise.

Brooklyn: San Francisco’s experience is not to say that fears of monotonous development aren’t somewhat warranted. Unleashing the market alone won’t solve all urban ills. The Wall Street Journal looks at the results of one of New York City’s rezonings, ten years later, with some detrimental effects on 4th Avenue in Brooklyn:

But the Planning Department lacked such foresight in 2003 when it rezoned the noisy avenue to take advantage of the demand for apartments spilling over Park Slope to the east and Boerum Hill and Gowanus to the west. Focused primarily on residential development, it didn’t require developers to incorporate ground-level commercial businesses into their plans, and allowed them to cut sidewalks along Fourth Avenue for entrances to ground-level garages.

Developers got the message. With the re-zoning coinciding with the real-estate boom, they put up more than a dozen apartment towers, many of them cheap looking and with no retail at the street level, effectively killing off the avenue’s vibrancy for blocks at a time.

The city finally got wise and passed another zoning change last year, correcting some of these mistakes.

The shortcomings on 4th Avenue show the tension between market urbanism and proscriptive/prescriptive urbanism (and both words probably apply) but it also shows the power of incentives and how development tends to follow the path of least resistance. But it’s not like this outcome is solely a product of the market.

Some of the architects responsible for middle-brow architecture along Fourth Avenue are surprisingly candid about the other cause: They pass the buck to the developers who hired them and the pressure they faced to cut costs at the expense of aesthetics.

“I try to do my best for my clients and try to get them as big a building as possible,” says Henry Radusky, a partner with Bricolage Architecture and Designs LLC, which has built nine buildings along Fourth Avenue in the last decade.

One of Mr. Radusky’s buildings was 586 President St., one of three buildings on the same two-block stretch of the avenue that contribute to its canyon of mediocrity look. Another is the Novo Park Slope, at Fourth Avenue and 5th Street, a pallid, prison-like structure with parking and a medical facility at ground level that towers menacingly over its next-door neighbors.

That parking, of course, is the product of prescriptive regulation. Market pressures might impact some design choices, but the relative impact of those decisions (compared against higher quality materials or prioritizing retail uses on the ground floor) likely pales in comparison to the cost and spatial needs of parking.

Back in San Francisco, Peter Cohen is looking for ways to mesh the market and prescriptive elements together:

Even housing advocates like Cohen concede a hard ideological approach loses hearts and minds. “I also understand that we have a changed disposition toward cities. How can you find a sweet spot between these two forces—how do you bring in this creative class, but also make sure that people who toiled in the weeds are not simply squeezed out? How can you sort it without just saying that the market will take care of everyone, when obviously it won’t?”

Constraints to affordability

'Truth' - CC image from Kellan

A few items on affordability and development:

Short term vs. long term: Matt Yglesias asks why we’re not building more multi-unit buildings in the face of tremendous demand, and the answer is (broadly speaking) financing:

Karl Smith, citing me, blames anti-density land use rules. Naturally I would like everyone to buy my book and it would certainly be convenient if my pet long-term issue were also the solution to our short-term problems. But I’m actually not sure it’s true. My reason for doubting it is that the construction undershooting doesn’t seem notably concentrated in the supply-constrained markets. What’s more, every time I speak to people who are involved in the development game, they assure me that the short-term constraint on big developments is financing. People have more or less shovel-ready infill projects and they need a loan. Some evidence for this is provided by the fact that there’ve been a curious volume of large 100% equity projects undertaken recently. What people say is that there’s too much liquidity risk to go into big things.

Financing is indeed a critical element.  Many of those shovel-ready projects are good ones, but the bar is much higher now than it was.  This represents a short-term constraint. Another factor is the considerable lag time involved in putting together complex development projects. That said, this doesn’t mean the long-term regulatory constraints aren’t a factor – particularly procedural ones.

Supplying affordability: Lydia DePillis takes a look at DCFPI’s most recent report, and asks why housing affordability advocates don’t do more to expand the supply of housing overall?

The DCFPI report makes mention of the fact that housing in Washington is constrained by our height limits. It doesn’t take that logic one step further to point out that there are lots of areas where D.C. limits its own capacity to build through low-density zoning.

It’s true, affordable housing people were the driving force behind inclusionary zoning, and smart growth advocates are getting to agitate more forcefully for the city to require developers who want public land to incorporate affordable housing into their proposals. But many developers avoid the public land process altogether, preferring not to deal with all the delays and frustrations. And affordable housing shouldn’t be all about setting prices artificially low—it’s also about letting builders build the amount of housing this city needs.

One option would be to look at the missing middle of density.  Regardless, the overall supply needs to expand in the face of DC’s growing population and intense demand.

Demand and that other thing I can’t remember:  Chuch Thies doesn’t seem to think there’s actually a housing price problem in DC:

The District of Columbia, for example, is a desirable place to live. Unlike in many parts of the country, there are job opportunities in our region. Many of the positions pay a good wage. A robust job market attracts new residents. In turn, the demand for housing increases. Prices go up.

Simple economics.

Perhaps a little too simple.  Simple economics would also allow for an increase in supply in the face of such demand.

But taxpayers should not be asked to spend a dime on affordable housing for young, single residents without children. There are plenty of market rate solutions to their housing concerns. They come in the form of suburbs, group homes, roommates and sacrifices.

Or, you know, we could build more housing.

Affordable for whom? RU Seriousing Me is making more maps – this one focusing on affordability, noting that affordability is relative to one’s income:

 I’ll echo Lydia DePillis‘ call to affordable housing advocates to pay attention to the effect that excessive land use regulations have on housing costs. Relaxing building height restrictions and eliminating barriers to the construction of housing is a good way to make housing more affordable across the board, even though chances are, the free market will never produce housing in DC that its many impoverished residents can afford, which is why DCFPI’s recommendations to increase subsidies for low-income housing production and homeownership are also valid.

Squeezing out the entry-level middle: The Post gets in on the action, too:

Many of the outer suburbs still have plenty of houses in the lower price ranges. But less-expensive homes are very hard to find closer to central D.C.: 68 percent of homes offered for less than $350,000 are located in the outer suburbs beyond Montgomery County, Arlington and Alexandria. In the District, Redfin counts only 862 listings for less than $350,000.

Don’t forget bad regulations that drive up costs: Such as those that demand the provision of parking on-site, like this development in Brooklyn.  The cost aspect is bad enough, but the impact on urban design is truly awful.

The rent is still too damn high

CC image from Jaybird

A few more thoughts (and links) to discussion from The Rent is Too Damn High.

On rent control:  Mike Konzcal (linking to JW Mason) notes how Yglesias’ book is more or less an endorsement of renting, yet rent control and similar sorts of tenant protections are part of what helps give renters similar levels of stability to owners.  While rent control often gets a bad name because of distortions it can cause in the rental market, the purpose was not explicitly to distort the market, but to provide stability. Mason:

I would just add that a diversity of income levels in a neighborhood is also a goal of rent regulation, as is recognizing the legitimate interest of long-time tenants in staying in their homes. (Not all rights are property rights!) So by framing the question purely in terms of the housing supply, the Booth people have already disconnected it from actual policy debates in a way favorable to orthodoxy. Anyway, no surprise, orthodoxy wins, with only a single respondent favoring rent regulation. (And I think that one might be a typo.) My favorite answer is the person who said, ” Rent control will have similar effects to any price control.” That’s the beauty of economics, isn’t it? — all markets are exactly the same.

Indeed, despite the virtues of renting, many aspire to own just because of that extra measure of stability and control – see Emily Badger in The Atlantic.

Defenses of rent control aside, I think this critique misses Matt’s broader point, which is that the kinds of entities focused on maintaining affordability via non-profit affordable housing development and via rent subsidies and so on should be on the forefront of wanting to grow the overall housing supply – but they seldom are.  There’s a blind spot and a disconnect here. Peter Frase takes Matt’s argument to the extreme:

The problem, here as elsewhere, is that in the tradeoff between social stability and aggregate material prosperity, Yglesias appears to assign stability a value of zero. If people “tend to resist change”, then this is simply an obstacle to be overcome by “state and federal officials”. The ideal type of society that’s evoked here is a perfectly frictionless world of market transactions, one that fully realizes Marx’s comment that under capitalism, “all that is solid melts into air”.

Glaeser’s Triumph of the City suffers a bit from this same problem in its policy descriptions (the ones regarding historic preservation are particularly illustrative), but just because their policy ideas might be a bit extreme doesn’t negate the substance of the analysis. Glaeser’s broad point is that cities are important, density is good, and we’ve severely restricted some of our most innovative and creative places.

On incremental change: Given the huge value current regulations place on maintaining the status quo (providing too much stability in many cases), any changes will necessarily happen at the margins.  They’ll be incremental, not transformative. Even a large change to the procedural environment around these markets will take years to adjust given the current levels of pent-up demand. Frase hints at this:

It’s not that Yglesias’s line of critique is totally wrong—I agree that NIMBYism and fear of change is often an impediment to desirable policies, and I agree that people with generally Left politics often betray a confusion about these issues. But while it’s not desirable to just freeze our current cities and neighborhoods as they are, it’s unreasonable to simply dismiss the desire for stability out of hand. To take this to itsreductio ad absurdam, I don’t think most people—or probably even Matt Yglesias—would want to live in a world where we all had to change jobs and move to new apartments every few weeks, even if such an arrangement would make us materially richer.

On confounding factors in housing markets: Mike Konzcal notes (#2) the major differences in housing price due to other variables beyond just supply and demand – namely, school districts, infrastructure, and all of the other elements of ‘location, location, location.’  The economic comparison requires an assumption of all else being equal, yet it seldom is.

 The quality of your schools, the relationship you have with the police, your ability to move freely and transport yourself, how you’ll be represented democratically, the primary means through which you’ll transfer wealth across generations (if you are a homeowner) and more are all in play even before you get to the economic efficiency, public sphere and social/health arguments about what housing brings.  Perhaps we can reform housing regulations without having to reexamine these issues, but it will be difficult.

Indeed, these kinds of intermingling of various issues is part of what makes zoning decisions so emotional and contentious.

On upzoning: Matt notes two cases where upzoning could be useful (or even just relaxation of existing rules around, say, accessory dwelling units), one about the broader need to increase the overall housing stock:

The question is not whether some fixed pool of people should give up stability in exchange for more money. The question is whether the incumbents should be asked to give up some stability for the sake of other people who are currently excluded from the opportunities the incumbents enjoy. My answer is that yes they should.

Consider the reactions against such increases in the housing stock, often exemplified by those incumbents.  Again, these decisions are incredibly emotional and contentious.  However, Chris Bradford notes how this ability to add supply is working in Houston:

The difference between Houston and a lot of other cities is that it is still easy to add housing in Houston’s nice, central city neighborhoods (unless your project has “Ashby” in the title). There are currently 15 apartment projects with 4,300 units under construction in the Montrose/River Oaks area. That’s not “announced” units; that’s 4,300 units under construction. For point of reference, only 3,089 building permits were issued for housing units of any type in the entire San Jose-Sunnyvale-Santa Clara metropolitan area in 2011.

Houston has a lot of needless land-use controls, including excessive minimum-space requirements and parking minimums,  but there really aren’t many other places in the country where there is both strong demand for infill development and a regulatory environment that freely allows it.

On the direct link to affordability: Matt’s second post takes aim at Arlington, VA:

What you see is a narrow thread of urbanism between Wilson Boulevard and Clarendon Boulevard, with a bit of a thicker blob of urbanism around the Metro station itself. I don’t really want to condemn this development paradigm because if you compare it to other suburban jurisdictions around the United States, what Arlington has done really stands out as practically best in class. But still the fact of the matter is that these single-family homes adjacent to the corridor of urbanism are sitting on some extremely expensive land. If you opened it up to redevelopment, you’d see denser building. Perhaps tall apartments in some cases, perhaps attached rowhouses in others. Opening this up would both bring the luxury market closer to saturation, and also just create some housing that’s a bit less convenient to the Metro and thus perhaps a bit more affordable.

One commenter expresses skepticism about the the ability of new luxury units to actually filter down as more affordable units.  As a counter, I always like to link to Chris Bradford’s posts on the subject of filtering: one here, another one, and a third.

On sprawl and governance: Charlie Gardner notes that growth on any given space has its limits.  Sooner or later, growth can’t just go up, it must go out.

A basic point I’d raise is that in almost all times and places, the solution for urban population growth has not been vertical densification, but outwards expansion into greenfield areas.  Historically, dramatic vertical growth was the product of exceptional circumstances, generally related to the presence of city walls paired with external military threats discouraging sub-urban construction, or the occasional imperial mega-city.  The development of skyscrapers in the late 19th century looked to have the potential alter this longstanding pattern, but for several reasons, greenfield development still remains today the overwhelming source of accommodation for urban population growth.

While I think Charlie is a little too attached to shorter cities (just as perhaps Glaeser and Yglesias are too attached to high rises), the point stands. I don’t recall the source, but I remember seeing a chart estimating the number of New Yorkers who live on the 5th floor or below.  Some very small portion (say 5-10%) lived above the 5th floor (i.e. in mandatory elevator territory).

Indeed, growing outward is natural. It need not be sprawl, since outward growth is only one key part of sprawl. Part of the problem (particularly when discussing regulatory and policy issues) is that of governance – and how our governance structures no longer match the actual economic geographies of our cities.

Some of this is inherently confusing our own terminology in discussing the issue. Mike Konzcal (#3):

There’s a good Foreign Affairs review of Glaeser’s Triumph of the City, which points out the trouble the economics-driven, supply-side housing costs arguments have with dealing with the suburbs.  As someone who read Suburban Nation early when he began to think critically about these issues, I find that a lot of these arguments just focus on city regulations while ignoring the whole existence of suburbs.  Foreign Affairs review:

Glaeser overlooks one of the central issues confronting cities for most of the last century: their competition with suburbs. Glaeser sees the competition as primarily between cities that restrict growth and those that accommodate it…

Getting any traction on this issue depends on defining suburbs.  The Joel Kotkin-esque definitions aren’t really useful, nor do they illuminate the differences between the real economic geographies of cities (that is, their regions) and instead focus on arcane and often anachronistic political boundaries.

None of this even gets at the key points about the regulations and governance structures that lead to sprawl – from Payton Chung:

Here’s the main problem I have with anti-government status-quo boosters: they’re somehow completely blind to how government created the existing situation, but then loudly whine about how government shouldn’t change anything! Not even removing its distortionary supports for the status quo!

On prospects for reform: Ryan Avent circles back to the same issues, albeit by approaching them from a different direction:

At some point, however, we need to stop and ask why the most sensible of ideas aren’t adopted by the American government. It’s not that congressmen are corrupt dolts—they may be, but that’s beside the point. It’s that America’s legislative institutions are not set up to encourage the adoption of the policies opinion editors want to see. Every once in a while an op-ed writer stumbles toward the truth with a “Washington is broken” sort of piece. It is incredibly rare to see a systematic analysis of the incentives facing legislators, which follows its logic through to the end: if Americans want Congress to behave differently, then it may make sense to devote more energy (or, really, energy) to assessing areas of institutional weakness and figuring out whether reform is needed.