This post originally appeared at Neighborhood Effects, a Mercatus Center blog about state and local policy and economic freedom.
At The Atlantic Cities, Emily Badger writes about a new program from the Rockefeller Foundation called 100 Resilient Cities, focused on equipping cities with a new employee called a Chief Resiliency Officer. The program states its goals as follows:
Building resilience is about making people, communities and systems better prepared to withstand catastrophic events – both natural and manmade – and able to bounce back more quickly and emerge stronger from these shocks and stresses.
[. . .]
There are some core characteristics that all resilient systems share and demonstrate, both in good times and in times of stress:
- Spare capacity, which ensures that there is a back-up or alternative available when a vital component of a system fails.
- Flexibility, the ability to change, evolve, and adapt in the face of disaster.
- Limited or “safe” failure, which prevents failures from rippling across systems.
- Rapid rebound, the capacity to re-establish function and avoid long-term disruptions.
- Constant learning, with robust feedback loops that sense and allow new solutions as conditions change.
In his book Antifragile: Things that Gain from Disorder, Nassim Taleb defines antifragile as something that not only recovers from shocks, but becomes stronger after recovery, in line with the stated objectives of 100 Resilient Cities. Following its Great Fire of 1871, Chicago demonstrated antifragility. It rebounded rapidly from a disaster that killed 300 people and left one-third of city residents homeless, many without insurance after the fire bankrupted local insurers or the blaze destroyed their paperwork. Despite this great loss, residents of Chicago quickly rebuilt their city using private funding and private charity that was small relative to the amount of damage, but without any government funding. In rebuilding, Chicago developed safer building techniques both through entrepreneurship and with new insurance requirements and new municipal building codes. The city invested in a better-equipped fire fighting force to lower the risk of fire damage in the future. Despite not having the telecommunications that seem critical to allowing fast disaster recovery today, Chicagoans began building new, safer buildings immediately, investing $50 million in the year after the fire, and tripling the real estate value of the burned blocks within 10 years. Its difficult to imagine a twenty-first century city allowing property owners to move so quickly through the approval process, and its difficult to imagine a Chief Resiliency Officer widening this bottleneck.
A bureaucrat like a Chief Resiliency Officer would not be able to learn the lessons from a natural disaster that the residents of Chicago did in their rebuilding efforts because this knowledge is dispersed, only to be discovered by individuals acting in what they believe to be their own best interest. Taleb describes bureaucrats as fragilistas because they do not suffer from downside risks and therefore cannot learn and grow stronger from shocks. If a disaster strikes a city equipped with a Chief Resiliency Officer and it turns out the city was ill-prepared, he or she will not be held accountable for failing to predict what may have been a very low-probability event. In fact, we often see government efforts toward making cities more resilient introducing fragility contrary to their stated intentions. For example, federal flood insurance minimizes the downside risk of owning flood-prone property. In turn, this encourages more people to live in the highest risk areas, putting them at greater risk when disaster strikes. Cities will not have an opportunity to learn from this to better prepare for future flooding because their rebuilding is subsidized; however, bureaucrats cite this insurance as a success because it facilitates rebuilding without adapting to risk.
The Transportation Security Administration offers a preview of what bureaucratic disaster prevention looks like; top down planning for low-probability events results in attempts to prevent the catastrophic events that we’ve seen in the past without realizing that we’re unlikely to see these same events in the future. As TSA critic Bruce Schneier explains:
Taking off your shoes is next to useless. “It’s like saying, ‘Last time the terrorists wore red shirts, so now we’re going to ban red shirts,’” Schneier says. If the T.S.A. focuses on shoes, terrorists will put their explosives elsewhere. “Focusing on specific threats like shoe bombs or snow-globe bombs simply induces the bad guys to do something else. You end up spending a lot on the screening and you haven’t reduced the total threat.”
Likewise, preparing for low-probability natural disasters, such as 100-year storms, is not something that can be done from the top down. To the extent an event is foreseeable, some individuals and firms will prepare for it, as we saw with Goldman Sachs’ generator and sand bagging efforts in the aftermath of Hurricane Sandy. The disaster revealed successful preparation methods, allowing more individuals and the city as a whole to learn and be better prepared for the next disaster. Chief Resiliency Officers are unlikely to accurately foresee low-probability shocks to their cities. To the extent that they protect cities from these shocks, they will likely take away the learning process that would make cities better able to withstand larger shocks, introducing fragility instead of greater resiliency.
906 H Street NE
On Monday, Fundrise will make their newest offering at 906 H Street NE in DC available to investors. Many real estate journalists have covered this innovative investment company’s crowdsourcing strategy, with Urban Turf naming Fundrise a top real estate trend of 2012. This development is the company’s second crowd-sourced project and their third property on H Street. Without special approval, publicly advertised offerings can only seek funding from accredited investors, but Fundrise has has gone through a cumbersome process through DC, Virginia, and federal securities regulators to permit any individual to invest in their newest offering with a $100 minimum investments.
Because of the high regulatory hurdles standing in the way of marketing public offerings to a broad audience, Fundrise is currently the only group in the country doing so. Daniel Miller, Co-Founder of Fundrise, explained that he thinks crowdfunding has significant potential to improve incentives for focusing on the long run in development. From an urban development perspective, one benefit of crowdsourcing is that small companies do not face the same pressure to post quarterly profits that larger, publicly-traded firms do. Because real estate is a long-term investment that doesn’t always demonstrate profits on a timetable that’s attractive to Wall Street investors, crowdsourcing provides an opportunity for development financing that will not have a short-term bias. The difficulty in getting legal approval for small investors, however, demonstrates the regulatory bias in favor of large firms. Daniel said:
When you’re invested in a broader portfolio like a REIT that owns 400 or 500 malls, it’s very difficult to measure success because there are only financial indicators. But if you’re invested in a single property — the tenant is open, he’s paying rent, he has good sales — it’s much easier to measure success. There’s transparency in reporting. A lot of these big companies don’t give you a lot of information on individual properties. We think that this blend of a single asset that is easier to understand with transparent reporting is going to make people focus less on short-term profits and actually understand the individual asset.
Both financial regulations and local entitlement processes have created bias toward large developers and toward repetitive development patterns. Crowdsourcing offers an opportunity for smaller scale projects with the potential to be simultaneously more innovative and lower risk. Daniel pointed out that crowdsourcing connects a development to its customers. “Over time as there are more crowdfunded projects, we think those are more likely to be successful in terms of having better sales, in terms of having support from the neighborhood, and in terms of getting through entitlements,” he said. “I think that local investors are going to take a lot of risk out of the project. By better linking supply and demand and having more people support that investment, we think that provides a better chance of that business succeeding.”
From a tax perspective, crowdsourcing in real estate offers investors the same well-publicized advantages that they can achieve in a REIT. Daniel explains, “Right now we are structured as an LLC, but we have the same tax advantages as a REIT. There’s no double taxation — income and losses are passed through to the investor, so it’s about the most tax efficient vehicle possible. A REIT was created to allow the general population to invest in real estate, so in some ways what we’re doing is a return to the original REIT concept. But we’re focused on individual properties rather than nationwide portfolios because we think that when people invest in their own neighborhood, there are social benefits to that.”
In addition to introducing increased transparency into measuring development success or failure, crowdsourcing may help projects make it through the entitlement process. Daniel said this may have been the case with Fundrise’s first crowdsourced project. “We had a bunch of investors email the permit office for 1351 H Street and email their council member to help get the permits. Particularly with entitlements and liquor licenses, we think that transparency and having investors communicate with permit offices is really going to help move it forward and speed up the process.”
If you’re a DC or Virginia resident interested in investing in 906 H Street NE, create an account at Fundrise and register to get priority access. “I think it’s exciting that this is most people’s first chance to invest in commercial real estate,” Daniel said.
I recently finished The Power Broker by Robert Caro after many months of Metro reading. I loved the book, and can’t recommend it enough. Caro provides an overview of Robert Moses’ policies here. If you don’t want to invest in reading the full 1162 pages, I would particularly recommend the chapters that explain the impacts of Robert Moses’ policies on what were cohesive neighborhoods: “Changing,” “One Mile,” and “Rumors and the Report of Rumors.”
While reading The Power Broker, I was repeatedly reminded of the massive coercion involved in road building despite the commonly held belief among many advocates of limited government that road provision is one of the least offensive government practices. Oftentimes the small government tolerance of road building seems to stem from the relatively small subsidies that roads require. Randal O’Toole has often demonstrated that automobile travel is cheaper per passenger mile than mass transit and that the bulk of these costs are born by drivers. While he advocates moving to a vehicle mile tax that would more closely tie road costs to their users and allow for the devolution of transit funding, he does not challenge that road building is a legitimate state and local government function.
However, as Stephen, Adam and others have previously pointed out, these accounting costs of road building don’t take into consideration the opportunity cost of the land dedicated to roads, which in areas with high real estate prices is considerable. Moses notoriously bulldozed valuable developments for highways and while he made operating profits on tolls, he put land to lower value use in the process.
For example, Moses used eminent domain and government funds to transform what was once a privately operated elevated rail system into an elevated highway on Brooklyn’s Third Avenue, destroying property values and a neighborhood in the process. We have no way of knowing whether privately run mass transit systems would have continued to thrive in United States cities without the onslaught of government road building and transit regulations, but the fact that government roads are today more cost effective than government transit does not demonstrate that supporters of the market process should tolerate government intervention in urban form, even if it’s covered by user fees.
Caro explains how coercive government policies produced suburban development around New York that favored transportation by car:
The building of public works shapes a city perhaps more permanently than any other action of government. Large-scale public works shape a city for generations. Some public work — most notably the great bridges and highways that open new areas to development and insure that these areas will be developed on the low-density pattern fostered by highways as opposed to the high-density patterns fostered by mass transportation facilities — shape it for centuries if not, indeed, forever.
Obviously not all roads are built with Moses’ complete disregard for neighborhoods, and in a free market it’s likely that automobile transportation would still be the favored mode of transportation for many people. That said, comparing per passenger mile costs in a world where the urban form is determined by the state does not provide evidence that mass transit would necessarily be unprofitable in a free market or that government-provided roads are always less distortive than government-provided transit.
Anthony Ling of Rendering Freedom fame will be visiting New York from Brazil this weekend. We’ve planned a meetup in Williamsburg Brooklyn at 5:30 pm this Sunday, April 21. (venue to be determined) Come meet Anthony and some of the Market Urbanism crew. All are welcome.
Hope to see you Sunday,
Update: Per Stephen, we’ll meet “outside of Crif Dogs at Driggs & North 7th…it’s a specialty hotdog place (very Williamsburg).:
Yesterday, the Mercatus Center released the third edition of Freedom in the 50 States by Will Ruger and Jason Sorens. The authors break down state freedom among regulatory, fiscal, and personal categories. At the study’s website, readers can re-rank the states based on the aspects of freedom that they think are most important, including some variables related to land use and housing. The available variables include local rent control, regulatory takings restrictions, the Wharton Residential Land Use Regulatory Index, and an eminent domain index.
Using only these “Property Rights Protection” variables, Kansas ranks as the freest state, followed by Louisiana, Indiana, Missouri, and South Dakota. Texas, sometimes cited as the state without zoning, comes in at 18th. The least free state is New Jersey, with Maryland at 49th, followed by California, New York, and Hawaii. This result — states with some of the most expensive cities being the most regulated — is unsurprising.
In the places with the freest land use regulations, where a developer would be able to build walkable, mixed-use neighborhoods without going through a burdensome entitlement process, there isn’t demand for dense development. This may be one reason why the Piscataquis Village project, an effort to build a traditional city, is happening in a sparsely populated Maine county because new development of this sort is simply not permitted near any population centers.
As Stephen recently pointed out, public opinion in New York tends to see city policies as wildly pro-development:
In spite of the popular impression of New York as a builder-friendly city that’s constantly exceeding the bounds of rational development, the city’s growth over the past half-century has been anemic, and has not kept pace with the natural growth in population.
This ranking of New York near the bottom of the index demonstrates what urban economists already know — new development is not permitted to be built where rents are highest and it’s most needed in spite of perception of pro-development policies. Does anyone have development experience in some of the freest states? Does this ranking match your perception?
Update: For full disclosure I was a project manager on Freedom in the 50 States.
After receiving years of praise for its work in post-Katrina recovery, Brad Pitt’s home building organization, Make It Right, is receiving some media criticism. At the New Republic, Lydia Depillis points out that the Make It Right homes built in the Lower Ninth Ward have resulted in scarce city dollars going to this neighborhood with questionable results. While some residents have been able to return to the Lower Ninth Ward through non-profit and private investment, the population hasn’t reached the level necessary to bring the commercial services to the neighborhood that it needs to be a comfortable place to live.
After Hurricane Katrina, the Mercatus Center conducted extensive field research in the Gulf Coast, interviewing people who decided to return and rebuild in the city and those who decided to permanently relocate. They discussed the events that unfolded immediately after the storm as well as the rebuilding process. They interviewed many people in the New Orleans neighborhood surrounding the Mary Queen of Vietnam Church. This neighborhood rebounded exceptionally well after Hurricane Katrina, despite experiencing some of the city’s worst flooding 5-12-feet-deep and being a low-income neighborhood. As Emily Chamlee-Wright and Virgil Storr found [pdf]:
Within a year of the storm, more than 3,000 residents had returned [of the neighborhood's 4,000 residents when the storm hit]. By the summer of 2007, approximately 90% of the MQVN residents were back while the rate of return in New Orleans overall remained at only 45%. Further, within a year of the storm, 70 of the 75 Vietnamese-owned businesses in the MQVN neighborhood were up and running.
Virgil and Emily attribute some of MQVN’s rebuilding success to the club goods that neighborhood residents shared. Club goods share some characteristics with public goods in that they are non-rivalrous — one person using the pool at a swim club doesn’t impede others from doing so — but club goods are excludable, so that non-members can be banned from using them. Adam has written about club goods previously, using the example of mass transit. The turnstile acts as a method of exclusion, and one person riding the subway doesn’t prevent other passengers from doing so as well. In the diagram below, a subway would fall into the “Low-congestion Goods” category:
In the case of MQVN, the neighborhood’s sense of community and shared culture provided a club good that encouraged residents to return after the storm. The church provided food and supplies to the first neighborhood residents to return after the storm. Church leadership worked with Entergy, the city’s power company, to demonstrate that the neighborhood had 500 residents ready to pay their bills with the restoration of power, making them one of the city’s first outer neighborhoods to get power back after the storm.
While resources have poured into the Lower Ninth Ward from outside groups in the form of $400,000 homes from Make It Right $65 million in city money for a school, police station, and recreation center, the neighborhood has not seen the success that MQVN achieved from the bottom up. This isn’t to say that large non-profits don’t have an important role to play in disaster recovery. Social entrepreneurs face strong incentives to work well toward their objectives because their donors hold them accountable and they typically are involved in a cause because of their passion for it. Large organizations from Wal-Mart to the American Red Cross provided key resources to New Orleans residents in the days and months after Hurricane Katrina.
The post-Katrina success of MQVN relative to many other neighborhoods in the city does demonstrates the effectiveness of voluntary cooperation at the community level and the importance of bottom-up participation for long-term neighborhood stability. While people throughout the city expressed their love for New Orleans and desire to return in their conversations with Mercatus interviewers, many faced coordination problems in their efforts to rebuild. In the case of MQVN, club goods and voluntary cooperation permitted the quick and near-complete return of residents.
Yesterday at Slate Matt Yglesias pointed out the poor logic behind AAA’s opposition to the elimination of some parking minimums in the DC zoning reqrite. AAA is not alone, joined by many DC residents who oppose the rewrite that will introduce some deregulation in parking requirements and zoning. The rewrite includes a few basic changes, and Greater Greater Washington provides excellent coverage of each:
Initially, the plan included a proposal to switch from parking minimums to parking maximums, but fortunately this proposal was rejected in favor of allowing developers to build parking based on what they think will be profitable, allowing for a freer market in parking. Now, those who assert that eliminating subsidies to driving amounts to a “war on drivers” are left without basis for their argument.
I am not too enthusiastic about the zoning rewrite because it doesn’t go nearly far enough in permitting a greater supply of housing. It makes no significant changes to allowable floor area ratios, only permitting greater density by tinkering around the edges. However, as the zoning update is focused on simplifying the zoning map and allowing some increased freedom for developers to build what they think consumers want, it is in many ways a step toward market urbanism. It will benefit some homeowners and their renters by permitting accessory dwelling rentals. Additionally the attempt to simplify the Planned Unit Development process could improve rule of law in DC development and take steps toward leveling the playing field for developers.
Perhaps the most significant element of Smart Growth — as opposed to traditional urbanism — remaining in the draft plan is the Green Area Ratio requirement. The GAR will apply to new developments and to renovations where the cost of renovations exceed the building’s assessed value. Depending on how developers find it feasible to meet GAR requirements, these rules may lead to Corbusian development, with green space that creates dead space for pedestrians rather than a more interesting environment. Worse, the GAR requirement will act as a deterrent to renovations for existing buildings in cases where adding green space is cost-prohibitive. Like parking requirements which have made it difficult to re-purpose historic buildings after their original uses are no longer viable, the GAR would place unnecessary restrictions on small businesses starting new uses in existing buildings. The draft rewrite suggests that some historic buildings could get exceptions to the requirement, but a new type of exception introduces further subjectivity into the entitlement process.
As Greater Greater Washington points out, most of the changes that are part of the new code permit traditional urban development rather than setting new requirements. The reason for the rewrite is to eliminate some of the negative consequences that the existing 1958 code has produced by requiring developers to subsidize drivers with parking and preventing people from renting out their homes. The GAR is the exception to the pattern of deregulation in the updated code, and as such it brings with it the possibility of unseen costs and unintended consequences.
Earlier this week I attended an Urban Land Institute event about DC’s new development, The Yards on the Anacostia waterfront. This is a 42-acre area which was formerly a manufacturing center for the Navy. In 2003, Forest City Washington purchased the site from the General Services Administration for residential, retail, and office redevelopment. Generally I don’t have strong architectural preferences, but some of the former factories that now have glass curtain walls are looking very cool.
During the presentation, I was reminded of Ronald Coase’s 1937 paper, “The Nature of the Firm.” This paper is about knowledge problems, within and outside of the firm. He explains that firms exist, rather than each worker serving as his own contractor, because firms reduce the transaction costs of contracting for individual projects. However, firms face knowledge problems similar to those that government bureaucracies face:
In economic theory we find that the allocation of factors of production between different uses is determined by the price mechanism. The price of factor A becomes higher in X than in Y. As a result, A moves from Y to X until the difference between the prices in X and Y, except if so far as it compensates for other differential advantages, disappears. Yet in the real world, we find that there are many areas where this does not apply. If a workman moves from department Y to department X, he does not go because of a change in relative prices, but because he is ordered to do so. Those who object to economic planning on the grounds that the problem is solved by price movements can be answered by pointing out that there is planning within our economic system which is quite different from the individual planning mentioned above and which is akin to what is normally called economic planning.
In the case of The Yard, this means that Forest City Washington is saving money on development expenses, likely in large part on negotiations with the city and federal government, and giving up the price system which would better direct firms developing individual parcels to know what their customer want. This tradeoff is represented below. Firms will increase in size until the cost of not being able to rely on the price system is equal to the transaction costs of contracting work out:
During her presentation, Deborah Ratner Salzberg stressed her firm’s objective of creating a “complete neighborhood” with a balance of residential development and a mix of retail to serve tenants, including restaurants, a grocery store, and soft retail. By one firm developing this entire small neighborhood, they had the advantages of knowing which tenants were likely to sign leases in which buildings and to control the vision for development within one company. However, they were not bidding against other developers to determine the highest-value buildings for each parcel, meaning that planning, rather than the price mechanism, shaped the definition of a “complete neighborhood.”
In a free market, we would expect firms that remain in existence for long periods to do a good job of weighing these tradeoffs, but of course development in DC is not a free market. The entitlement process favors large firms who have the ability to spend the money and time necessary for approvals. In this specific case, the federal government was selling right to develop 5-million square feet as a package, excluding firms who couldn’t make the investment to purchase the entire area.
Perhaps one of the largest drawbacks of large developments is that they tend to take advantage of their ability to lower transaction costs by working with brokers who represent many large tenants, resulting in repetitive development featuring, for example, Chipotle adjacent to Noodles and Co. In the case of The Yards, however, Forest City Washington made an effort to sign leases with local chains such as Vida Fitness and Sweet Green. Do you think it’s easy to recognize when one developer has planned a neighborhood rather than many small developers directed by the invisible hand? Has the entitlement bias toward large firms hurt the creation of complete neighborhoods?