Market Urbanism

Liberalizing cities | From the bottom up

“Market Urbanism” refers to the synthesis of classical liberal economics and ethics (market), with an appreciation of the urban way of life and its benefits to society (urbanism). We advocate for the emergence of bottom up solutions to urban issues, as opposed to ones imposed from the top down.

A hole in the literature?

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In the comments of a previous post, readers discussed the incentives facing different types of landowners whose properties are facing potential upzoning, demonstrating just how complicated the relationship between land use regulations and property values is. As I see it, theory tells us that upzoning will increase the value of much of the land that will be redeveloped by opening up options for the developer to put the land to a higher valued use. However, land that is not economically viable for redevelopment and perhaps some land near this margin would fall in value due to the increased supply permitted.

The example from the earlier post was a proposal for upzoning in Hollywood. I would think that plenty of properties there would be ripe for redevelopment, as single family zoning is constricting supply to well below the market clearing level. If this is true, many homeowners would stand to receive a windfall with upzoning. I’m not very familiar with Los Angeles, but I’d think it likely that owners on the periphery of the area to be upzoned could potentially lose money, as the supply of housing would increase in the most desirable parts of Hollywood, devaluing homes in the less desirable areas. In the comments, awp provided clear analysis of what’s going on in this situation:

The excess “rent” comes from having a part of a limited SUPPLY. Any one individual would be able to increase their portion of the “rent” by being the only one allowed to increase their supply, while lowering the total “rent” through the increase in SUPPLY.  If the zoning is removed there will be no remaining excess “rent”.  It would take some serious analysis that I have never seen to figure who would benefit the by moving from a zoning regime to a free market regime.  My guess would be those whose real estate’s spatial properties (i.e. proximity to the amenity) had the greatest value that was underutilized.  So that those closest to the park or downtown would see a marked increase in their land values and would increase the density of the built environment on their real estate, while those the farthest away (who before had valuable buildings on their land because of the restrictions on the built environment closer in) could see their property values fall drastically.

One of the tricks of examining an upzoning is unbundling the value of current land uses from the land itself, as this is where the potential for redevelopment lies. I tend to stretch a priori reasoning to its limits, but analyzing the financial impacts of upzoning is an empirical question. The policy change will create winners and losers, but the number of people on each side and the change in land values can’t be deduced without looking at the data. I went looking for studies on upzoning and the resulting changes in land values but came up disappointingly short.

Gerrit J. Knaap of the University of Maryland’s National Center for Smart Growth Research and Education has conducted the only study of the impact of upzoning on land value that I’ve found. He studied land values outside of Portland because the city’s Urban Growth Boundary offers an opportunity to compare the value of comparable land parcels under different zoning regimes. His paper, titled “The Price Effects of Urban Growth Boundaries in Metropolitan Portland, Oregon,” was published in 1985, but unfortunately doesn’t appear to be available without institutional access or purchase.

Knaap looks at sales of vacant land in two Oregon counties, Washington and Clackamas. He writes:

Suppose there exist two types of residential land, urban and nonurban, where the difference is enforced by zoning regulations and defined by housing denisty, minimum-lot sizes, or some other allowable-use criteria. Suppose further that as a result of zoning, urban rents, Ru, are higher than nonurban rents, Rn, for some radial distance from the urban core. For ease of graphical exposition, urban rents are assumed to decline linearly with distance, t, and nonurban rents are assumed spatially invariant under permanent zoning. The market values of urban and nonurban land equal the present value of their respective rental streams.

Washington County, he finds, was more strongly impacted by the UGB because in Clackamas County development is limited primarily by sewer access rather than zoning. His results in Washington County offer support for this model. There, Knaap finds a positive, statistically significant impact on the price of land located within the UGB, the land allowed to be upzoned sooner than land outside the UGB:

In sum, and as the model suggested, urban land is higher valued than nonurban land; nonurban land inside a growth boundary is higher-valued than nonurban land outside a growth boundary; and urban land, when it exists, on both sides of a growth boundary, is not higher valued inside the boundary than outside.

Knaap’s results demonstrate that, unsurprisingly, restrictions on land use reduce its value. However, this study doesn’t get into the issue of land that is already developed and sold to be redeveloped following upzoning. Has anyone seen such a study? In the effort to provide support for the value created by permitting dense urban development, this seems like key data to have.

Comments

  1. As a Portlander I can add some incite to our urban growth boundary. The UGB was created by both kinds of Oregonians in the 70’s: liberal urbanists who wanted to stop sprawl and keep existing homes on par value wise as federally subsidized (mortgage and highway) new construction, and the rural conservatives who wanted to keep farmland and forestland cheaper (for property tax and capitalistic reasons) and maintain a country setting sans traffic and urbanites. Both sides wanted forests, farms and rivers protected for environmental, recreation and natural landscape reasons. Additionally, it was a win-win for everyone in how to get development to pay for itself (schools, roads, etc could be planned for and taxed for appropriately).
    Basically, Oregonians didn’t like the new style of development created by federal subsidies, and wanted to protect the beautiful land that existed for their own enjoyment.
    So, with that said, I believe your argument is wrong by how it’s phrased. Land values outside the UGB never went down; they go up, just not as fast as within the UGB. That is exactly what the UGB was designed to do, keep food and timber farms cheap and urbanized areas compact and more competitive. So saying that “restrictions on land use reduce its value” is false because land everywhere in Oregon has steadily climbed in value. I know you’ll argue that in a free market you are limiting full land values, but we do not live in a free market. Suburban growth was/is caused by 1930’s policies and subsidization that got rid of the free market in regards to transportation and land development. The Oregon UGB system is designed to offset these federal subsidies and maintain free market competition without overly subsidizing new greenfield development with police, schools and sewer systems (most suburban growth is still heavily subsidized by already urbanized areas in almost all metropolitan areas).

  2. Thanks for sharing some background on the UGB. Just to be sure I’m not misrepresenting Knaap’s, he does not come out opposed to the UGB at all. He writes:

    According to  conventional economic theory, land-use policies that influence the allocation of land must affect land values. A test for price effects of UGBs, then, determines if UGBs influence land allocation or whether UGBs are currently redundant instruments to existing land-use controls. The test cannot determine welfare effects. Significant price effects might indicate inefficient market intervention; on the other hand, significant price effects may be necessary to correct existing market, or nonmarket, imperfections. This issue surpasses the scope of this study. But it is clear from the language in the goals and guidelines that LCDC’s intent is clearly the latter purpose.

    While I share your opinion that development has clearly been shaped by detrimental subsidies and regulations from all levels of government, I don’t think that UGBs are the solution. Perhaps I should have said “restrictions on land use reduce its value, ceteris paribus.” As more people want to live in and around Portland, land values will rise both inside and outside the UGB. But this doesn’t mean that the UGB doesn’t reduce property values outside of the boundary from what they otherwise would be while increasing land values inside the boundary by limiting supply.

  3. Thank you, but I stand by my belief that without government subsidy land further away from the central city would still be valued far less than those closer in. The only reason for an UGB is to counteract the effects of government policy and subsidy. I do admit that there is no real way to test my theory because development has already occurred and there are far more factors involved, but I base my belief on my University study and travels to other countries (Europe, Asia, S. America) where development is built without the U.S. style of subsidization in varying styles of free markets.

  4.  This is an important question that is complicated by the fact that zoning is not the only restriction to the productivity of a property, though probably the most obvious and in many cases the most important.  Design guidelines, topographic limitations and parking requirements can also affect the ultimate use/density of a development.  I think the literature is broader than you have alluded to, but in regards to your specific question, the lack of studies is likely a reflection of the lack of quality ‘natural experiments’ and the necessary data to measure their effects.    Nonetheless, it is an issue that needs attention and one which I hope to focus (at least tangentially) my dissertation work on.

    Anyways, i’ll email you a few “literature review” type articles that touch on some of the issues you brought up in your article.

    One thing that is rarely talked about in the UGB discussions is how zoning interacts with a growth boundary.  In a situation with inflexible large lot zoning and a UGB, home prices will inevitably rise because developers cannot substitute capital for the more expensive land (cause by the supply limitations of the UGB), however in a situation with flexible lot sizes (assuming away product durability and parcelization concerns) a UGB should only create smaller lots and more dense development, not more expensive homes.

    Finally, whether or not rural land owners are “entitled” to land value appreciation due to approaching urbanism is probably, at least partially, a normative question…one which Henry George (for all of his mathematical faults) might have something interesting to say about.

    Andy

  5. Replying to myself, I feel that I have gone off topic by following a tangent that is nonquantifiable, more of a litmus test in which I look at land use law as a glass half full. The original idea here is that upzoning is problematic and complicated. Following my thoughts on the UGB, Portland metro is not a medieval walled city, although an UGB shares similar characteristics with limited government resources. Every 5 years the regional planning government is legally obliged to expand it to accommodate 20 years of forecasted growth. This expansion goes through a lengthy public process that is very contentious. Rural landowners outside the UGB and the respected county elected officials haggle over where and when areas will be urbanized. Most often areas that want to remain rural stay rural and others who want to “cash out” on development get included in an expansion, but that is not always the case due to politics, taxation and infrastructure requirements. An UGB is definitely not a flawless system, but it does help mitigate urban/ rural divides in regards to strategic upzoning.

    Back to Hollywood, there is no easy answer to upzoning issues, but I believe there is a way to increase the surrounding areas values along with the rezoned districts, and not just leech value from one to another for I do not believe it to be a closed ecosystem.

  6. I’m an L.A. resident and I’ll give background on the Hollywood upzoning plans.

    Hollywood is already a dense, urban neighborhood with mostly apartments and condos and a small and dwindling number of single-family homes. The remainder of non-rental residences are large-lot estates that are north of Hollywood Boulevard, at the base of the hills or in the hills. This is not affected by upzoning.

    The plans call for upzoning for high-rise residential and commercial density near the subway stations and along Hollywood and Sunset boulevards. The goal is for more commercial development on the scale of Hollywood & Highland ( http://g.co/maps/2e3ua ) or the residential-commercial mixed use like the one at Hollywood & Vine ( http://g.co/maps/44m6z ). These two are massive projects built atop subway stations, and they are to serve as catalysts for similar developments nearby.

    The biggest pushback comes not from property owners, but from longtime renters in the neighborhood. Hollywood is largely low-income renters, transient tenants and owing to the show business, a great deal of flake renters (those who can’t pay on a regular basis). What the tenants fear is the loss of pre-1977 rentals.

    L.A. has a rent stabilization policy in effect on all properties that existed when the law was passed in 1977. Any property newer than that is unaffected and tenants pay market rates. The pre-1977 buildings set a fixed percentage at which rents can be raised for existing tenants, and it applies to both leased and month-to-month units. Rents can rise to market rates when the apartment is vacated, but the stabilization applies to the new tenant as well.

    Hollywood has mostly absentee landlords who would love to cash out their property to a luxury developer, especially to get out from rent stabilization laws and because the buildings have outlived their usefulness.

    Residents, naturally, are afraid they’ll lose their homes and priced out of the neighborhood market altogether.

  7.  Heh– I can’t help but notice that the neighbors of these new highrises are… old highrises. Is it correct to say that before the upzoning, the old buildings would not be permitted?

    Regarding the long-time renters, looking at that map I see no shortage of lots that could be built on without touching any existing housing.

    At least in San Francisco, the question of longtime renters has been dealt with by requiring the new buildings to contain designated replacement “voluntarily” rent-controlled units, so that there’s no reduction in rent-controlled housing.

  8. Those old buildings are spoken for. The mid-rise at Hollywood and Vine on the southwest corner is now a condo complex. The other buildings are offices that are still reasonably occupied. The W complex, which I pointed to in the map, replaced what had been low-rise and low-value land. When Metro built the subway, it was essentially an open courtyard for more than a decade with a parking lot in the back for bus layovers. The residential part, on Vine and Selma (where the Trader Joe’s is), used to be a DMV office with its neighbors being single-story storefronts. It was easy to clear out these buildings, and that’s why the project wraps around the old mid-rise on the southeast corner.

    The affected areas that would be upzoned are all around and in between these places. The midrises would likely stand, as they are built from more durable materials built for commercial environments. It’s the smaller stucco, crackerbox and multiplexed ex-SFRs that would be affected.

    The goal would likely to be orienting the megaprojects around Hollywood and Sunset boulevards, which would affect everything from Franklin Avenue (or the 101 Freeway) to the north to Fountain Avenue to the south. It would basically follow the subway’s route. West of the subway (where it turns north toward the San Fernando Valley), Hollywood is already very dense and high-income and harder to redevelop. East of Western Avenue, it’s harder to redevelop because of the institutional landholders in the Church of Scientology and three major medical facilities near Vermont Avenue.

  9. Interesting, it’s great to have more details on the proposed changes to Hollywood and the current landscape. The article I had seen on it made it sound like many single family lots would be upzoned. The interest group of tenants in rent-controlled apartments face double incentives to oppose the change, it sounds like, since they might not want more density and certainly wouldn’t want the neighborhood to go market-rate.

  10. I guess I would be a bit skeptical of awp’s claim that an upzoning could result in drastic value declines elsewhere in a city.  At the time an upzoning takes place, all that has changed is the potential for certain land to host higher intensity uses, which may be reflected in speculatively higher per acre land prices (depending on local demand).  The added supply may not materialize at all, or make take years to appear, and when it does, it may simply absorb population growth rather than poaching demand from existing places.   Property values in built-up areas shouldn’t be affected greatly, if at all, by this initial zoning change.  My guess is that other more immediate factors are much more important in determining base value: the presence of city services and infrastructure, transportation options, the quality of local schools, local governance, etc. There are other complicating factors, too.  The precedent set by a rezoning in one area may set off speculation in a adjacent neighborhood that such an upzoning could occur there, too, causing prices to spike rather than fall (I have witnessed this phenomenon at work in Nashville, where one neighborhood’s opposition to the rezoning of nearby land for a major condominium development fed on fear of increased values, not decreased values).  If the markets for single-family homes and apartments are discrete, the pending loss of homes in the rezoned area may through scarcity increase the value of others nearby.  If upzoning does eventually increase the appeal of a central area through increased supply of high-quality dwellings, that appeal may carry over into adjacent areas as well (I’ve seen this too, reflected in realtors’ pitches for single-family homes). Even were zoning somehow abolished in an entire city, I don’t think the effects on suburban values would be as significant as some would imagine.  Low-density suburbanization was proceeding rapidly long before the first zoning codes came on the books.  The highways would still be there, and the ease of adding new greenfield development compared the difficulty of urban infill and redevelopment would continue to encourage expansion at the fringes.  Houston may be the closest thing to an example, but even there the intense redevelopment of the neighborhoods in and around the downtown has only absorbed a tiny fraction of the net population increase from 2000-2010.

  11. “However, land that is not economically viable for redevelopment and
    perhaps some land near this margin would fall in value due to the
    increased supply permitted.”

    If we’re talking about mixed-use development, yes, supply will rise, but so will demand, so land values won’t necessarily fall as a result of the increased supply.

  12. Emily, think of Hollywood as L.A.’s equivalent of Brooklyn or Queens. It has long been an urban neighborhood and was so even when it was a suburb in the late 1800s.

    You’re right that the tenants have an incentive to oppose the change. It’s not really a density issue per se, but the biggest quality of life issue there is all the added automobile traffic the recent developments have brought. It’s gotten to the point that Angelenos have become so spooked by the specter of traffic that they now oppose any activity that might lead someone, somewhere to get in a car and partake in it. Even in Hollywood, which has one of the highest public transit utilization rates in California.

    As for the tenants not wanting the places to go market-rate, it’s deeper than economics. It’s a personal level. Many of them don’t see a good outcome. They dread a Hollywood of W Hotel clones because projects like these banish them from their own neighborhoods. About 90% of Hollywood’s current residents cannot afford market-rate TOD projects. It’s a Pareto nightmare for them — 90% of these projects will go to the top 10% of the market who can pay those rents.

    It’s like a modern version of “Death and Life” playing out, only with transit oriented development instead of suburban colonialism as the pretext for deracination.

    If you want to follow specific development projects, Curbed LA (http://la.curbed.com) is a great site to follow.

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