The finitude of real-estate development pressure?
May 6, 2015 8:38 PM   Subscribe

My city has been re-writing its zoning code. There has been a lively debate about proposals to allow higher buildings in select areas, and about how doing so -- or not doing so -- would affect other areas in the city. Some argue as if there is a finite amount of 'pressure' to develop, and that if this pressure isn't relieved by up-zoning in the select areas, the other areas will experience more undesirable development than they would if the pressure were relieved. Is this really how it works?

The modestly sized city is a desirable place to live, with relatively high rents and high property values. It has several residential areas, some of which are zoned for multi-unit buildings and in which there are lots and lots of rental units, many under rent control. Everyone appears to agree that these residential areas need to be 'protected', which means that having more density there is seen as undesirable, and also that condominium conversions there are seen as undesirable, because they would displace current renters, and make the city as a whole less 'affordable'.

It was proposed that several other areas, especially some commercial boulevards where there are currently mostly one- and two-storey buildings, be zoned in such a way as to encourage the development of mixed-use buildings that would bring more housing units to the city. Some advocate that 5-storey buildings be allowed in these 'new' areas, others that 3- and 4-storeys should be the limit. Those who want the 5-storeys to be okay say that 1) the lower heights won't give developers enough economic incentive to build enough new housing, and that 2) therefore these developers will go to the residential areas and build there or engage in condominium conversion there, both of which would be more profitable than building new lower-scale buildings in the mixed-use areas.

My question is about (2). Specifically, it seems to me intuitively that if there are profits to be made converting to condominiums in the residential areas, or building anew there, there will be developers who will be doing that whether or not there are profits to be made developing mixed used projects elsewhere in the city. The idea that the residential areas are likely to be left alone only if there are profitable opportunities for building housing elsewhere in the city seems to rest upon the premise that there are a limited number of companies in the development business in town, and that these folks have a limited amount of cash. Now, everyone in the debate seems to agree that the demand for higher-end housing here is effectively infinite. Doesn't that mean that the capacity of real estate developers to get financing to supply additional housing is also effectively unlimited? And that therefore profitable projects will be pursued wherever they are in the city, whether few or many?
posted by bertran to Law & Government (3 answers total) 3 users marked this as a favorite
everyone in the debate seems to agree that the demand for higher-end housing here is effectively infinite

In that case, yes, developers might as well pursue profitable projects everywhere in the city.

However, it's worth noting that effectively infinite demand at the local level says nothing about demand at a regional or national level. The number of wealthy people is finite, even if there are enough to build midrises in every neighbourhood of your city. Every additional housing unit in your city means that a household is no longer bidding up the price of housing elsewhere.

tl;dr: Your thesis seems correct at a local level but you should also consider benefits that may be partially or entirely realised outside your city (those people matter too!).
posted by ripley_ at 10:05 PM on May 6, 2015

there will be developers who will be doing that whether or not there are profits to be made developing mixed used projects elsewhere in the city.

Development/urban planning is not my field, although I'm in a related one.

I'd assume that all of the developers are putting a pro forma together for all of the different areas, and calculating the internal rate of return, and prioritizing the highest areas first. I can't imagine why a (purely economically driven) developer would prioritize an area with a lower IRR over the higher one.

Also just because a residential area is profitable on paper doesn't mean that it will be pursued first, or at all, considering the risks involved. I've talked to a developer who casually said "10% return? Why bother?" to a proposed cooperative residential project...
posted by suedehead at 7:28 AM on May 7, 2015

If your town is where your profile says you live.... then yes, demand is effectively infinite (a relatively small city in a booming metro area with tens of millions of people). Even if you knocked down 99% of the single family homes in the city and replaced them with a 20-story condo buildings, I think there would still be a developer chomping at the bit for that last 1%.

In more average cities, where demand is large but not limitless, I think that one neighborhood being developed could definitely reduce investment in another neighborhood.
posted by miyabo at 1:43 PM on May 7, 2015 [1 favorite]

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