Developer size and development patterns

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?

  • http://thegreatermarin.wordpress.com/ OctaviusIII

    Yeah, of course. Any time you have a large organization planning a neighborhood it ends up sterile. The hope is that, over time, the first tenants – like Chipotle – give way to more nuanced and interesting tenants. That would require years and years of waiting, but it could happen.

  • benjaminhemric

    Interesting and thought provoking post!

    My initial reaction is that there are five factors of interest in this case (at least for me): 1) single-ownership (part of your point?); 2) size of landowner (part of your point?); 3) form of landowner (public corporation?); 4) government policy re sale of government property (as one unit, or smaller units); and 5) amount of government involvement (e.g., tax abatements, etc.) in development, especially large developments sponsored by large corporations.

    Off hand, factors [1] and [2] don’t seem necessarily problematic to me. If a large landowner wants to buy a large piece of property and develop it as he or she sees fit, that might work out well or badly — but it’s a market decision nevertheless. More problematic, it seems to me, is that [3] a large landowner that is a public corporation might be more likely than not to favor large chains, etc. But most problematic, so it seems to me at the moment, are [4] and [5]. In most instances, I think it’s important that government try to avoid favoring large corporations or land owners and try as much as possible to break things up into small pieces (as there’s an inevitable tendency for things to consolidate as time progresses anyway). And it’s also very problematic when such developments get various forms of government aid, which they seem to do — especially when it’s a large singly-owned piece of property owned by a large company.

    Benjamin Hemric
    Fri., Feb. 22, 2013, 8:05 pm

  • Emily Washington

    I agree that issues 4 and 5 that you point out are the primary concerns and contribute to banal development in ways that are not visible to residents unless they carefully follow the development process. As you’ve said, larger developers may be less likely to take risks, and by selling the entire site in one deal, the city and federal governments have introduced a conservative bias. Additionally, this deal like many large deals in DC, includes tax incentives for both the developer and tenants, making it more difficult for smaller developers to compete.

  • northendmatt

    Any large development is going to have one PM and therefore the entire project will have the same thematic elements. IMHO this is the most underappreciated issue in city development. I’ve commented on it at places like Streetsblog and Atlantic Cities without getting any response. The essence of the problem is:

    1 – it’s no coincidence that the majority of America’s best loved urban neighborhoods, the ones that show the fine-grained fabric that people talk about, all predate zoning. Today, owners of small parcels can’t pay the ante to get into the game. Impact fees, the need for zoning variances, permitting, etc. Things like zoning variances, conditional use permits, and environmental impact reviews are hassles for a large developer. For someone who owns an SFR and would like to build some ADUs or put up a small apartment building, they’re an insurmountable barrier.

    2 – what hasn’t dawned on many people yet is that the type of urban development they want to see is impossible under the current zoning and permitting scheme. Even if small property owners could afford to overcome the regulatory hurdles, the city zoning/permitting infrastructure wouldn’t be able to move fast enough, because cities don’t have the resources to apply that level of scrutiny to so many projects. For example, Santa Monica’s planning department recently slowed down development because they couldn’t keep up with all the applications.

    So not only is the price system a better way, it’s the only way.

  • Emily Washington

    Great comment. Do you have experience in Santa Monica development?

  • northendmatt

    I don’t have personal experience in terms of trying to get a project through, but it has been a hot issue. The director of planning basically proposed increasing the pain put on developers or putting a moratorium on development because they couldn’t keep up with the flow of applications (http://la.curbed.com/archives/2012/12/panic_as_samo_considers_halting_development_agreements.php ) but thankfully it looks like they will address the issue by expediting some projects (http://santamonica.patch.com/articles/council-responds-to-request-to-slow-down-development#photo-12889333 ).

    I live in LA proper now but lived in SM during the last election cycle, and development was the main issue in local elections. I got a lot of election mailers for city council and planning commission urging me to vote for candidates who would put the brakes on development, endorsed by the usual coalition of environmental groups that claim to support smart growth (e.g. Sierra Club) and NIMBY groups with nebulous titles (e.g. Santa Monicans for Smart Growth).

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  • hcat

    In So Cal, it depends on whether Mexican land grants broke up early or not. Where they broke up early, you have diverse development; where they didn’t, you have humongous “planned communities.”

  • hcat

    I live in a Paleo new urbanist town 2 miles from a huge and prestigious mall. The effect of the mall is that the town proper has very few chain stores.