Taxing Land Speculation

Bill Hudnut at the Urban Land Institute wrote a post that attracted some attention at Austin Contrarian and Overhead Wire. Hudnut discusses a different approach to taxing land:

How about restructuring the property tax across America to install a two-tiered system? More tax on those horizontal pieces of empty land and asphalt, less on the buildings. That is, reduce the tax rate on homes and other improvements, and substantially increase the rate on the site value. I think such a system would induce more compact development and more infill work.

It sure would induce more development.

Higher taxes on the land, lower taxes on the building, discourages a land holder from leaving his land fallow and speculating on its increased value, and conversely, encourages improvements on the land and redevelopment. The monograph used Sydney Australia as a case study, but its general point, that a site value tax system puts “pressure on owners to sell their property for redevelopment if they cannot or will not redevelop it themselves.”

Note that ULI is an organization primarily of real estate developers, investors, and related professions. (I am a member.) So, I can see why developers would favor a mechanism that would force more land into development.

Overall, this type of scheme will help drive development in the short run, but be harmful in the long-run.  By encouraging development in the present by discouraging land speculation, we can expect a few consequences:

  • Speculators play an important role in the land market, even if we don’t like the surface parking lots they often operate on their land.  Speculators essentially hold the land until development is optimal for the site, and all sites cannot be optimally built at once. Discouraging speculation drives the land into the hands of developers at cheaper prices than current market prices.
  • At the same time in reaction to the new tax regime, all the new developers will compete for users of the space they are building on the vacant land. This either means they’ll build smaller in anticipation of the glut of new development, or vacancy rates will be much higher.
  • The new supply of space will likely serve to lower rents and condo prices, but this will only be temporary as available development sites quickly disappear.
  • Had speculators been forced to build on their lots, less dense, and less optimal buildings would be in their place, and a future developer faces the opportunity cost of demolishing that building. This would be similar to developing in New York, where vacant parcels are very rare, compared with developing in Chicago where developable parcels are relatively plentiful.  There is a huge affordability gap between New York and Chicago, which can be partially attributed the the availability of development sites.
  • It will harm the diversity of building age that Jane Jacobs claims as a key ingredient that makes for great cities. The stock of buildings will be disproportionately represented by buildings built shortly after the tax scheme is enacted. As new development occurs, affluent people will be attracted to the developing areas. As these buildings depreciate, the more affluent will relocate. Without enough diversity, over a long period of time a neighborhood will be predominantly lower-class residents.
  • This under-developed scenario will breed NIMBYism over the years, as the new development will be of lower density than under current taxes.  Residents will likely be resistant to future higher density development of sites to meet market demand.  However, new development would necessarily involve demolition of existing lower-density buildings, which is costly from an opportunity cost point of view, as well as community relations.

I do favor some regional, state, or other tax based upon acreage. (if offsetting income tax or other productivity-stifling taxes)  However, I would implement the tax to discourage sprawl, not to discourage speculation.  Thus, I would tax each acre equally, whether developed or vacant.  Encouraging development of vacant land may only serve to encourage lower density development as a “tax payer”, as opposed to a more optimal use of the land. As long as density isn’t overly restricted, speculation can allow for higher density, and more optimal land use in the long run.

By burdening speculators, we should expect speculation to shift to under-optimal “development” like this:

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The Story of I’On: Struggles of a New Urbanist Project

43 John Galt Way

43 John Galt Way

27 Mises Street

27 Mises Street

I recently googled upon a post at a blog called “Rub-a-Dub” that mentioned a land development project in Mount Pleasant, SC called I’On

I imagine the developers of the I’On “Traditional Neighborhood Development” (TND) community are sympathetic with Market Urbanism, as they named streets after John Galt (of Ayn Rand’s Atlas Shrugged), free-market economists Ludwig Von Mises and Thomas Sowell, as well as urbanist writer Jane Jacobs. (ironically, Jane Jacobs Street doesn’t have sidewalks yet according to google street views)


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Who says New Urbanists and free markets can’t mix?  (well, I’m sure we all can name at least one such person…)

What I found interesting was the story of the development shared in the comments of the post by Vince Graham, Founder and President of the development company.  The story really conveyes the struggles developers go through to get projects through the approval process; especially when the standard 20th century, auto-centric layout is being challenged by innovative development solutions.

The reason why there is only single family homes and a limited amount of commercial space in the neighborhood is due to unfortunate compromises necessary to get the neighborhood approved through the arduous political process. Here is a summary:

A Summary of the Political Background and Permitting History for I’On.

    Background:

The traditional walking neighborhood of I’On is located on a 243-acre infill site in Mt. Pleasant, SC located 5 miles from Charleston’s historic district and 3 miles from the Old Village of Mt. Pleasant. The site is surrounded by conventional subdivision development of the 1950’s, 60’s, 70’s, and 80’s. Approximately 60% of I’On’s acreage was originally comprised of former agricultural fields, 30% was 30-40 year old hard wood growth, and 10% took the form of three man made lakes. The design workshop for I’On took place in May of 1995. I’On received approval in March of 1997, and ground was broken on infrastructure in June of 1997, and on the first house in March of 1998. As of January 1, 2003, approximately 300 homes were occupied in I’On, with another 60 homes or so under construction. 19,000 s.f. of commercial space is complete and occupied with another 8,000 s.f. under construction. Two civic buildings have also been completed.

Mt. Pleasant is a bedroom community of Charleston. It has a population of approximately 50,000 people spread over 26,000 acres (roughly the size of Hilton Head Island or Nantucket Island). In 1992, well in advance of the initial design workshop for I’On, the Town Council of Mt. Pleasant unanimously adopted a town-wide Master Plan incorporating Traditional Neighborhood Design (TND) principles. This plan, known as the Redmon-Johnson Master Plan, praised the Old Village of Mt. Pleasant with its mix of civic, commercial, and residential uses as the development model to emulate. It even recognized the site upon which I’On was to be built as an ideal location for a TND. In addition, the Town had adopted and unanimously approved a Strategic Plan in 1994, which also encouraged future development to take the form of compact, traditional neighborhood like the Old Village of Mt. Pleasant. Unfortunately, the Town’s zoning had never been modified to make it consistent with the Master Plan or the Strategic Plan. The underlying zoning for the site was “R-1” specifying 10,000 s.f. minimum lot sizes with accompanying requirements of conventional development (minimum lot widths, setbacks, etc). Thus, to develop the property as a TND required a zoning change to “Planned Development”.

The Founders retained Dover Kohl and DPZ as land planners for the neighborhood. The Founders led the combined firms on a tour of the best models of urbanism in the region including Savannah and Charleston, as well as the historic areas of lesser known coastal towns like Beaufort, Rockville, and the Old Village of Mt. Pleasant. In addition, the group toured Newpoint, a three-year-old TND the Founders were currently building in Beaufort.

Over the next seven days, the group worked to develop a design code and plan comprising 800 single-family lots, 440 multi-family units, 90,000 s.f. of commercial space, and a number of civic sites. Andres Duany presented the plan to a standing room only crowd at the Mt. Pleasant Town Council chambers in mid-May of 1995.

The Founders spent the next few months working with members of DPZ and Dover Kohl to fine tune the plan and code to ready them for rezoning application submission. The rezoning application was submitted in August, 1995. After several public meetings, it received a 7-2 recommendation for approval by the Mt. Pleasant Planning Board. Prior to being reviewed by Mt. Pleasant’s Town Council, compromises were made to the rezoning application reducing single-family lots to 730, and multi-family units to 120. These 850 units worked out to a density of 3.5 units/acre. 3.5 units/acre met the Town’s definition of “low density” [Note: this definition has since been revised downward to 2.8 units/acre.]. Despite more citizens speaking in favor of the project than in opposition at the Mt. Pleasant Town Council meeting held in December of 1995, the application was rejected by a 5-4 vote.

Among other concerns, several residents from the adjacent subdivisions of Hobcaw Point, Molasses Creek, and Heron Pointe feared that the smaller lots would depress their property values, the proposed roundabout would be a “circle of death”, some of the planned streets would be too narrow for fire equipment to use, the parks and apartments would attract “undesirables”, and traffic from I’On would overwhelm Mathis Ferry Road.

After much debate, the Founders elected to continue with option payments to purchase the property. They worked to decipher what kind of plan would be supported by those council members who voted against the application. They also worked with planners to make further compromises to the plan such as removing the multi-family component, reducing the number of proposed thoroughfare types from 11 to 4, reducing commercial from 90,000 s.f. to 30,000 s.f., eliminating a vehicular connection to the adjacent neighborhood, and reducing the total unit count to 759. The Founders had deep regrets about making these compromises as they felt the neighborhood would be less diverse and less affordable, thus reducing the overall quality of I’On. However, political circumstances made these compromises necessary to get anything approved.

Note: 759 units on 243 acres works out to a density of 3.1 units per acre. For comparison, the Old Village of Mt. Pleasant has 3.7 units per acre, Charleston south of Broad Street has 5.2 units per acre, and a conventional R-1 subdivision in Mt. Pleasant has about 2.7 units per acre.

The compromises alleviated the concerns of a large portion of the opposition. However, there was still a core group of four or five individuals lead by Vince Adams who were determined to defeat the development proposal. Opponents argued that the neighborhood plan would generate too much traffic on Mathis Ferry Road. They refused to believe a traffic impact study prepared for the project, which found that because of the off-sight improvements being made by the developer (which included a new connector road between Mathis Ferry Road and U.S. 17) the traffic impact from new homes in I’On would be less than it would be from a conventional subdivision development where no connector road was required. This study also found that the level of service (a qualitative measure of traffic flow conditions) on Mathis Ferry Road would not change once the development was fully built out. Nor would opponents believe the Town of Mt. Pleasant’s own traffic engineering consultant who reviewed the study and concurred with its findings.

The opponents’ claimed the I’On Founders were being deceptive, and the maximum number of units that could be built on the property using R-1 guidelines was between 450 and 500 units. Their basis for this claim was a land plan that had been prepared for the property in the early 1990s, which opponents would cite in public meetings and letters to the Planning Board and Town Council. This plan, which showed 450 units, had been commissioned by Bob Miller, a developer with strong political connections, who had been building conventional subdivisions in the Town for many years. Miller had worked on this plan with Dick Jones, a former Mayor of the Town.

This new plan and rezoning application was submitted in December, 1996. After the requisite public hearing, it received a 7-1 recommendation for approval by the Mt. Pleasant Planning Board in January, 1997, followed by a 7-2 first reading approval by Town Council in February of 1997. The plan and rezoning application received 6-3 final approval by Town Council in March of 1997 (one council member who had supported the rezoning in February, switched his vote after intense lobbying by rezoning opponents). As with the 1995 application, the majority of citizens who came to speak at public hearings voiced support for the plan for I’On.

Infrastructure construction began in the summer of 1997 (two years after the initial design workshop took place) and ground was broken on the first house in March of 1998. Homes in the neighborhood have ranged in price from $160,000 to $1,700,000, and lots range in size from 1/20th to one half of an acre. It is worth noting that some of the more expensive homes sold in the neighborhood are located on some of the smallest lots. Quantity is not quality, and thus, does not necessarily translate into a higher price.

During the time the Planned Development ordinance received first reading approval in February of 1997 and infrastructure ground breaking in the summer of that year, the opponents of the project gathered a petition of 3,500 registered voters, which they presented to Town Council requesting that governing body overturn the approved ordinance, or otherwise, hold a referendum enabling the citizenry to vote on the zoning. The Founders challenged this action, and a Circuit Court Judge placed a Temporary Restraining Order (TRO) on the Town prohibiting them from acting on this petition. This TRO was subsequently lifted, and while the Town Council voted 6-3 against overturning the rezoning, they did schedule a Town-wide referendum be held in October of 1997.

The Founders continued their legal challenge, while preparing a campaign to win support for I’On at the polls in October of 1997. Site work construction continued unabated throughout despite the opponents’ legal attempts to stop it. One week prior to the scheduled referendum, Circuit Court Judge Markley Dennis ruled that a municipality could not hold a referendum on zoning issues. The Town was satisfied with the decision, but the opponents were not and intervened to appeal this decision. The appeal was heard by the South Carolina State Supreme Court in December of 1999. In January of 2000 the Supreme Court ruled unanimously to affirm the lower court decision.

The principal opponents of I’On targeted the incumbent supporters for defeat. In subsequent elections, five of the six council members who had voted to support the rezoning of I’On were defeated at the polls, and the other member of Council who had voted to support the rezoning, elected not to run. Despite all its aesthetic, economic, environmental and social successes, I’On was effectively used as a galvanizing issue for the anti-growth forces of the Town to defeat incumbents.

Since its approval, I’On has received numerous local, state and national awards for environmental sensitivity, sustainability, and design, including a Stewardship Award from the South Carolina Department of Natural Resources, and the National Association of Home Builders “Best Smart Growth Community” in the country in 2002. It has also received national and international recognition from media outlets ranging from CNN to National Geographic magazine. The neighborhood has played host to college groups, city councils and planning staffs from other municipalities in the Carolinas, and developers from as far away as Europe, Japan, and Australia. They come to learn more about smart growth principles in action.

The political fervor has died down over the years as I’On’s residential property values have consistently outperformed the market and are easily the highest of any new community in Mt. Pleasant. However, from time to time a new controversy will arise. A 2001 proposal to connect with the new subdivision of Braemore to the southwest was fought by Council. Another 2001 proposal to allow up to 80 of the 762 approved homes to take the form of “Rainbow Row” styled townhouses was voted down by Town Council 9-0. In January of 2002 the Town chose to fight a Montesorri School’s decision to locate on one of the sites designated for civic use in I’On, by arguing that a school is not a civic use. A circuit court judge ruled that the Town cannot exclude a school from its definition of civic use, but despite this, the Town asked its city attorney to appeal this decision to the S.C. Court of Appeals in April of 2002. In October of 2003 the Court of Appeals handed down a unanimous decision affirming the lower court’s decision, which opens the door for a school to be built in the neighborhood.

    A few observations.

As discussed, the neighborhood is located in close proximity to two historic districts that are, if price is any measure, the most sought after places to live in the area; through its Master Plan and Strategic Plan the Town had adopted a clear vision for the kind of development they wanted; we had two of the best, if not the best, planning teams in the country creating the initial plan; no less than four environmentally oriented groups endorsed the plan along with a substantial number of community leaders; and the developer had a track record of successful TND development within a 90-minute drive of the subject property.

It is important to recognize that our society has politicized property rights and democratized land use to the point that most re-zonings now involve a political campaign. Even with great built examples such as the historic area of Charleston and the Old Village of Mt. Pleasant, one should not make the naïve mistake of assuming that citizens or their elected leaders will understand the concept after hearing a lecture or reading a few articles on Traditional Neighborhood Development. Some may take years to understand the concept, while others may never understand it. And there are some who feel that accepting the design principles of TND involves an admission that what has been built over the last 50 years was a mistake. They may be unable or unwilling to make such an admission. Also, one should not assume that if a politician or appointed board member likes a project or thinks it is “the right thing to do” they will necessarily support it in a public forum. Few are those who possess the political will or guts to stand up to an angry room full of NIMBYs, or a well-connected citizen.

It is extraordinarily difficult to win such a political campaign in most areas of the country for several reasons: (1) Prior to World War II people were excited about growth. Their expectations were that what was built would be beautiful and contribute to their quality of life. However, the overall quality of the built environment of the last 50 years has been poor. This makes people distrustful of anything new, and gives rise to a legitimate belief that anything new will, by association with most of what has been built over the last 50 years, will necessarily be bad; (2) the private/exclusive mindset embodied in the suburban mentality (which has spread to many urban areas) leads people to believe that any more development will degrade their privacy and exclusivity; and (3) it is in the best short-term economic interests of existing property owners because limiting supply of new homes, puts upward pressure on existing home prices.

There are many bright spots in the I’On story that those involved in campaigning for, building, and living in the neighborhood can view with pride. As mentioned, the neighborhood continues to grow in aesthetic, economic, and social value. It attracts people from around the world interested in smart growth principles, and demonstrates that it is still possible to build in a beautiful manner.

The present Town Council of Mt. Pleasant attempts to address growth by widening roads, and mandating lower densities and segregated land uses. This has the effect of spreading new growth out to the fringes of Town, requiring longer travel times, mandating the need for a car to meet daily needs, and thus exacerbating the problem of traffic congestion. There are however, many municipalities taking aggressive measures to address the problems of sprawl. For example, the Founders have been welcomed by other municipalities and their citizens in South Carolina and North Carolina to participate in building new neighborhoods. With I’On and other examples of mixed-use development now taking shape across the country, the future looks bright for an expanded availability of housing choice.

Vince Graham
The I’On Company
vince@iongroup.com

Another Angle on Planning in Houston

Brian Phillips at Live Oaks contacted me regarding the recent post by Stephen Smith on planning in Houston. Brian is a long time opponent of land use restrictions and defender of property rights in Houston. Brian has a different point of view on the subject, and has written a post on his blog, which I hope will spark some lively conversation.

Brian invited me to publish a copy of his post at Market Urbanism. Tomorrow, I hope my schedule gives me the opportunity to share some of my thoughts on the topic, because I sympathize with both authors’ points of view. In the meantime, I want to share Brian’s post right away to get readers reactions to it:

Urban Legends: Myths About Houston

by Brian Phillips

In a recent posting titled “Is Houston really Unplanned?” on Market Urbanism, Stephen Smith attempts to debunk alleged myths about Houston and planning. In the process, he actually engages in a much more widespread error–the failure to essentialize. (Here is a good explanation of essentializing.)

Smith cites several examples of land use regulations in Houston, such as minimum lot size mandates and regulations dictating parking requirements for new development. He argues that these regulations, along with the city’s enforcement of deed restrictions, refute claims that Houston has developed primarily on the basis of free market principles.

Smith’s position is common. Zoning advocates actually used similar arguments in the early 1990’s. Zoning advocates were wrong then, and Smith is now.

Admittedly, Houston is not devoid of land use regulations. But the nature, number, and scope of those regulations is significantly different from other cities. There is an essential difference between the regulations in Houston and those in other cities. The permitting process in Houston is relatively fast compared to other cities, and the expenses incurred in that process are also significantly lower in Houston. In other words, developers in Houston can respond much more quickly to changes in the market and do not incur exorbitant costs that must be passed on to consumers.

This is not a justification for the regulations that Houston does have. They are wrong and immoral, as are all land use regulations. But the fact is, Houston has far fewer and much less egregious restrictions on freedom than other cities.

Smith, and many others, attempt to paint a picture of Houston land use policies with a very wide, and indiscriminate, brush.

Boosters of Houston’s land use policy – those who believe that Houston’s land use patterns are the free market, revealed – never mention the restrictive minimum lot size and minimum parking requirements. They mention deed restrictions as free market innovations but fail to see how the city’s prosecutors turn private concerns into public budget drains.

If someone defends Houston’s relatively free land use policies, pundits such as Smith seem to assume that those advocates defend all of Houston’s land use policies. This is akin to believing that if someone likes one of Clint Eastwood’s movies, he likes all of Clint Eastwood’s movies (and everything else Clint Eastwood does). This is patently absurd.

As an example, Smith cites opposition to a proposed project at 1717 Bissonnet (the Ashby High Rise) as evidence that Houston does not have a laissez-faire policy towards land use. Smith implies that one particular violation of property rights is evidence that Houston is no different from other cities. He evades the fact that the vast majority of development projects proceed with little or no obstruction from the city.

I have defended the Ashby High Rise many times on this blog and at a panel discussion at Rice University. I have defended the project as a matter of principle–land use regulations are wrong and immoral. I have also addressed numerous other violations of property rights on this blog and elsewhere for nearly twenty years. To claim that “[b]oosters of Houston’s land use policy” have ignored the city’s violations of property rights is simply untrue. It may be true of some, but not of all. Smith chose to put all of us in the same boat with a broad generalization that flies in the face of the facts.

The fact is, Houston has fewer land use restrictions than other cities. Those that do exist are less restrictive (in general) than the restrictions in other cities. Those that do exist are less destructive than the restrictions in other cities. Again, the restrictions that do exist are indefensible.

Smith’s argument amounts to: Either Houston is completely laissez-faire or it is just like every other city. This ignores the degree of the transgression. This equates a pickpocket with a murderer. Both have violated the rights of another. Both have engaged in evil, but on a much different scale. To equate the two is to diminish the murderer’s evil. To equate Houston with cities that erect mountainous obstacles to development is to diminish Houston’s greatness.

But painting with a wide brush is not the only error that Smith makes. He questions the validity of contracts:

Another form of planning that Houston has, which is celebrated by the self-titled Antiplanner, is the institution of supposedly voluntary deed restrictions, or private land use covenants agreed upon by the owners of the property under restriction. I’m personally torn over the “libertarianness” of such schemes – are they truly voluntary? Can an individual owner of a property opt out of them once they’ve been signed? What’s the statute of limitations? One thing that makes me suspect that they perhaps aren’t as “free market” as they seem is that though the contracts are between individuals, Houston’s city code allows the city attorney to prosecute these lawsuits at no cost to the supposed victims – fellow property-owners.

Consider Smith’s own question– “Can an individual owner of a property opt out of them once they’ve been signed?” In other words, after a contract has been signed, can one party unilaterally breach that contract? This is nothing more than a desire to invalidate the very concept of contracts. If one party can unilaterally breach a contract, contracts–all contracts–are rendered meaningless.

A contract is an agreement to engage in certain actions over a period of time. If one party can unilaterally breach that contract–that is, declare the agreement void–the contract isn’t even worth the paper it is written on.

I agree that the city should not be enforcing deed restrictions–that is the responsibility of those who are party to the contract. But this error on the part of the city does not invalidate the fact that Houston remains freer than other cities. Smith fails to distinguish between minor transgressions and major.

A right is a sanction to act according to one’s own judgment without seeking permission from others. In this regard, Houston recognizes individual rights more consistently than other cities. This does not mean that Houston is perfect–it means that Houston recognizes individual rights more consistently than other cities. Where Houston does not recognize individual rights, it is wrong.

But Smith–and those who share his position–uses isolated facts to argue his case and then fails to identify the essence of those facts. He implies that all “[b]oosters of Houston’s land use policy” are the same. He implies that the voluntary and contractual planning that accompanies deed restrictions is no different from zoning or other coercive land use regulations. Both of these implications are false.

When one does not think in essentials, disparate facts can seem very similar. On the surface, deed restrictions and zoning might seem the same–both restrict land use. But the former is voluntary and consensual, while the latter is coercive and mandatory. There is an essential difference between the voluntary and the coercive. There is an essential difference between allowing individuals to act on their own judgment and forcing them to act contrary to their judgment. There is an essential difference between Houston and every other major city in the nation.

Another On “Conservatives” and Urbanism

While I sympathize with the theme and agree with regards to roadway spending and “conservative” hypocrisy, a recent article in the progressive The American Prospect takes a narrow-minded view of politics and urbanism, while throwing around broad generalizations about evolution and global warming to support their assertions:

The Conservative Case for Urbanism

In fact, one doesn’t have to be concerned about climate change at all in order to support such policies; values of fiscal conservatism and localism, both key to Republican ideology, can be better realized through population-dense development than through sprawl.

Tom Darden, a developer of urban and close-in suburban properties, said Wednesday, “I’m a Republican and have been my whole life. I consider myself a very conservative person. But it never made sense to me why we would tax ordinary people in order to subsidize this form of development, sprawl.” Darden told the story of a road-paving project approved by North Carolina when he served on the state’s transportation board. A dirt road that handled just five trips per day was paved at taxpayer expense, with money that could have gone toward mass transit benefiting millions of people.

“Those were driveways, in my view, not roads,” Darden said.

I agree with Darden. However, so-called “progressives” fall into the same narrow minded trap when they support public transportation as a solution to global warming that “conservatives” fall into when they try to protect their auto-centric lifestyle. Many are really calling for more of the same top-down overspending on transportation infrastructure that will require a taxpayer bail out at some time in the distant future. Where is the rational voice trying to slow down overspending on all energy-reliant, sprawl-creating, redistribution of productive resources? While existing transit may be less bad environmentally in comparison to highways when looked at from a narrow point of view, it is a common mistake to assume that more spending on new infrastructure of any form will create denser living patterns. Yet we hear the top-down paternalistic rhetoric over and over:

“People don’t want to live 40 miles away from their workplaces,” Coleman said. “But we have to offer them options. If we can build a light rail line into the city of St. Paul and build the density of business around it that we are planning, we will be able to significantly alter people’s lifestyles.”

But in order to build public support for such policies, conservatives must join progressives in rethinking the United States’ geography. Density is cost effective, it fosters small business development at the local level, and it strengthens ties within communities. None of that should be anathema to either national party — unless they continue to put the interests of construction behemoths and automakers above the interests of ordinary Americans.

I would argue that “progressives” who wave the banner of environmentalism, while well-intentioned, are no friends to urbanism. I plan to dispel the myth that more spending on public transit will lead to denser living patterns in a future Urbanism Legends post. If these “progressives” really want denser living and a more environmentally friendly transportation network, they should rethink their love affair with top-down planning and spending, including on new transit. Afterall, progressivism brought us Euclidean Zoning in the first place.

Update:
rationalitate hits the nail one the head in response to the American Prospect article, and hits on some other points I didn’t get into:

But what it doesn’t mention is that the sort of sprawl that dots America’s (mostly suburban) landscape is enabled by zoning and minimum parking regulations, and that the suburbs might be a lot denser if people were allowed more complete property rights. I don’t know if it’s because the Republican party has strayed so far away from its limited government roots that this no longer qualifies as a “conservative” issue, or if the author mistakenly equates municipal government with individual choice, or if the author is just plain ignorant as to the root causes of sprawl. But in any case, she took what could have been an insightful topic, stripped away any persuasive arguments, and left readers with the impression that urbanism simply isn’t compatible with American conservatism. And that’s a shame.

I’ll go with: “the author is just plain ignorant as to the root causes of sprawl.”

[HT: The Bellows]

Skyscrapers as Economic Indicators

Ever hear of interesting economic indicators such as the correlation beween the economy and length of skirts?  Here’s one urbanists should appreciate: the skyscraper index, which shows strong correlation between the completion of world’s tallest buildings and downturns in the business cycle.  Mark Thornton discusses the skyscraper index in his article, Skyscrapers and Business Cycles [or mp3 read by the author], which was originally published in the Quarterly Journal of Austrian Economics:
Burj Dubai, Worlds Tallest Building under construction [flickr israel_is.live]

The skyscraper is the great architectural contribution of modern capitalistic society and is even one of the yardsticks for 20th-century superheroes, but no one had ever really connected it with the quintessential feature of modern capitalistic history — the business cycle. Then in 1999, economist Andrew Lawrence created the “skyscraper index” which purported to show that the building of the tallest skyscrapers is coincidental with business cycles, in that he found that the building of world’s tallest building is a good proxy for dating the onset of major economic downturns. Lawrence described his index as an “unhealthy 100 year correlation.”

While macro business cycle theory is beyond my core strength in economics and the scope of this blog, this is a particularly interesting topic to me as I am an economics enthusiast with a passion for tall buildings.  The basic premise is that construction of worlds tallest buildings has strong corelation with economic downturns.  Construction of these buildings begin during times of economic expansion towards the peak of business cycles.  However, by the time the buildings are complete, the market has taken a turn for the worse.  Could the Burj Dubai be an indicator that tough times are ahead?

The common pattern in these four historical episodes contains the following features. First, a period of “easy money” leads to a rapid expansion of the economy and a boom in the stock market. In particular, the relatively easy availability of credit fuels a substantial increase in capital expenditures. Capital expenditures flow in the direction of new technologies that in turn creates new industries and transforms some existing industries in terms of their structure and technology. This is when the world’s tallest buildings are begun. At some point thereafter, negative information ignites panicky behavior in financial markets and there is a decline in the relative price of fixed capital goods. Finally, unemployment increases, particularly in capital- and technology-intensive industries. While this analysis concentrates on the US economy, the impact of these crises was often felt outside the domestic economy.

Thornton tells us three main effects of the business cycle on skyscrapers.  First, looking at the fundamentals of the economics of land development and interest rates:

When the rate of interest is falling, the land best suited for the production of the longer-term, more capital-intensive, and more roundabout methods of production will increase in price relative to land better suited for shorter term, more direct methods of production. …  Simplified, higher prices for land reduce the ratio of the per-floor cost of tall vs. short buildings and thus create the incentive to build buildings taller to spread the land cost over a larger number of floors. Lower rates of interest also reduce the cost of capital, which facilitates the ability to build taller. Thus, higher land cost leads to taller buildings.

Second, lower interest rates enabling larger firm sizes:

A lower cost of capital encourages firms to grow in size and to become more capital intensive and to take advantages of economies of scale. Production and distribution become more specialized and take place over a larger territory.

The third being improved technology as a result of investment in research and development of taller buildings:

Buildings that reach new heights pose numerous engineering and technological problems relating to such issues as building a sufficiently strong foundation, ventilation, heating, cooling, lighting, transportation (elevators, stairs, parking), communication, electrical power, plumbing, wind resistance, structural integrity, fire protection, and building security.

Beyond the mere technology it takes to build the world’s tallest building, every vertical beam, tube, or shaft in a building takes away from rentable space on each floor built, and the more floors in the structure, the greater the required capacity of each system in the building, whether it is plumbing, ventilation, or elevators. Hence, there is a tremendous desire to innovate with technology in order to conserve on the size of building systems or to increase the capacity of those systems. Therefore, as the height of construction rises, input suppliers must go back to the drawing board and reinvent themselves, their products, and their production processes.

 

diagram from the article

diagram from the article

An office building is a capital good that is used to bring a variety of consumer goods to market in the sense that production in the office building involves the decision-making process over all aspects of the firm. Its use is ubiquitous in “big business” and is totally absent in small businesses such as family farms, hot dog stands, plumbing services, auto body repair shops, etc. The office building is a critical capital good in very roundabout production processes that represent virtually all modern production and all cutting-edge goods and service production. The modern economy is inextricably linked with the large office building or as Carol Willis (1995, p. 181) put it: “Skyscrapers are the ultimate architecture of capitalism.”

The skyscraper is not just a large version of the office building. Skyscrapers can be used to house the offices of a single corporation, the central offices and branch offices of multiple corporations, hotel and residential living space, commercial space, convention space, a wide variety of personal service businesses, and specialized tenants such as stock exchanges, theaters, and television studios. The skyscraper can serve as a much larger and more advanced office building (being both more productive and producing a higher-quality service). It can even take on the status of a business community or specialized form of privately controlled marketplace. Naturally, greater amounts and diversity of production are possible in larger skyscrapers. The world’s tallest building, past and present, also adds the status of a distinct address.

An interesting fact to consider is that the Burj Dubai is the first world’s tallest to be residential and not office.  Does it reflect the unique market cycle we are now in where the credit bubble resulted in a world’s tallest building with a non-commercial primary use?  Is it somehow telling that the Burj Dubai is not a skyscraper directly meeting the needs of big business?

Of course, the skyscraper index is not perfect, but Thornton examines the main counterexamples to the index, such as New York’s Woolworth Building.

Housing + Transportation Affordability Index

affordability in the LA area

affordability in the LA area

affordability in NYC
affordability in New York City

Play with the HUD-Brookings Institution’s new index maps here:

The Housing + Transportation Affordability Index, developed by CNT and its collaborative partners, the Center for Transit Oriented Development (CTOD), is an innovative tool that measures the true affordability of housing. Planners, lenders, and most consumers traditionally measure housing affordability as 30 percent or less of income. The Housing + Transportation Affordability Index, in contrast, takes into account not just the cost of housing, but also the intrinsic value of place, as quantified through transportation costs.

I enjoyed playing with the maps to see the interplay of accessibility and affordability. In New York, some very accessible places are not-so affordable, such as many areas of Manhattan. Same goes for upscale parts of Chicago. At the same time, very affordable housing locations in exurbs become less affordable when considering transportation costs.

I plan to spend more time investigating how they produce the index.

[tip of the hat to Peter Gordon]

Glaeser on Affordability of NY vs Houston

Harvard Economist Ed Glaeser wrote an opinion piece in the New York Sun about the differences in housing affordability and other costs of living between Houston and New York.

New York is naturally more expensive than Houston because the geographical constraints force higher density development, which is more expensive to build. New York’s highly regulated land use and zoning process adds more constraints that exacerbate this problem. On the flip side, Houston has few geographical constraints and relatively loose regulation, allowing the market to allocate housing more efficiently. In conclusion, Glaeser recommends that New York could do much to improve affordability by loosening it’s many regulations.

NY Sun – Houston, New York Has a Problem

Why is it so much more expensive in New York? For one, supplying housing in New York City costs much, much more — for a 1,500-square-foot apartment, the construction cost alone is more than $500,000. Also, part of the reason is geographic: an old port on a narrow island can’t grow outward, as Houston has, and the costs of building up — New York’s fate, especially in Manhattan — will always be higher than those of building out. And the unavoidable fact is that New York makes it harder to build housing than Chicago does — and a lot harder than Houston does.

The permitting process in Manhattan is an arduous, unpredictable, multiyear odyssey involving a dizzying array of regulations, environmental, and other hosts of agencies. A further obstacle: rent control. When other municipalities dropped rent control after World War II, New York clung to it, despite the fact that artificially reduced rents discourage people from building new housing.

Houston, by contrast, has always been gung ho about development. Houston’s builders have managed — better than in any other American city — to make the case to the public that restrictions on development will make the city less affordable to the less successful.

Of course, Houston’s development isn’t costless. Like most growing places, it must struggle with water issues, sanitation, and congestion. For environmentalists who worry about carbon dioxide emissions and global warming, Houston’s rapid growth is particularly worrisome, since Houstonians are among the biggest carbon emitters in the country — all those humid 90-degree days mean a lot of electricity to cool off, and all that driving gobbles plenty of gas.

But Houston’s success shows that a relatively deregulated free-market city, with a powerful urban growth machine, can do a much better job of taking care of middle-income Americans than the more “progressive” big governments of the Northeast and the West Coast.

The right response to Houston’s growth is not to stymie it through regulation that would make the city less affordable. It’s for other areas, New York included, to cut construction costs and start beating the Sunbelt at its own game.

New Research on the Economics of Green Buildings

There is little reliable research into the economic returns of high-performance (green) features of buildings, but Professor John Quigley plans to release his groundbreaking research on the subject this Fall.

I am very excited to learn this news, and will certainly look forward to reviewing the results. Especially if implementation could improve my own development practice.

Professor John Quigley Discovers Green Building Pays Greenbacks

Everyone’s talking about “going green,” but in the building industry, the cost of investment has been difficult to justify – until now. Haas Professor John Quigley has undertaken the first systematic analysis of environmentally sustainable construction and its economic impact on the real estate market.

In the working paper, “Doing Well by Doing Good? Green Office Buildings,” Quigley and co-authors Piet Eichholtz and Nils Kok of Maastricht University, Netherlands, determined investments in proven green building practices lead to sizable increases in a property’s market value and effective rent, the average per-square-foot rent paid.

Green-certified buildings produced an 8.5 percent increase in effective rent. The additional annual rent for going green amounts to almost $309,000, based on the average size building. Likewise, the incremental value of a green structure is an estimated $5.1 million more than an ordinary building. The study did not calculate the incremental cost of investing in green building practices.

When asked why he decided to research the economic value of green-certified buildings, Quigley, the I. Donald Terner Distinguished Professor in Affordable Housing and Urban Policy, replied, “To see if this was hype or real.” While Quigley’s work concludes the resulting profitability is real, he is continuing to research why green commercial buildings produce higher rents and market value by using engineering data from the Environmental Protection Agency (EPA).

The research focused solely on commercial property. It first identified 694 buildings, green certified by the federal government’s Energy Star program or the private LEED (Leadership in Energy and Environmental Design) standard. The control group consisted of nearly 7,500 other office buildings within a quarter-mile of the certified buildings.

Quigley was surprised at the results. “If I were an owner of commercial property, I would investigate the cost of attaining an Energy Star rating. If that is at all a reasonable investment, I would think about doing it,” he says.

His research offers quantitative evidence for builders and investors who value the social responsibility factors of green buildings but, up to now, lacked data about the financial performance of these investments. Quigley says, “Finding there is a linkage between energy and profitability of rental properties is potentially significant and leads to more extensive uses of this information.”

In July, Quigley will be attending a conference in Istanbul, Turkey, to extend his study of the economic effects of green building to Europe and the Middle East. The complete document, “Doing Well by Doing Good? Green Office Buildings,” will be available in fall 2008.

[tip of the hat to Matthew Kahn: John Quigley Goes Green for the lead]