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January 28, 2010

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It sometimes happens that in asking "Where do we go from here?" that some foundation and insight can be obtained by investigating the still more fundamental question "How did we get where we are now?".

In most cases, the downtown area is the oldest part of the city; it is also the locus from which, in its early, vibrant days, the geographic expansion of the city spread outward.

The problem being one of central decay -- a decay which subsequently spread outward even as the earlier growth did -- the question thus devolves to asking at what point did the city center cease to be an engine of growth, and became instead the epicenter of a creeping and expanding decay: and why?

Though it may be that factors idiosyncratic to a given locale are important, we are, here, concerned with the general rather than the particular: and it may be that in attempting to isolate factors common to all (or most) specific instances, we can discover some principles of general applicability and value, and address what might be termed "the Downtown Question".

Now, the first issue which any local economy must address, is that of population growth. Unless a locality experiences both: (a) zero net immigration from other localities; and (b) balanced birth and death rates, the local population will grow, as it has tended to in most U.S. cities during most of their formative years. With obvious exceptions, the only question in general has been one, not of growth or stagnation, but of degree of growth.

When the local population grows, from whatever cause or combination of causes, the result is more demand for a fixed quantity of developed property (i.e., that corresponding to the city's geographic limits). An increase in demand for a limited quantity in supply tends to bid up prices: at some point local wages -- that is to say the distribution of income -- must be made more egalitarian if the broad working masses are to continue to afford rents or the land-space which their rent represents.

Since the natural tendency of the ownership class is to hoard rather than redistribute income via expanded wages (the latter cutting into both company profits and their personal incomes), there are two basic choices where new housing is concerned: (1) build upwards, increasing the population density for a fixed land area; (2) expand the city's geographic boundaries, thus increasing supply to keep up with demand and easing upward pressures on rents.

The first option increases building costs by requiring more sophisticated engineering, and eventually reaches a point of diminishing returns for private developers.

The second option expands the city's geographic boundaries, creating suburbs relative to the original city center, but has the advantage of decreased land costs on the periphery, thus sllowing decreased rents while supporting greater profits for landowners and, derivatively, developers (buying low, and developing at lower cost). Its disadvantage is that it requires an expansion of city infrastructure (water and gas lines, roadways and traffic control, electrical distribution grids, sewers, etc., which must be supported by public tax dollars.

If the ownership class must see its tax burden rise to support expansion, what is the point of the latter, from the perspective of this ownership class, whose desire for increased profits, it will be remembered, were driving expansion to begin with, starting with the land owners?

To the extent that the ownership class controls political administration by means of campaign finance, post-public office job opportunities, and related means, the only way to fund the tax base needed for an expanding geographic area and infrastructure is a growing population of workers whose wages and spending can be tapped by city government. This, however, presumes the expandability of city land area faster than population growth, so as to keep land development and rental costs under control.

As long as Phoenix, for example, had plenty of land, plenty of water, and an increasing population, the expansion model was virtually guaranteed to drive local economic growth.

It is, of course, something of a Ponzi scheme, because it depends for its continuation on an ever expanding tax base supported by an ever expanding population, where new infrastructure is paid for by successive population increases and newly recruited workers and their taxes.

Additionally, there is the cost not only of operating the original infrastructure to be carried forward, as well as the cost of the new, expanded infrastructure, but also the cost of repairing and replacing the aging original infrastructure, not just running it.

The oldest parts of the city decay first, all else being equal. These are also the portions of the city with (at first) the greatest density, since the city expands outward from them.

So, you have a point reached where the city center is both dense (not attractive to those who like living space, privacy, and quiet) and agining decaying (not attractive to those who like well-functioning, modern infrastructure and aesthetics).

This naturally leads to a situation where those who can afford to buy housing elsewhere tend to move away from the decayed, unrepaired, ugly, old-fashioned city center, out to the new, spacious, modern, efficient, attractive, fresh, and in good new condition suburbs.

Who does this leave behind? Low wage workers who cannot afford down-payments and mortgages, much less the cost of moving itself and/or commuting; those who can only afford an apartment, preferably close to their jobsite. These, in turn, tend to concentrate minorities there, since they generally lag behind in the wage structure (social bias rendering them more easily exploited).

So, the inner city tends to become run down, overpopulated, and tenanted by the lower working class (including minorities).

The alternative is to expand taxes to cover not only the cost of running both the old infrastructure, and of installing and running the new infrastructure in the peripheral portions of the city, and running all of the infrastructure in the intermediate portions, but also repairing and replacing the aging, decaying, old, inefficient and finite infrastructure of the oldest parts of the city, beginning with the downtown.

Who is going to pay the additional taxes needed to repair, replace, and renovate the decaying inner city? Not the low wages proles who remain there and who simply don't have the money. Not the politically connected landowners who want to maintain their high personal incomes. Not the new, upwardly mobile classes who have already migrated to the more spacious, newer suburbs. That leaves nobody.

Note that similar arguments apply to the cost of maintaining and repairing the moldering buildings, leaky roofs; the paint, brick and mortar, plumbing and electrical systems of private homes and buildings there.

At this point, the dissolution of the city center is all but guaranteed. The only thing that can delay it is the existence of a thriving urban economy (typically manufacturing as the inner city lends itself to factories and warehouses but not so much to upscale retain malls); and an immobile workforce tied to this.

Get rid of the economic engine (by outsourcing manufacturing, for example) or give the inner city masses the mobility to move outwards, by providing jobs and affordable rents there, and the decay of the city center is inevitable.

Since geographic and economic expansion continues outward, and the failure of the infrastructure and private blight continues to expand from the oldest portion of the city, the blight affecting downtown tends to spread, like leprosy, to adjacent regions, except as contained by vital economic interests, or by pockets of old wealth able, for a time, to maintain their neighborhoods as historical areas, typically retirees or a stubborn subclass of commuting professionals.

So, it can be seen that, in the general case, the need of landowners to maintain or increase profits leads to geographical expansion; which leads to increased infrastructure costs; which leads to the decay of the oldest infrastructure, this being the downtown or city center; which leads to increasing class differentiation as the city center is abandoned to a hardcore of impoverished proles/minorities; which leads to decreased opportunities for local retailers, and the increasing concentration of the inner city economy in gritty manufacturing and warehousing concerns; which sets up the inner city to be dropped like a bowling pin as soon as structural changes in the evolving economy occur; how this, finally, abandons the city center to an odd mixture of stubborn gentility and the lumpenproletariat.

Having seen how we got here, the question of "Where do we go from here?" may be addressed with greater lucidity. The only thing that can stop indefinite outward expansion are fundamental structural factors. The Great Recession has challenged the old growth model. If new economic life is to be found within the city, starting in its sick center, what must be done?

Remember that the issue of inner city land prices, followed by the cost of repair/renovation/replacement of existing infrastructure there, was the original driver of outward expansion.

The organic causes of high land prices there, high density population and the high demand for limited land area, no longer apply. This might tend to provoke urban renewal there, if land were cheap, provided that local housing, jobs, and population exists; but it isn't clear that any of this, much less all of it, exists.

To the extent that land-banking exists, land prices do not match the actual, productive, immediate value of downtown properties. This won't end until local jobs, housing, and population exists there, to make sale or development of the land worthwhile; but those won't exist as long as land-banking holds parcels indefinitely and prices at futuristic, speculative levels.

The first order of business, then, is to insure affordable land values to developers. The only means to accomplish this that I can think of offhand, is the use of taxation and regulative/maintainence codes and fines, and/or land valuations, to compel land-bankers to sell to active developers at lower than the current, artificial market prices.

Once land downtown is a comparative bargain, developing that land into housing becomes feasible and profitable; not by appealing to a limited number of yuppies looking to experiment and willing to pay high rents, but to a broad working class of possible tenants. Affordable housing CAN attract residents; once this occurs, the development of land (again, at comparative bargain prices) by retailers seeking to serve the needs of new local residents, becomse feasible.

The cost to housing developers includes: (a) land cost; (b) materials and construction costs; (c) the local tax code and zoning fees, and (b) is more or less constant in the Metro area.

If profitability and feasibility do not emerge from the infinite patience of land-bankers hoping to make a big killing someday, it is up to local government to alter the market framework, encouraging land sales, development.

P.S. A couple of additional notes.

First, it might seem purblind to speak of such things as encouraging affordable housing in the city center, in a market currently awash in surplus housing. I suggest that this surplus may not last forever, and that if it should evaporate within the next five to ten years, the situation will be changed. At that point, the choice will be between trying to renew the old growth model, and trying to renew blighted but centrally located areas of the city with aging but already developed infrastructures.

Second, I do apologize for both the length of my previous comment and the failure to edit for typographic errors (e.g., "upscale retain malls" rather than "upscale retail malls"); but my online time is extremely limited, and I barely had time to type in what I had previously composed (offline), much less to proofread and edit it for length.

Outstanding column Jon. Excellent commentary Emil.

And after reading all the words, I go off to bed muttering to myself "purblind", "purblind".

A new favorite word. I hope to use it in a sentence tomorrow. My wife will not be happy.

Isn't there a simple idea underneath all of this? Shouldn't we place a much higher value on being able to live, work and play in the same area? Without a "happening" downtown, how do we achieve this? And do folks like Grady Gammage and Elliot Pollack have the chutzpah to face up and fess up to what's wrong here?

The market is still experiencing downfall, and it will do so until the end of the year according to real estate specialists analysis.

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