Continuing from my earlier post on Transportation Theory, today I wanted to take a look at property values, and what creates value in land. Again, these are my own words, but are drawn from the extensive graduate research I did as well as my professional experience as a real estate consultant.
Fundamentally land value is driven by its productivity, and at a root level there are only two kinds of land productivity. Land can be resource-productive, or what I call “people-productive”.
Resource-productive land includes any kind of agricultural land, mining areas, fisheries, etc. It is the simplest, most basic form of land value, determined almost exclusively by the market value and quantity of resources that any piece of land can produce. This is the biggest component of rural land valuation. (By rural, I mean genuinely rural, not exurban or small town, but land that people are living off of in one way or another.)
People-productive land is non-rural land. This can be in small towns, suburbs, or big cities. This is land that people use to house improvements (structures) such as homes, offices, and even factories. This land is not valued because of the natural resources that can be extracted from it, but because of its ability to attract human investment and use.
The simplest example of how people-productivity determines land values are home prices and retail rents.
Let’s look at home prices: where are they the most expensive? Any place that lots and lots of people want to be. So, for instance, most waterfront property is expensive. If they had a choice, almost everyone would prefer a house looking over a lake or the ocean than a house that didn’t. More people are competing for that limited land, therefore it’s price increases.
Where is retail rent the highest? In places that are busy. Any place that is packed full of people, especially people with money, is going to have very high rental prices, especially for retail space. Why? Because there are more businesses that want to be in a highly visible, high-traffic location, so they’ll compete on price which drives up rent. Think of Times Square, or Piazzo San Marco in Venice. You know, it costs like $20 for a coffee in Piazza San Marco, because that’s where everyone wants to sit and have coffee.
Any place that people are drawn to is worth more than any place people are not drawn to. For the best local example, look at Discovery Green. Land prices on the parking lots around the park have shot up in the last couple years because more people want to be there now than before.
What’s true for Times Square is true for every piece of property in the world. Even factories are subject to the same value-economics. More businesses are willing to compete for places with access to freight shipping than places without it, and for places with more workforce to draw from, and so on. Therefore the most expensive industrial land is the land that draws the most human competition.
It’s important to note that the built environment, if well designed, creates value by attracting people. This is why the idea of the “planning tax” doesn’t hold up to scrutiny very well. Highly planned places like Portland, Oregon and Boulder, Colorado are more expensive than other similar sized cities because MORE PEOPLE WANT TO LIVE THERE than other similar sized cities.
There certainly can be higher costs for developing in highly regulated cities, and there would certainly be a greater quantity of development if they were totally unrestricted. However, this is as true for Portland as it is for Dallas or San Antonio, which are highly regulated but do not see a significant price difference with less regulated competitors like Houston.
The other way of looking at the impact of good planning is that it creates wealth for citizens by making their communities more desirable to live in which increases their property values. However, it is important to keep in mind that while certain kinds of planning can be good, it’s easy for over-regulation of the market to occur, which causes major problems.
The phenomenon of people-productivity can produce some unusual results, however. In Downtown Houston there are dozens, maybe hundreds of blocks that are vacant, or used only for surface parking. Why would these prime lots sit for so many years underused? There are two side-effects of people-productivity at work that explain what has happened in most American city centers in the last 100 years and why they look they way they do today. The first is “price-out”, the second is “hold-out.” Transportation choice also plays a big role, which we’ll look at later.
The City of Houston, like all American cities, was originally built as a people-attractor. The Allen Brothers were staking their fortunes on the idea that they could attract waves of immigrating population to settle in their city, and followed traditional town planning principles to attempt this. They laid out the city in a simple and elegant grid, they left spaces for parks and a courthouse, they provided a basic dock for boats coming up the bayou, and they sold lots. Property owners did the rest, building simple homes and shops in what would become Downtown Houston.
Houston thrived and grew. As the competition for this land grew more and more intense, certain uses were no longer economically productive enough to survive in what was becoming Houston’s Downtown. For instance, single-family housing has no place there any more, because the value of the land is so great that property taxes become a strong force to move people out. Houses were converted into businesses, warehouses, or multi-family residential developments. This is the normal pattern of growth for cities.
However, as technology changed a new phenomenon emerged: businesses began tearing down buildings and creating parking lots. When smaller businesses or homeowners decided they wanted to sell, the big businesses that were competing for land in Houston’s most accessible location, were the often highest bidders, valuing the land that had once been housing as a spot to put their cars during the day.
This caused a problem. In most cities (and especially a city like Houston that doesn’t have a major environmental attractor at its center, such as a huge lake or river) the built environment is the primary attractant, which either:
A. Creates crowds of people by housing them and offering them a place to work, or
B. Attracts people from outside who want to see the crowd (and use services that cater to it).
So, when more and more houses and shops (not productive enough to live next-door to hi-rises) were converted to parking lots, it began to reduce the human activity of the area from a 24 hour environment into an 8 hour environment. The retailers and restaurants still had good crowds for lunch because of the office workers, but without residents to dine and shop in the evening it became harder for them to survive.
Initially there was still a lot of people coming in from the surrounding neighborhoods, and many of them took advantage of the increased parking availability to access the remaining commercial areas. This kept retail alive in Downtown for a while. But eventually enough of the old city was torn down that it’s people-attracting power was lost. Nobody is excited about going to see the parking lot, or hang out in the empty office-tower district.
Thus, in most American cities, especially cities that were still pretty small in the early 1900′s, Downtowns began to decline as transportation became more auto-centric.
The next logical question is, why do vacant lots persist even in areas where the need for surface parking has disappeared? If there’s all that competition to be in ‘that place’, wouldn’t somebody buy the vacant lots and build something on them?
The reason this often doesn’t happen is that property owners, especially speculative buyers who bought in a long time ago in anticipation of increasing demand, hold out for very high prices. They often ‘smell blood in the water’ when one project is developed on a formerly vacant lot, and buy up as much vacant land as they can in the surrounding area. They then attempt to sell the property at a similar valuation to the developed property nearby.
The seller wants to make the most money possible, and is ‘holding out’ for everyone else to sell so that finally someone who “just has to be in that spot” will come and pay a super-premium price for the last empty lot.
The problem is, when lot of people do this (which usually happens the moment there’s any kind of public hype about an area beginning to redevelop) and everyone holds-out, and the area never redevelops. Developers are being asked to pay for a lot as if it were the last one, which means they’d have to charge extremely high rents, which they can’t do yet because the area hasn’t fully become the place that it could be some day.
This is magnified when there is fragmented property ownership, which is especially the case in area of Houston like Midtown. The blocks in Midtown were mostly small houses a long time ago, and often there are still six or eight different owners for little pieces of a vacant lot. That magnifies the difficulty of negotiating for a reasonable price on the land.
Cars are a great thing for providing access to rural land. In the early 1900′s America was a predominantly rural nation, and unsurprisingly we fell in love with the freedom that cars could offer us. In their love affair with the car, urban planners in the early to mid 1900′s became frustrated by the ‘problems’ they saw in cities. There’s never enough space to park, they decided. It’s too slow driving in the city, they decided. And so, they decided to make it illegal to build any more cities.
Property owners were required to build buildings far back from the street (to leave room for future widening), to provide outrageously excessive parking for the time, which is still too much today. The effects of this have been catastrophic, and offer resounding evidence of the damage of over-regulation by the government. For a bit of further reading on the problems high parking requirements, check here, here, and here.
Cars are not a great thing for providing urban mobility, because as the number of cars increases the people-productivity of land decreases. This is because nobody wants to be near ten lanes of fast-moving traffic. The noise and the smell are major problems, as well as the very real dangers to drivers, passengers, and pedestrians.
Giving Away Land
There is a trade-off at work. In an auto-only transportation system, businesses must provide a certain amount of parking or they become unreachable. At the same time, successful businesses attract traffic, which causes congestion, which deters further growth.
Road widening can help the local congestion, but offers diminishing returns: each successive road widening increases accessibility less than the previous one, because as the roads get too big, access must be reduced in order to prevent gridlock, until you eventually need a limited-access road like a freeway to handle the volume of cars.
So, while a road like Westheimer attracts a lot of development along a corridor, it doesn’t have the supporting network to attract DENSE development like Louisiana St. can downtown.
This is why highly connective networks (diffuse traffic, allow walking and transit) and market-priced parking (property owners decide how much they need and price it appropriately) are critical for the future of Houston.
When businesses are required to provide parking they’re literally being forced to give up land that might be used for something else. When a parking space sits empty that business owner is losing money: he has invested in the paving and the dirt beneath it and is getting no use from it.
Transit Matters for our Future
We now live in a very different time and place from America in 1900. We’re not an agricultural nation, we’re an urban industrial one. In order to secure a better future for ourselves and our cities, we need to increase the productivity of our urban centers by removing the artificial cap that auto-only transportation systems place on urban development. Transit gives people a different way to get from A to B, and it means that more growth can happen without more parking.
In our urban centers this means more vacant lots can develop, because they don’t have to build as much structured parking (which increases the rent they would have to charge). In corridors this creates the potential for new businesses to start on smaller, more affordable lots, where parking wouldn’t be available. This reduces the cost of entry into the market, and creates more opportunity. After all we’re proud of Houston being the Opportunity City, aren’t we? Transit, and a shift beyond the auto-dependent past is the paramount opportunity of the 21st century.
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I hope you enjoyed this essay, please let me know what you think by leaving a comment. I’ll be following up soon with Part 2.
(Update 04/02/09: As I was writing the next piece I changed my mind on what it would be about… an installment about Places that Attract People will follow soon!)