The benefits of the market in both infrastructure and urbanism


Alain Bertaud, a senior research scholar at the Urbanization Project, has had a long career in urban planning, and many of his writings have a market urbanist flavor. He is currently working a book called Order Without Design, and last year he published an excerpt from that book called “The Formation of Urban Spatial Structures: Market vs. Design.” In the article he offers a compelling case for letting the market determine building sizes and uses, but he argues that infrastructure provision must be left to the state. I agreed wholeheartedly with the first portion of his paper, but find that his arguments for the market in land use contradict his arguments for the state in infrastructure.

Bertaud eloquently explains the knowledge problem facing urban planners who seek to regulate efficient land use patterns. Because economic growth is such a complex process that’s dynamic over time, he explains that top-down design will fail to keep up with changing land use needs to the detriment of economic growth. He cites Hartford, Connecticut as an example. The city developed a large insurance industry, but as it became profitable for American insurance companies to outsource clerical work abroad, fewer Connecticut residents find employment in the industry. However, in a futile effort to maintain jobs, urban planners have refused to update land use regulations to permit new employment opportunities. Rather than succeeding in keeping historical sources of employment in place, urban planners have prevented economic diversity that can hedge against a downturn in a specific industry.

Bertaud describes price mechanism that allows the market to identify land’s highest value use:

Markets …  recycle obsolete land use quasi-automatically through rising and falling prices. This constant land recycling is usually very positive for the longterm welfare of the urban population. In the short term, changes in  land use and in the spatial concentration of employment are disorienting and alarming for workers and firms alike. Responding to the disruptions caused by land use changes, local governments are often tempted to intervene in order to slow down the rate of change and to prevent the recycling of obsolete land use. However, the long-range effects of maintaining obsolete land use through regulations are disastrous for future employment levels and for the general welfare of urban dwellers.

While Bertaud waxes romantic about the power of the market in allocating land use and supporting economic growth, he makes two primary arguments for why the private sector cannot provide road networks. First, he asserts that private sector is incapable of assembling the necessary rights-of-way to build major thoroughfares.  Second, he makes an externality argument. He says that because roads can improve accessibility and increase land values, it’s “impractical to allocate and to recover its cost from beneficiaries since not only road users but also landowners benefit from better accessibility.”

To the first point, it’s false that the private sector is incapable of constructing a road network beyond local access streets. In fact, several major roads in the United States have been financed, constructed, and maintained by private companies that collected tolls. By constructing these roads in existing easements, these companies didn’t need to resort to eminent domain. Private U.S. companies built turnpikes in an era when road building was much less efficient than it is today, and more importantly tolls had to be collected by humans in tollbooths, rather than electronically, requiring more overhead than a toll system would today. Turnpike companies sought investments from landowners near the road who stood to gain from road construction, demonstrating that mutually beneficial exchange can happen even in the face of the externalities that Bertaud describes. Aside from roads, private enterprise has historically provided canals, streetcars, and elevated rails demonstrating the powerful incentive that people have for identifying opportunities for cooperation even when the benefits to buying and selling a good aren’t fully captured by the consumer and producer. Bertaud points out that, unlike regulators, the price system can effectively make tradeoffs between land uses. Similarly, the price system could determine resource allocation between different types of transportation, but instead this role is delegated to “designers” in developed countries today.

History demonstrates that privately built and financed roads are in fact possible, but Bertaud is likely correct that they would not be possible in developed countries today because government infrastructure spending and regulations have largely crowded out private investment in the industry. Those who assume that roads must be built by the government rely on market failure arguments to assert that the private sector fails to produce the efficient amount of infrastructure. Bertaud writes, “to build an effective, citywide circulation network, a city needs to connect privately-built roads, linking various neighborhoods and allowing travel speeds consistent with the efficient functioning of labor markets.”

It’s possible that the free market would fail to reach some optimum level of travel speed as identified by technocrats, but it’s key to note that government’s infrastructure building record is rife with failures. The political process results in bridges to nowhere and costly mixed-traffic streetcars. Robert Caro provides a detailed account of Robert Moses’ trangressions against the people of New York for the cause of his infrastructure building mania, but neighborhoods across the country were irreparably damaged by highways with relatively little recognition of the damage wrought by government road building. Unlike state road designers who can raze entire neighborhoods for the sake of infrastructure, privately built roads would not likely be built through densely populated neighborhoods.

Government infrastructure planning is subject to many of the same problems that Bertaud points out plague government land use planning. If neither the market nor government can reliably provide the “efficient” amount of infrastructure in the right places, which sector does it better is an open question that won’t be answered without developed countries’ governments drastically curtailing their involvement in infrastructure. Those who argue that the market cannot provide the level of infrastructure deemed efficient by econ 101 models make an unfair comparison to idealized models of how the public sector provides infrastructure rather than looking at the infrastructure that government actually delivers. Infrastructure provision presents private sector challenges because it isn’t bought and sold according to the textbook example of perfect competition. But starting with the assumption that government can identify and execute an optimal infrastructure plan whitewashes publicly provided infrastructure failures.

Thanks to Anthony Ling for pointing out the article.

Planned Manufacturing Districts: Planning the Life Out of Districts

Chicago’s Goose Island and surrounding Planned Manufacturing Districts

They are called different things in different cities, but they are similar in form and intent among the cities where they are found.  For simplicity’s sake, a Planned Manufacturing District (PMD), as they are called in Chicago, is an area of land, defined by zoning, that prohibits residential development and other specific uses with the intent of fostering manufacturing and blue-collar employment.

Proponent of PMDs purport to be champions of the middle-class or blue-collar workers, but fail to consider the unintended consequences of prohibiting alternative uses on that land.  At best, PMDs have little effect on changing land-use patterns where industrial is already the highest-and-best-use.  At worst, they have the long-run potential to distort the land use market, drive up the costs of housing, and prevent vibrant neighborhoods from emerging.

A Race to The Bottom

Before getting into it further, it is important to examine the economic decisions industrial firms make in comparison to other uses.  Earlier in the industrial revolution, industry was heavily reliant on access to resources.  Manufacturing and related firms were very sensitive to location.  The firms desired locations with easy access to ports, waterways, and later railways to transport raw materials coming in, and products going out.

However, the advent of the Interstate Highway System and ubiquitously socialized transportation network have made logistical costs negligible compared to other costs.  Where firms once competed for locations with access to logistical hubs and outbid other uses for land near waterways in cities, they now seek locations with the cheapest land where they can have a large, single-floor facility under one roof.  This means sizable subsidies must be combined with the artificially cheap land to attract and retain industrial employers on constrained urban sites.

Additionally, today’s economy has become much more talent-based rather than resource based, and patterns have shifted accordingly.  In contrast to industrial, residential and office uses are still very sensitive to location.  In fact, residential preference for urban locations are increasing.  Likewise, most office and other commercial firms seek to locate where they can best attract talent or customers, or simply put, convenient to residential.  To the dismay of the politicians, blue collar jobs are destined to leave cities to seek cheaper land in less desirable locations.  We should expect industrial firms to prefer exurbs and sites close to negative externalities, such as near highways and airports where noise and air pollution drive out residential uses.  Efforts to stem the tide of these realities will surely incur dead-weight losses.

In a race to the bottom, prohibition of housing and other uses in PMDs drives the value of that land down to the point it can compete on price with the most undesirable suburban locations. That is, until a non-manufacturing use compatible with the wording of PMDs emerges to crowd out industrial.

We are are in an interesting time, and are witnessing the first cases where the long-term consequences of PMDs are beginning to emerge for us to witness.

Google and Chicago’s Fulton Market

Over the past two decades, Chicago’s West Loop has become one of the most desirable neighborhoods in the City.  Developers flocked to the neighborhood to take advantage of the neighborhood’s proximity to Chicago’s Loop, and abundance of underutilized warehouses waiting to be converted to hip lofts.  However, Fulton Market and meatpacking district on the northern part of the West Loop remained immune to the radical transformation.  Neighboring West Town, River West, and West Loop blossomed during the housing boom.  Was Fulton Market less desirable?  Far from it – meaningful redevelopment was forbidden.

As developers began converting West Loop buildings in the 90’s, the Randolph Fulton Market Merchants Association proposed the formation of the Kinzie Street Industrial Corridor.  The Association ultimately triumphed in their lobbying for the district, which formed a PMD to protect them from the encroachment of competing land uses.  They also won a Tax Increment Financing district to fund subsidies, and other programs aimed at enriching incumbent and new businesses in the area.

Then, along comes Google.  According to the wording of the PMD, “High Technology Office” is a permitted use in the Kinzie Street Industrial Corridor.  Google, in search of an office with large floor plates for its Chicago headquarters, chose to move into a former cold storage building in the Fulton Market that is being converted into office.

As a result of Google’s impending arrival, Fulton Market has attracted a flurry of speculative real estate investment as other technology firms, hotels, restaurants, and entertainment venues flock to the area.  Land prices have been driven up to extent that no matter how much the subsidy, Fulton Market is no longer an economically viable location for industry or manufacturing.  We should expect politicians to scramble to fight this over coming years, but extinction of Fulton Market industry is imminent.  Efforts to hamper market-forces, millions of dollars of wasted subsidies, and unnecessarily higher housing costs were sacrificed to achieve nothing of lasting value.


Vibrancy Thwarted

Possibly the biggest victim of the vast prohibition on uses of land in Planned Manufacturing Districts are the neighborhoods in which they are located.  In her treatise, The Death and Life of Great American Cities, Jane Jacobs discusses the ingredients of what makes urban districts flourish or fail.  Jacobs makes the case that great urban districts typical have a diversity of primary uses, short blocks, diversity of the age of buildings, and sufficient concentration of people.  Districts aimed at preserving and fostering limited uses, such as PMDs, stand in the way of all of these factors necessary for the emergence of vibrant city life.

Most obviously, if residential and other uses are prohibited, a diversity of primary uses and sufficient concentration of people are impossible.  Since the optimal sites for today’s manufacturing and logistics firms are very large, single-story buildings, firms are likely to demolish older multi-story buildings otherwise desired by residential loft-lovers.  They are also prone to spread their facilities over several blocks, sometimes incorporation what was once a street into their property.

Clybourn Corridor, Elston Corridor and Goose Island PMDs

Inspired by Fulton Market’s sudden success, some developers have begun to set their sights on other well located PMDs.  These developers intend to snatch up the preserved land at artificially low prices and entice technology companies to come.  One such developer, South Street Capital intends to do just that in Goose Island, straddled between River North and Lincoln Park to the east, and River West and Wicker Park to the west.  Developers also have also been eyeing the nearby site of the former Finkl Steel Plant.

Ironically, it was Finkl who successfully lobbied for the formation of Chicago’s first PMD, the Clybourn Industrial Corridor.  In the debates leading to the formation of the PMD, light manufacturing firms and developers were opposed to protections.  Light manufacturing wanted to keep the option to sell their land to developers and move to the suburbs.  As reported by the Chicago Reader:

On the other side were a handful of industrial-property owners from the area and their battery of lawyers, who argued that Eisendrath was offering them protection they do not want. Someday they may want to move, they say, because their buildings are too small, old, or obsolete. And they want the right to sell to whomever they choose–builders of shopping malls, condos, town houses, it doesn’t matter–at the highest dollar the market will bear.

“I like doing business in Chicago,” says David Schopp, chairman of U.S. Sample Company, the second-largest manufacturing employer in the area. “But I don’t want to be restricted. I don’t think it’s government’s role to say who I can and cannot sell to.”

Now, it is Finkl who wishes for that option.

The southern part of Fulton Market, as much as zoning hampers it’s potential, should enjoy some vibrancy as adjacent uses spill over into the district. (further, we do expect the city to begin allowing more residential in it’s latest plans for the district)  However, without lifting the PMDs altogether, there is little reason to be optimistic about the Goose Island and Elston Corridor PMDs.  Unfortunately, development of the PMDs in line with current prohibitions will result in a large area devoid of residential uses and other essential ingredients needed to become vibrant districts.  The area currently lacks transit alternatives, so employees will get to work by car or bike, exasperating traffic on roads connecting Lincoln Park to the expressway. We cannot expect the area to be rescued by spillover from nearby residential areas, as the river acts as a border vacuum preventing interconnection and transit access is minimal.  Failure to remove the PMD before further development takes place will condemn the area to eternal dullness.

Chicago’s Goose Island, protected by PMDs

Other PMDs

There are a total of 15 PMDs in Chicago.  The PMDs mentioned above, in addition to the Chicago/Halstead PMD, are the PMDs that have successfully thwarted residential encroachment.  Because of their undesirable locations, the remaining PMDs are impotent at altering land use patterns.  Impotent PMDs only serve as a mechanism for politicians to pay lip service to manufacturing jobs, and window dressing that goes hand-in-hand with subsidies.

I often hear urbanists defend PMDs, repeating the Urban[ism] Legend that we need them to keep manufacturing jobs in the city.  We urbanists can do much to make these districts vibrant if we overcome our nostalgia for urban manufacturing and come to terms with how dangerous PMDs actually are.  Economically speaking, PMDs can only serve the purpose of keeping land prices low enough to compete with undesirable suburban locations for industry. PMDs nonetheless do little to overcome the enormous economic forces repelling industry out from desirable locations in cities.  At worst, PMDs permanently plan the life out of otherwise desirable areas in the long run after serving their purpose temporarily.  At best, PMDs are impotent to drive down land prices in already undesirable places any further than they already are.

At a time when housing affordability is a major issue affecting cities, one way to remove barriers to increased housing supply is to abandon our counter-productive nostalgia for urban manufacturing.  PMDs abolish urban vibrancy, and it’s time for cities to abolish PMDs before it’s too late.

See also:

2005 Study by the University of Wisconsin-Milwaukee on the performance of the Clybourn Corridor PMDs


Glamour in streetscapes

A while ago I attended an Urban Land Institute event on development trends in Fairfax’s Mosaic District. A presenter from the retail developer EDENS described their strategy of adding “sidewalk jewelry,” a design technique used to entice shoppers to travel down sidewalks between stores. Having never heard the term before, it nonetheless stuck with me as I thought about retail developments that manage to create relatively lively pedestrian environments from the top down.

At Mosaic District, this street jewelry takes the form of signage designed to engage pedestrians, fountains, and planters:

Mosaic 1


It’s certainly more aesthetically pleasing and engaging to pedestrians than the average strip center. While the typical strip mall has a parking lot for a set back, Mosaic District has a parking garage that allows the rest of the center to be more pedestrian-scaled. With the “sidewalk jewelry” framework in mind, it’s easy to see that many retail developers have embraced this trend toward focusing on the pedestrian experience once shoppers have left their cars at the center’s periphery. While Easton Town Center in Columbus has many of the same stores as any major mall, it’s outdoor shopping environment is distinctly different, attempting to emulate the “town center” in its name:

Easton town center

For shoppers who value retail ambience, these “lifestyle center” sidewalks provide a much nicer atmosphere relative to more dated strip center or shopping mall designs, but they can’t compare to environments where storefront decorations developed more organically. A recent trip to Quebec City reminded me of the sidewalk jewelry term, but there the visual treats that lure pedestrians down the sidewalk have much more texture than the shopping centers’ above because they are the result of an emergent order among the street’s businesses and residents rather than one developer’s vision:


This type of street meets social critic Virginia Postrel’s framework of glamour. In her book The Power of Glamour, she explains that glamour is something that transcends our everyday life and transports us to better, different circumstances. She explains that shapes that evoke mystery carry glamour because they create mystery at what lies beyond. The fortress walls surrounding the Quebec City add a sort of magic to the city’s charming streets:


Quebec City’s glamour makes it appealing to tourists, but cities that are home to more productive innovation have streets with even more glamour, such as this Tokyo scene where each sign invites the pedestrian to find out what’s inside the business:


As Postrel explains, this glamour “invites us into a world without giving us a completely clear picture.” While people may dismiss the importance of glamour in cities as a frivolous quality, Postrel explains the importance of glamour in our lives:

Glamour is all about hope and change. It lifts us out of everyday experience and makes our desires seem attainable. Depending on the audience, that feeling may provide momentary pleasure or life-altering inspiration.

[. . .]

Glamour can, of course, sell evening gowns, vacation packages, and luxury kitchens. But it can also promote moon shots and “green jobs,” urban renewal schemes and military action. (The “glamour of battle” long preceded the glamour of Hollywood.) Californians once found freeways glamorous; today they thrill to promises of high-speed rail. “Terror is glamour,” said Salman Rushdie in a 2006 interview, identifying the inspiration of jihadi terrorists. New Soviet Man was a glamorous concept. So is the American Dream.

Glamour, in short, is serious stuff. It can alter life plans, even change history. And as a broad psychological phenomenon, it holds intrinsic interest. While rarely addressed in C-SPAN discussions, glamour is the sort of topic to which such 18th-century titans as Adam Smith and David Hume often turned their attention. It spans culture and commerce, psychology and art.

Land use restrictions do a lot to eliminate glamour from urban development through setback requirements, parking requirements, and height limits. Rules of the game that favor large-scale development over the environment that’s possible with the chaos of many small developments prevent the elements of surprise that glamorous streets have. Today’s retail developers are attempting to add glamour back into their products with sidewalk jewelry, but no amount of attention to design on their part will match the level of intrigue of the streetscapes above. Viewed through Postrel’s lens, rules that remove glamour from cities aren’t just bad for the pedestrian experience, but they also dampen what can be an important source of inspiration in our lives. If glamour plays a role in driving us to action, it may be one factor that encourages people to pursue their work in the place where they will be most productive. Rules that eliminate glamour from a city’s physical environment can ultimately reduce its contribution to economic progress.


Urban Development in Charter Cities

In light of approval in Honduras for three new charter cities (REDs), much has been written recently on their potential to improve economic development. Economist Paul Romer makes a compelling case for the potential of charter cities, asserting that countries with institutions that impede economic growth can benefit by designating small areas with rules that permit free trade.

Despite the promise of REDs, designating new areas for urban economic zones may pose some challenges that haven’t been addressed elsewhere. Cities almost always grow through spontaneous orders in locations that emerge through human migration. Cities are a product of human action, not of human design. Older cities grew through their accessibility to trade and natural resources. More recently, towns have become cities as they have become centers for specific industries. This process happens not with top-down planning, but rather as the market process leads individuals to move to specific places, resulting in the urbanization patterns that we see. In the case of Honduras’ REDs, however, the locations were selected by the state.

Unlike the approved sites for REDs in Honduras, Hong Kong and Singapore (models of charter cities) were not greenfields before they became charter cities. Since becoming models of charter cities, both islands’ populations have exploded, but some level of development existed before British rule, and the British did not set out to create large cities. Rather than being planned, the success of these two islands was an accident, in which good institutions in fortunate locations have facilitated enormous economic growth. In contrast, all of the infrastructure and design for the REDs will be built from scratch, at first by one company, MKG, until other investors and individuals move to the city. In a sense, city construction may have to begin before there is demand for it. MKG has pledged $15 million to begin building infrastructure, a small amount in the scheme of city-building, but as of now it’s unclear where future investment will come from, and whether it will be centralized within a few large firms or dispersed.

Greenfield development for charter cities is absolutely key; otherwise, they would coerce people to adopt new rules, eliminating the choice and voluntarism that Paul Romer explains is essential for charter cities to succeed, not to mention potentially leading to violent conflicts. However one firm starting a city in a greenfield will face enormous knowledge problems in beginning to build a city from scratch. The magnitude of this challenge will depend on how much development is required of the few initial, large investors before attracting significant numbers of entrepreneurs. I don’t think either the investors or Paul Romer support top-down city design, but this is a necessary aspect of starting a new city in a government-designated location.

Some towns have been started with charters in greenfields previously, in the American colonies, for example, but none of these were founded with the intent of becoming large cities. Those that grew did so spontaneously because of their advantages over other cities. I don’t think that a state-selected greenfield location will prevent success in REDs or other charter cities, but I do think it bears acknowedgment that starting a city from the top down will create an added challenge. Assuming success, however, REDs will provide a fascinating case study in modern urban development under free markets. Here’s hoping the charter doesn’t include height limits or parking requirements.

Why do condos even exist?

It sounds like a dumb question – they exist because people like the security of owning a home combined with the services and lower costs that apartments offer, duh! But upon further reflection, condominium-style tenure can be a bit problematic.

240_Central_Park_South_2012-09-30_15-18-22The main problem, as I see it, is that a building that’s been carved up into condo units can almost never be redeveloped. So much so that preservationists have been known to cheer on developers doing condo and co-op conversions of historic properties:

Indeed, sometimes preservation advocates look to condo developers as white knights. Since the Bialystoker Center for Nursing and Rehabilitation on East Broadway closed last year, Laurie Tobias Cohen, the executive director of the Lower East Side Jewish Conservancy, has been “extremely eager” for a developer to buy the historic building and convert it to co-ops or condos. The closing of the nursing home was a great loss, she said; the goal now is to prevent the demolition, or further deterioration, of the building. “What we don’t want,” she said, “is to lose any more of the built historic fabric.”

This is no doubt an elegant solution to the problem of unprotected historic buildings, but what about the less-than-stunning condos and co-ops that have been built in the US – and pretty much every where else in the world! – since the end of World War II?

Why are condo buildings impossible to redevelop? Simple: gravity! You can’t keep your apartment on the 17th floor while someone demolishes their 5th floor unit. In Canada, Australia, New Zealand, and Singapore, they call condos “strata” apartments, which reflects what they really are: floors of apartments layered inseparably atop each other. To redevelop a condo or co-op building, you have to buy every single unit, after which you can dissolve the condo structure and own the property in fee simple (i.e., ownership over both the land and the structures on it – the way you own a detached or attached single-family home, or a landlord owns a building). And buying up every single unit in anything but the smallest of buildings is next to impossible.

So in theory, carving a building into condos should diminish its property value. All buildings are depreciating assets (long-run historic potential is too far into the future to matter), but when you own property in fee simple you can replace the buildings on it, ideally with bigger, more valuable ones (although not always “bigger” ones…more on that later). This option basically doesn’t exist for condos and co-ops (which for the purposes of this discussion are the same). One would think that dividing a building into separately-controlled residential condos would be so damaging to property values that nobody would ever do it, and yet, at least in the United States, it happens quite often.

The federal enabling legislation for the condominium form of ownership didn’t actually exist until 1970, when it was enacted for the benefit of Puerto Rico, and not, I believe, because of pressure from mainland developers. There had always been co-ops, at least in New York City (like the Dakota), and I’m not sure if these prewar co-op buildings were ever redeveloped (anybody know?), but they were only for the very wealthy and were much rarer during New York’s unregulated prewar growth period than they are today.

But condos didn’t become popular on the mainland for another 10 years after the 1970 enabling act (remember, the federal legislation was not passed in response to demand by mainland developers), so the oldest condos in American cities aren’t more than about 30 years old. But these are beginning to age – aesthetically, functionally, and density-wise – and I think in the not-so-distant future we are going to begin to feel negative repercussions from buildings that basically can’t be torn down without violating someone’s property rights. (I’ll also discuss later how Singapore does exactly that to get around the problem of a nearly 90 percent home ownership rate in a city-state chock full of multifamily buildings and a culture that has no love for second-hand apartments.)

I should also add that the inflexibility that comes with dispersed ownership in condos and co-ops can be problematic even before redevelopment. I once spoke to someone at a firm that did energy retrofits for prewar buildings in New York who said that even when the return on investment is obvious, it’s sometimes very difficult to get co-op and condo boards to approve the upgrades. But apartment landlords, he said, are much more economically rational, and are therefore willing to invest money when they see the savings. That seems borne out in this NYT article about a highly polluting heating oil used in New York that the city is trying to convince apartment buildings to phase out. It doesn’t mention rentals vs. co-ops/condos specifically, but all the drama in the article revolves around trying to convince co-op boards – not landlords – that it’s in their financial interest to do the retrofit. (I don’t think those sorts of oil furnaces were still around by the ’80s when condos became popular.)

So, back to the original question: why the hell do condos exist?

Though most of the (very smart!) real estate professionals I’ve talked to about it had never thought about it, I’ve read a few theories, and have a few of my own, which I’ll list, but I encourage readers – especially those with knowledge of foreign property markets where incentives and outcomes differ – to chime in. (I’m interested especially in East Asia, where the value placed on new housing is much higher than in long-built out American and European cities.)

So, without further ado, a few possible reasons why condos and co-ops exist…

Tax subsidies. Henry Hansmann at Yale Law wrote a paper in 1991 arguing that condos and co-ops exist mostly for their tax advantages, and that absent these, there would be far fewer. I emailed Henry recently asking if he still believes this, and he was nice enough to respond that he did, but that he hadn’t really kept up on the issue since 1991. But the paper is pretty persuasive, with the caveat (as always) that the math is beyond me. Here’re the first two paragraphs of the paper, which is available as a free PDF:

Twenty-five years ago, cooperative apartment buildings were uncommon in the United States, and condominiums were virtually nonexistent. Since then, however, both forms, and particularly condominiums, have spread rapidly through the real estate market. This article explores the factors responsible for this development. In the process, it also assesses the relative transactional efficiency of consumer ownership and investor ownership in multiunit housing.

I argue that two factors appear principally responsible for the recent spread of cooperatives and condominiums. First is the large tax subsidy to owner-occupied housing that has existed since the Second World War and that has been particularly large during the past two decades. Second is innovation in the forms available for organizing ownership in multiunit dwellings. A variety of considerations suggest that the first of these factors has been more important than the second and that, in the absence of the tax subsidy, cooperatives and condominiums would occupy a much smaller share of the housing market than they do at present. In support of this analysis, this article offers the first sophisticated calculations of the magnitude of the pure tax subsidy to owner-occupied housing, as opposed to rental housing, and of the changes in that subsidy over the past fifty years.

In support of his tax theory he mentions the relative paucity of commercial condos, where ownership is not privileged in the tax code over renting. In fact, I recently worked with a New York City developer who bought and carved an aging postwar skyscraper across from the United Nations into condominiums to market (very successfully, it turned out) to foreign countries for their permanent missions to the UN, specifically because they don’t have to pay property taxes by virtue of their sovereign status, while their landlords do.

Rent regulation. In certain cases it appears obvious that condos and co-ops were created because rental profits were artificially capped through rent controls. This was definitely the case with the massive wave of co-ops that appeared in the ’80s in New York City. Landlords realized they couldn’t make much money renting the units at regulated prices, so they sold them to tenants at unregulated ones. Because the current tenant was the only person they could sell to, the tenant had an unusual among of pricing power (especially in the ’80s, before prices started skyrocketing and, at least I assume, raised the possibility of luxury decontrol so that landlords gained the upper hand), and therefore many got “insider deals” – that is, they bought their apartments as co-ops for less than market value.

I once read – but cannot confirm – that rent controls in prewar Europe had a similar effect on tenure choice in new construction. Rents were regulated but sales prices were not, so many builders (and maybe landlords with already-built buildings?) decided to simply sell the units outright as co-ops or condos (can’t remember which) at prices that were unregulated. Then again, in Europe there is (and was) also the aforementioned issue of restrictive land use regulation, which was introduced earlier than in the US (where the really restrictive stuff didn’t start till the 1960s), so it may have been a factor in encouraging condos/co-ops. (Someone who actually knows what they’re talking about regarding Europe, rent regs, and housing tenure – please validate me and/or set me straight!

Restrictive land use regulation. This is one that I thought of on my own, although I don’t think it’s as solid as the tax subsidies and rent regulation explanations. Redevelopment can only happen if the government lets it happen, and though zoning doesn’t (usually) forbid you from razing and rebuilding, it does often prevent building a bigger structure. Some will eventually redevelop their property even if they can’t raise the square footage, but they’re much less likely to do so. And if your right to redevelop is curtailed anyway by land use regulations (even more so if it’s got historic preservation protection), then you’ll have less compunction about giving it up entirely by carving your property into condos.

Time value of money. Economists dating back to the School of Salamanca have taught that a dollar today is worth more than a dollar tomorrow, and that a dollar in a million years is practically worthless. Redevelopment is by definition far into the future from the time that the developer is making the choice between rentals and condos. The “option to redevelop,” as one developer I spoke to called it, may simply be too far into the future to matter, and especially to overcome the benefits of owning your own home without having to maintain the grounds and, at least in cases where the units are stacked on top of each other (i.e., in an apartment building), without having to pay for your own plot of land.

* * *

While the problem of impossible-to-redevelop condos is most acute in apartment buildings, where you physically cannot redevelop one unit without disturbing the rest, it has also hindered non-stacked condo units. Lydia DePillis (peace be upon her) recently noted an example in DC’s ritzy Logan Circle neighborhood of non-stacked condos, usually found in more suburban locations, that were originally built as affordable housing, but now can’t be redeveloped because the owners can’t all agree to sell. Which is a reminder that condos’ lack of redevelopment potential is not only a problem for a city’s overall affordability and fabric (and aesthetics, in many cases!), but it also really sucks for condo owners who’d like to cash out but can’t because of their intransigent next-door neighbor.

Now onto the case of Singapore. Singapore has highly encouraged homeownership as a means of social engineering (despite its free market bonafides, Singaporean housing policy is highly interventionist), and has been very successful at it: at 87 percent, its homeownership rate is trumped only by former communist countries that simply deeded people’s state-owned apartments to them after the fall of the wall (which I’m sure is going to become a huge problem once Eastern Europeans become wealthy enough to want to redevelop their infamous housing blocks).

But Singapore is also an incredibly dense city-state where the vast majority lives in multifamily buildings, so “homeownership” means owning your own strata unit (their term for a condo, also used in Australia, New Zealand, and Canada). And like all strata and condo buildings, the owners will almost never reach an agreement to sell, so they cannot be redeveloped by conventional means. Combine that with the ugliness of the buildings and the fact that Singaporeans, like all East Asians, place a high value on new homes, and you can begin to see the problem. (Worthwhile to note that en bloc sales were not allowed until a few decades after the homeownership policy took off, and it wasn’t private investors who built the unredevelopable strata towers in the first place – it was the government.)

So to solve it they instituted something called en bloc sales in 1994. The basic idea is that if a certain percentage of a designated building’s residents choose to sell their units (it used to be 90 percent, now it’s 80), then the developer wins the option to buy all the units (including apartments belonging to the “minority owners,” or those who did not approve the sale), which he can exercise at whatever price the supermajority agreed to.

The policy started with buildings that were built by the state-owned Housing Development Board, which is responsible for the vast majority of housing in the city-state, but I was told by Dr. Alice Christudason, an associate professor in the Department of Real Estate at the National University of Singapore, that private developments became subject to en bloc sales with less-than-unanimous consent in 1999 under the “Land Titles (Strata) Act,” which “supersedes any contracts made,” which of course didn’t contain any provision allowing for non-unanimous en bloc sales. (Not sure if newly-built private strata buildings contain any en bloc provisions?)

En bloc sales are very controversial, though (there’s even a TV show about them), and I can’t imagine a non-authoritarian country like the US or Japan tolerating that sort of routine violation of property rights quite the way Singapore does it.

It’s also worth noting that in some ways, a lack of redevelopability can be a positive externality. The ugliness of a 30-year-old condo building next door is mitigated by the fact that it won’t be replaced with a larger one that will take more of your light and air. And if the building is attractive – like the New York City co-ops of the turn of the last century, or possibly 1980s condo towers in the year 2100 (who knows, it could happen!) – then it’s not such a bad thing that it can’t be torn down. A lot of people much smarter than me don’t seem too concerned about the issue: I talked to NYC real estate guru Jonathan Miller about this a few months ago, and his thought on it was that it just contributes to a skyline that reflects all the layers of New York’s history.

But I do think that at some point it’ll become problematic, at least in East Asia. Thirty years from now, for example, is a 90 percent-urbanized China really going to want today’s unattractive, shoddily-built, auto-oriented condo towers marring the skyline and taking up precious land? Authoritarian China may adopt Singapore’s en bloc method of redevelopment, but what about democratic countries like Japan and South Korea that have more respect for property rights? (I’ve been told Japan didn’t have the condominium form of ownership until the early ’70s, but that means the older buildings are starting to become ripe for redevelopment.) Eventually I suppose everything will become attractive in an historic way, but what about the intervening years? (Or am I overestimating the number of condos in East Asia, and they’re actually a relatively rare form of housing tenure in multifamily buildings?)

Update: Here’s an article from March that @graemebone on Twitter sent me about Vancouver strata buildings facing this exact issue, with ballooning maintenance costs being the trigger. British Columbia passed its “Strata Titles Act” in 1966, so they’re facing these issues a few years before we will in the US. Some interesting bits about how they’re just now starting to deal with it:

“There is an implied provision in the Act, which is that if you have more than 10 units in a project, there will be one jerk,” says lawyer Patrick Williams, one of the city’s premier condo-law experts. “One jerk can bring down the whole house of cards, hold everyone to ransom.” Gioventu, from the owners association, is also less than reassuring: “If you live in a 64-unit building, think of those other 63 people you have to sell with as being like your in-laws.”

Until now, those dysfunctional relationships have been tested over familiar stresses: leaks, maintenance reserves, noise, pets, prostitution, grow-ops. Williams knows of just two cases in B.C. where judges have issued decisions on impasses between owners who want to stay and those who want to demolish and sell the land. (In both cases—one a three-owner condo in Kitsilano, the other a larger project in Burnaby—the judges ruled in favour of the owners who wanted to demolish over those willing to keep pouring money into maintenance.)

Even getting to those decisions hasn’t been easy. “The Strata Property Act here is really in its infancy,” explains Williams. Buyers don’t realize how fuzzy the law is when it comes time to shut it all down. It also sets the bar high for how much agreement is needed: 100 percent. Condo owners who can’t get that in their buildings have to go to court—as the Cypress Gardeners have done—to try to get a judge to order a sale. As if that weren’t enough, there’s another hurdle: the institutions that hold the mortgages may not go along with the deal.

And here’s some interesting research on en bloc sales in Singapore, in the same article:

In search of other jurisdictions where condo dismantling is further along, UBC professor Tsur Somerville and a group of colleagues looked to Singapore. “This is where we’re all headed,” says Somerville. They looked at the sales of 285 condo buildings after 1994 (when the government introduced regulations allowing developers looking for low-density properties to tear down and rebuild at higher densities). Their study found that the more units in a complex, the less likely the owners would agree (and the less likely a sale would happen). They found that another factor blocking sales was the difference between the smallest and largest units in a building: where units were similar in size (and, consequently, price), sales were more likely. Buildings that were owned mostly or entirely by investors reached sales agreements more easily. And sales became more likely when Singapore changed its law, reducing the owner consensus needed from 100 percent down to 80 or 90.

All this makes me wonder: why do condos/strata exist in Canada? Were they given tax subsidies similar to those in the US?

New standards for ridiculousness in historic preservation

Because Arlington County, VA is not home to many properties over 100 years old, planning officials have turned their historic preservation efforts to those properties they do have to preserve. The Sun Gazette reports:

The first phase of the effort focused on only a very narrow slice of property types in Arlington: garden apartments, shopping centers and commercial properties more than 50 years old. Leventhal said those types of properties are most vulnerable to redevelopment.

It sounds like preservation efforts in Arlington will be much less restrictive that the often discussed Landmark Designation in New York. However, the new policy will certainly increase uncertainty and cost for redeveloping protected property. And of course the question here is, are strip malls from the 1960s really worth preserving?

Miles Grant at The Green Miles hits the nail on the head with this quote:

But saying properties more than 50 years old are most vulnerable to redevelopment is like saying cars more than 10 years old are most vulnerable to being traded in.

Sure, if classic cars were protected and not allowed to be traded in, we would see more on the road. The trade-off, though, would be that consumers would not be able to choose the cars that best meet their needs.

While Smart Growth supporters and historic preservation activists share the same propensity for top-down control of development, this issue gets to the core of their inherent conflict. The preservation of car-centric development prevents higher density, walkable communities, even when this is what the market demands. While individuals may attempt to embrace both ideologies, protecting mediocre mid-century suburban architecture necessarily comes at the expense of Smart Growth principles.

More Libertarians on Jane Jacobs

The Ludwig von Mises Institute publishes a podcast performed by Jeff Riggenbach called “The Libertarian Tradition”, which discusses significant figures in the libertarian movement.  The most recent edition is dedicated to Jane Jacobs, who’s ideas are highly regarded by many libertarians, despite the fact that she publicly distanced herself  from being associated with the term or movement.  It’s a great listen, and mentions fellow Market Urbanists and friends of the site, Sandy Ikeda and Thomas Schmidt.  It’s great to see more attention given to Jane Jacobs and urbanism by free market advocates.

Mises Podcast on Jane Jacobs

On a similar note, Market Urbanist, Sandy Ikeda will be hosting a “Jane’s Walk” in honor of Jane Jacobs in Brooklyn Heights.  Here’s a description from the site:

Eyes on Brooklyn Heights

The beautiful and historic neighborhood of Brooklyn Heights offers excellent examples of Jane Jacobs’ principles of urban diversity in action.

Beginning at the steps of Brooklyn’s Borough Hall, we will stroll through residential and commercial streets while observing and talking about how the physical environment influences social activity and even economic and cultural development, both for good and for ill. We will be stopping at several points of interest, including the famous Promenade, and end near the #2/3 subway and a nice coffeehouse.

Please wear comfortable footwear and weather-appropriate clothing, and be sure to have lots of questions. See you there!

Date: Sunday May 8, 2011
Time: 1:00pm-2:30pm

Meeting Place: The tour will meet at the steps of Brooklyn’s Borough Hall (2nd stop on the #2/3 subway) and end at the Clark Street station of the #2/3 subway.

Host:Sandy Ikeda

Host Organization: Purchase College

Contact info:

I plan to attend.  It would be great to see some other Market Urbanists there!