Tag Archives: path of least resistance

Pop-ups – what counts as ‘reasonable?’

Beware the imperative that we have to do something.

Despite protestations from DC’s former planning director Harriet Tregoning, the preliminary vote count on the plan to limit rowhouse pop-ups in DC is poised to pass, 3-2 (note that two of the zoning commissioners tentatively in favor are the federal representatives to the commission; see this Washington City Paper profile of commissioner Peter May for more about the federal role in local decisions in DC).

Among the local media, the Washington Post editorial board came out against the proposed regulations. Other local papers, such as the Northwest Current, are in favor. The single biggest reason for supporting the proposed changes is that they seem ‘reasonable.’

IMAG2257

It’s not hard to see why many DC residents are eager for ‘reasonable’ restrictions on pop-ups. There are quite a few ugly ones out there; some include suspect construction. However, the proposed changes in the zoning code won’t outlaw ugly additions and the zoning code doesn’t regulate construction methods or enforce the building code.

Part of the challenge with ‘reasonable’ restrictions on new development is that many of the impacts aren’t intuitive. Consider the aesthetics of pop-ups: Just as zoning code parking requirements won’t solve on-street parking hassles (you must manage those parking hassles directly), a small reduction in the allowable height and shifting certain elements away from by-right construction towards requiring a special exception won’t address concerns about design. Implement these changes to DC’s zoning code and many will still complain about pop-up development.

Pop-ups need not be ugly. Nor are they a new phenomenon.

Part of the concern about overly restrictive regulations is that limiting small-scale development is a serious constraint on the market’s ability to provide housing that is affordable to a wide range of incomes (here’s a perfect place to shift the narrative away from the nebulous ‘affordable housing’ and instead focus on providing abundant housing instead).

Still, without that background knowledge, it’s not hard to think that these restrictions won’t harm the District’s progress towards abundant housing. Proponents of allowing more growth argue pop-ups provide an opportunity for families and individuals to live in desirable neighborhoods at a lower price point. Meanwhile, the Northwest Current editorial board isn’t convinced that allowing additional housing supply helps ease the supply crunch. Instead, they would wish housing prices would drop naturally:

IMAG2256

However, the flip side of the “we’d rather just see the existing houses priced more affordably” coin is essentially an argument to lower property values. I don’t think we’ll see such an editorial from the Northwest Current anytime soon. Why? Because I doubt neither the editorial board nor the paper’s readership would consider advocacy to lower property values to be ‘reasonable.’

So, what are options to regulate pop-ups? A few ideas, keeping in mind the differing perspectives and scales)

  • Recognize the value of by-right development and the path of least resistance. Similarly, the idea of negotiating every single building project on a case-by-case basis might also seem reasonable, beware the unintended consequences of this approach.
  • Consider a form-based approach. The Coalition for Smarter Growth suggested an approach that mandates a setback for true pop-ups (those that retain the existing facade) or some other design treatment to minimize the visual impact. The challenge for this approach would be in enforcement. The advantage is that the regulatory authorities can offer clear guidance for this form of ‘lite’ administrative design review. It also avoids the perils of full-scale design review; a process that doesn’t keep the desired outcomes on the path of least resistance.
  • Remember: one of the goals of DC’s pending zoning code re-write was to reduce the burden on the BZA’s case load. Simply adding more cases to the pool of potential special exceptions is a step in the opposite direction.
  • Build more rowhouses. Part of the rationale for regulating pop-ups is a desire not just to preserve the urban design of DC’s rowhouse neighborhoods, but also to preserve larger housing units for families. If this is indeed a goal for the city’s housing strategy (and consistent with the desires for abundant housing), then the goal shouldn’t just be about preserving rowhouses, but encouraging the construction of more of them in existing single-family detached areas. This is also consistent with the city’s goals for accessory dwelling units as a part of the zoning re-write.
  • Build more multi-family housing. Work to relieve development pressure from the other end by allowing the construction of more small-scale apartment and condo buildings. DC has many of these grandfathered into existing R-4 (rowhouse) zones. While the Comprehensive Plan does prioritize the preservation of rowhouse areas, the existing zoning clearly allows multi-unit buildings. While much of the commentary focuses on micro effects and ugly additions, lurking beneath the surface is a clear bias against additional dwelling units. This backlash mirrors other DC planning debates about accessory dwelling units and growth in general.
  • Develop a market-based housing plan for the city as a whole. Collect and distribute data on the overall housing market to better inform decisions on demand as well as new supply.
  • Shift the narrative around housing discussions away from ‘affordable housing’ and towards ‘abundant housing.’ Hopefully this shift can help avoid the counterfactual trap of new supply that is still expensive, yet cheaper than it would’ve been. Consider this: if car manufacturers could only build a limited number of cars, they would likely focus on higher-margin luxury models. The same is true of housing; yet this doesn’t disprove the impact of supply.  Just because new condos in popped-up buildings aren’t always cheap, that doesn’t mean the impact on the overall market isn’t real.

Any other ideas?

Development and the path of least resistance

A quick link that builds on a couple of themes I’ve written about here – development following the path of least resistance, and the need for cities and urban areas to grow in the face of demand for additional development in those places.

Winchester, MA - aerial image from Google Maps

Winchester, MA – aerial image from Google Maps

Zoning makes Massachusetts housing expensive – from the Boston Globe editorial board

Outside of Boston, developers often run into the challenges of regulatory requirements on new development, while city officials come to terms with the fact that the regulatory path of least resistance does not lead to the city’s desired outcomes.

Tidy downtown Winchester, just 20 minutes by train from North Station, should be a prime target for new development. According to one recent study, Greater Boston may need 19,000 new housing units every year just to keep pace with demand. And Winchester would welcome new residents: Town Manager Richard Howard says downtown restaurants and stores are eager to see new residential development on the city-owned lots, and that a planned upgrade to the commuter rail station next year could bring new vitality to downtown. The style of transit-oriented housing would also fall in line with the state’s environmental goals, which call for concentrating residential and commercial development near rail stations.

The obstacle, though, is the state’s dysfunctional ’70s-era zoning code, which sets the parameters for how individual cities and towns plan for development — and, in practice, sets up complex permitting rules and creates numerous opportunities for litigation. The process of securing approval to build new housing in downtown Winchester is so onerous, Howard says, that developers simply won’t bother. And in suburban towns where anti-development sentiment is stronger, the path is even steeper.

The end result? Most development follows the path of least resistance, and the path of least resistance leads to sub-optimal outcomes:

What it amounts to is the worst of all worlds. Sensible, smart-growth housing plans often languish, while single-family homes proliferate on large lots in sprawling suburban subdivisions — one of the few types of housing that can be easily built in Massachusetts under current law. State officials rightly fear that the housing market dynamics squeeze middle-class families so much that they’re endangering the state’s economic health. It also ensures that much of the growth that does occur is unplanned, expensive, and environmentally harmful.

Matching the functional outcomes of a host of complex regulatory processes to a planning vision is difficult, but necessary. It’s also not enough to look at incentives for particular planning goals. Instead, one must look at the entire development process. One must understand the tensions within real estate investment, between city-building and financial performance, how those tensions impact the decision-making of developers, and how the regulatory process creates a choice architecture for those developers.

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.

Housing demand and the regulatory path of least resistance: Seattle and microapartments

Seattle Space Needle. Photo by author.

The feature piece in The Stranger last month delved deeply into Seattle’s trend of micro-apartments. Dominic Holden offers an in-depth look at not just the development trends, but the politics of the policy and planning conversation around development in an expanding city.

A few things popped out:

Room for rent: The article describes Seattle’s micro-apartments like this:

But inside each town house, the developer was building up to eight tiny units (about 150 to 250 square feet each, roughly the size of a carport) to be rented out separately. The tenants would each have a private bathroom and kitchenette, with a sink and microwave, but they would share one full kitchen for every eight residents. The rent would be cheap—starting at $500 a month, including all utilities and Wi-Fi—making this essentially affordable housing in the heart of the city.

If that sounds familiar, it should – it’s a situation similar to what already happens in big cities – renting a room in a group house. For a fraction of cost of a studio or 1-bedroom apartment, you can instead rent a room in a shared house. Considering that comparison, there is clearly a market for these kinds of spaces, and it’s not exactly new.

It ain’t much, but it’s home: While the rise of micro apartments is in the news in Seattle, it’s not a new thing for cities. Single-room occupancy (SRO) apartments have a long history in cities. The Blues Brothers highlighted this housing typology in their 1980 homage to the city of Chicago (“how often does the train go by?” – “so often you won’t even notice it.”).

Chicago’s WBEZ documented the dwindling numbers of SROs in the city, noting how this particular form of affordable housing has served a different market of individuals than the kinds of tenants mentioned in Seattle:

The Chateau is among the city’s shrinking pool of single-room occupancy hotels (map below), which offer an important housing option for people with low- and fixed-incomes. SROs also serve clients with troubled credit or criminal histories. The North Side has long been an SRO hub, but in recent years many such buildings have been purchased by developers and closed, only to reopen as more expensive housing — often beyond the means of prior tenants. Some SRO residents and community organizers worry the Chateau Hotel might be the next building in this trend.

The key difference is in the level of maintenance, and thus the target market. Nonetheless, it’s not hard to see how micro-apartments like likes in Chicago or the new construction in Seattle would appeal to a number of potential markets. None other than The Stranger’s own Dan Savage makes note that he lived in an SRO when first moving to Seattle, and “I wasn’t sketchy then, I’m not sketchy now.”

As a part of re-evaluating the SRO’s sketchy reputation, Next City focused on the role this type of housing can have in the future of our cities.

Meeting housing demand: As Holden notes, a dynamic and expanding city like Seattle needs room to grow, and needs opportunities for a wide range of incomes. He also makes note of the only sure-fire way American cities have to meet growing demand post-WWII – sprawl. “Accommodating our growing population by shipping workers into the low-density sprawl of the exurbs is not the way a city should operate.”

This isn’t unique to Seattle. Other cities (including New York and DC) are struggling to meet the demand for housing, and are considering micro apartments as one potential solution.

The politics of neighborhood opposition: Holden’s Stranger article offers a fascinating dive into the politics of those opposed to these projects. Holden examines the stated objections to these projects (which include everything but the kitchen sink – or, in the case of complaints about shared kitchens, why not bring it up?) and finds most opponents to be “dramatically exaggerating”  the impacts. “Tick through the neighborhood groups’ complaints,” he writes, “and they don’t add up to a logical argument.”

The two issues in opposition that Holden deems to have legs deal with a tax break loophole for these developments and an exemption from the city’s normal design review process (more on this later). The principal objection is that the apartments count as many units for the purposes of a tax break, but few units to avoid the threshold for additional design review scrutiny.

Holden’s article goes into substantial detail about his interactions with some of the individuals and groups in opposition, highlighting a kind of fanaticism. Even without the crazy elements, the strength of the opposition and relative lack of proponents involved in the discussion shows the kind of game theory challenge for urban development regulations – opposition is strong, but only in a narrow segment of the population; support is broad, but few individuals feel the need to organize in favor of developments like micro apartments. The existing legal procedures favor the organized, and therefore give organized groups leverage in discussions.

The limits of design review: While a procedural loophole exempts micro-apartments in Seattle from design review (and Holden flags this as a legitimate complaint from opponents), there are limits to what such reviews can accomplish. Holden notes that such reviews in Seattle are largely administrative. He also ferrets out the intentions of those pushing for design review: “What public reviews will do is give activists a chance to obstruct microhousing by quibbling with the appearance.”

Holden understands the importance of process, and the cost it can impose on any new development. Since developers must (at a minimum) cover their costs to even entertain a proposed project, any increase in procedural time and costs means those costs must eventually be baked into the cost of the final product.

If the city pursues design and environmental reviews—which could improve the aesthetics and aren’t inherently flawed processes—they should be administrative reviews. They should be conducted by city staff who notify the public but limit input to letters in writing. They shouldn’t involve neighborhood meetings that are easily sidetracked, shouldn’t require multiple revisions to the architecture, and shouldn’t allow appeals.

If the public is allowed to obstruct these projects—and their arguments thus far have been specious—the results will be predictable: Every time developers must redesign the buildings to satisfy the neighbors, every time the project is delayed for further review, every time a spurious appeal is filed, the more it costs to build that project. And that has one predictable outcome: It will make them more expensive to rent, i.e., fewer people will be able to afford them. In other words, whether deliberate or not, the effect of neighborhood advocacy and its input on development projects will make living in these places more expensive and push out workers with less money. That would seem like a terrible mistake—unless pushing out poor people is the actual goal.

Development following the path of least resistance: Given the increasing costs of compliance with the regulations and procedures, it’s not hard to understand why so much real estate development seeks to follow the path of least resistance.

Leaving aside the question of whether micro-apartments are a worthy policy for cities to pursue (as opposed to other expansions of zoning allowances), it does show the catch-22 inherent in things like design review: the additional regulatory review is required because the outcome those reviews shape is a desirable policy goal – but the very cost of the review makes achieving those desired outcomes less likely.

The ideal would be a case where the desired outcome is prioritized, given the path of least resistance. Holden’s discussion of keeping reviews administrative and not subject to lengthy public hearings and appeals is an example. I suspect that (with the exception of some special cases), changing the outcomes from the path of least resistance cannot be accomplished through de-regulation alone.

However, the larger question looms in the background: what agreement is there about the most desired outcomes?