Sunday, November 15

What will a recovery look like?

The Urban Land Institute and PriceWaterHouseCoopers has released their 2010 real estate forecast, a market analysis considered by many to be the most reputable in the industry. The first line gives a good impression of the tone of the report:

"More investors recognize massive losses—value declines will eventually total “40 to 50 percent” off market highs, propelled by lagging impacts of the deep recession."
Other descriptive words from the first page: "savaged," "debacle," "even worse," "enveloping gloom," "doom," "anemic demand," "carnage," "comatose," "mammoth value busts." (I didn't see "apocalyptic" but I didn't read the whole thing). You get the picture.

However, some smart growth advocates are seeing a silver lining in the fact that urban infill and redevelopment projects have shown to be more resilient than the typically housing on the exurban frontier of metropolitan areas. Kaid Benfield pulled out this quote from the report:
"Next-generation projects will ori­ent to infill, urbanizing suburbs, and transit-oriented develop­ment. Smaller housing units-close to mass transit, work, and 24-hour amenities-gain favor over large houses on big lots at the suburban edge. People will continue to seek greater convenience and want to reduce energy expenses. Shorter commutes and smaller heating bills make up for higher infill real estate costs."
On the one hand, I see this as a hopeful sign for movement toward a more sustainable economy. On the other hand, I'm a little reluctant to cheer too loudly during a recession. The million dollar question, in my mind, is not what the best investment bets are during the low period (could these not simply be inferior goods?) but what kinds of development will usher us out of the recession entirely and into a new economic paradigm.

The news media is filled with pundits prescribing a way toward "recovery": by which they usually mean resumption of the status quo - getting our savings rate back to zero, pushing the Per Person Vehicle Miles Traveled back onto its upward climb, getting the average square footage of houses back onto the upward trend (and by implication the average screen size of the televisions, so you can see them from across the room). But I don't think this is the only shape economic growth can take.

Jane Jacobs differentiates between "expansion" and "development",
"Expansion and development are two different things. Development is differentiation - new differentiation of what already existed. Practically every new thing that happens is a differentiation of a previous thing. Just about everything - from a new shoe sole to changes in legal codes - all of those things are differentiations. Expansion is an actual growth in size, volume, or activity. That is something different."
Development for Jacobs is the "creative destruction" of innovation, taking the raw materials of what we already have and making it better. In many ways the analogy of exurban expansion and urban infill fits these two models of economic growth very well. Instead of growing outward in size, consuming new land and leaving the internal remnants of a disposable core, a sustainable economy would continually augment the developed land. This is not a "steady-state economy" or some other fictitious narrative. The economy would be an organism that evolves, not simply to grow in size and energy consumption, but to grow intelligently to adapt to the conditions of its environment.

I understand that values are not normally welcomed in a discussion about economics, but Wendell Berry lays out the contours of such an economy with the succinct language of a poet,
"We must learn to prefer quality over quantity, service over profit, neighborliness over competition, people and other creatures over machines, health over wealth, a democratic prosperity over centralized wealth and power, economic health over 'economic growth'"

1 comment:

Anonymous said...

On the employment front, smart growth really has been a non-factor. If anything the higher prices for residential usages maybe crowding out employers from city centers.

According to Brookings study of job sprawl, most of the regions praised as smart growth success stories are also the regions with rapid employment decentralization. Note the job sprawl in Portland, Seattle, Washington DC, Minneapolis. See table 5 here.

Most smart growth policies have relied extensively on metro rail transit programs. But one of the unintended consequences of these rail programs was to make suburban office complexes along those rail lines essentially part of the CBD. The suburban office parks along these rail spurs areas have access to the transit networks for the entire region, but offer much lower office rates. They also offer shorter commutes for those employees who wish to drive in from the burbs. As gas prices go up and as long as office rents remain cheap in the burbs, there are incentives to move out to the burbs.

In practice so far smart growth hasn't involved higher value employment in city centers as much as the transformation of older office buildings into new high rise residential units.

If you look at CBD's they are still having problems retaining employers. Chevron left SF for San Ramon. The economic center for the bay area shifted from the City of SF to the very suburban Silicon Valley. The Venture Capital firms in the bay area left SF for Sand Hill Road in Menlo Park. The largest law and accounting firms branch offices in the bay area are generally in the Silicon Valley, (not SF) because the Silicon Valley is where most of the SF bay area Fortune 500 companies reside.

Economically speaking the City of San Francisco is now a high end residential suburb of the Silicon Valley with a lot of tourism related business. Google runs a shuttle between Mountain View and SF, but its to pick up employees in SF and drop them off to work in Mountain View.

The corporate headquarters, the accounting, legal and banking jobs are dispersing throughout the region and the high end work is going to the high end suburbs.

If you look at Los Angeles region their is a similiar pattern. Downtown Los Angeles is having a residential renaisance, but the area has lost most of its large Fortune 500 companies that built skyscrapers in downtown LA. First Interstate, Arco are long gone.

Disney is headquartered in Burbank. Taco Bell is in Irvine. Amgen is in Thousand Oaks. The major law firms accounting firms are as likely to be in Centry City, Beverly Hills or Orange County as to be in downtown LA.