Saturday, October 28, 2006

What is the Myth of Development?

Many hold a false belief that all development is good.

The Lawrence Journal World buys into the myth that all development is good. In the editorial of October 28, 2006, it stated, "The company [Wal-Mart] would have hired many employees, would have provided extra income for many families and would have spun off added taxes for the benefit of the entire community."

Examination of the facts shows this to be incorrect.

1. No net gain in employment

While it is true that the company would have hired many employees, there would be no net gain in employment in the community. The total number of jobs in the retail sector is a function of the total spending in the retail sector. Adding new stores does not mean new spending. New stores do not add new people or new income. The new stores only displace workers from one store to another. We saw this when the Wal-Mart on south Iowa expanded; it caused the closure of the Food-4-Less. The gain in jobs at Wal-Mart was canceled by the loss of jobs at Food-4-Less.

2. No net gain in income and possibly a loss

If retail workers will not see any increase in their numbers, will they at least see a gain in their wages? With Wal-Mart, the answer is "No". Kroger will probably close the Dillon's store at 6th and Wakarusa if a Wal-Mart opens at the intersection. The Dillon's workers will lose their wages and benefits. Wal-Mart is notorious for paying low wages and offering few or no benefits to its workers. Thus, there is certainly no gain in wages, and probably, there will be a loss. More workers will be without a health plan, leaving the community vulnerable to greater unpaid usage of the City's hospital facilities.

3. No new sales taxes

Sales taxes from retail sales are paid by the consumer, not the vendor. Adding more stores does not increase the population or its income. It only changes the location where the sales tax is paid. Thus, adding a new Wal-Mart will not provide any increase in sales tax revenues for the community. It will only take it away from other stores and send it through Wal-Mart, with no net gain to the community.

4. Short-term gain in property taxes with a long-term loss

There will be a short-term gain in property taxes. A new Wal-Mart store will pay property taxes. This is an immediate gain to the City. However, because the retail maket in Lawrence is saturated with a surplus of stores, opening a new Wal-Mart will only cause other stores to close. As these stores close, they are still subject to property taxes, even if they are empty. But chronically empty stores create blight that is expensive to fix through redevelopment. This redevelopment generally comes with high public expenditure. A short-term gain with a new store will be lost through the high, long-term cost of blight elsewhere in our community.

It is a myth to believe that all development is good. There is little doubt that growth is good, but excessive growth is cancer. Lawerence, like any growing community, needs to be smart. It needs to distinguish between well planned beneficial growth and growth that does not serve the long-term interests of the community.

Thursday, October 26, 2006

Can good design cure bad development?

Design is important, but it cannot fix all of the problems resulting from bad planning.

The City has gone through a long and detailed process, attempting to determine whether or not a Wal-Mart should be built on the northwest corner of 6th and Wakarusa. Law suits have been filed. Landowners have made claims that it is their “right” to build whatever they want. Planning staff have been battered from all sides. Angry citizens have felt betrayed by their elected officials. Developers have effectively become a political party, attempting to purchase the votes they want on the City Commission.

Now it looks like Commissioner Highberger will switch sides, leaving the progressives, and joining the pro-developer camp. He indicates that if the design of Wal-Mart is improved, he will vote for the development.

An improved design, a few more trees in the parking lot or placing the buildings closer to the street, will do nothing to resolve the market impact. The town is already overbuilt in retail space. Adding a new Wal-Mart to an oversaturated market will only cause other stores to close and become vacant. Finding tenants will be difficult to impossible. It is probable that we will simply add to the already large stock of empty, deteriorating, and blighting vacant retail buildings that already deface our community. The jobs in those stores will be lost. The workers will have the unhappy choice between unemployment or going to work for Wal-Mart.

Good design is not the same as good planning.

No issue galvanized voters in the 2003 election as did the Wal-Mart issue. The voters called for good planning. They did not want sprawl, hurting the older districts of the City. They did not want overbuilding of commercial space, hurting the existing commercial districts, especially the downtown. Unfortunately, the leadership of the City failed to deliver. Sprawl and overbuilding continues unabated. No amount of architectural details can cover this failure.

Thursday, October 19, 2006

Do we need to worry about keeping developers happy?

"Yes" is not always the correct answer.

Developers are interested in building. The only answer that they want to hear when seeking planning approvals and building permits is "yes". Any other answer is, from their perspective, the wrong answer.Very often the community is best served by an answer other than "yes". Often the answer is simply "no". The proposal does not conform to the City's plan. The proposal is simply a bad proposal. Sometimes the answer is "not now". The proposal is premature because the infrastructure is not available to support the proposal or the proposal cannot be absorbed in the market without significant negative impact on the market. The proposed development may be too far from existing sewers or roads. The proposed development may add too much space to an already saturated market. The answer may be "not this design". The proposal may be too big or too poorly configured for the site or generate traffic or other problems. Developers are not happy with any of these answers.What are the consequences of developer's being unhappy?

Not all development is helpful.

This community has, for too long, equated progress with building. The difficulty with this equation is that not all development is a good thing. The community cannot grow and prosper without development, but not all development contributes to the prosperity of the community. Planning is how the community guides its growth and distinguishes between developments that are good for the community and those that are not. Left up to the developers, the community’s growth would not follow the plan. Left up to the developer, the community’s growth would be plagued with sprawl and excessive building as well as with a deteriorating downtown and declining older neighborhoods.

Guiding a growing community is tricky. Growth is a luxury that, if used well, can benefit all parts of the City. If left to the developers it will be squandered in the most profitable locations leaving the older parts of the City to deteriorate. Downtown can thrive and older neighborhoods can be revitalized if we carefully manage the growth. However, this is not the path of least resistance for the developers. Developers are prone to excessive growth, which should be curtailed, and are prone to sprawl, which needs to be redirected back to the older parts of the City.

The community should manage its growth in a way that is beneficial to the community as a whole. The community should not succumb to the pressures to make the developers happy.

Wednesday, October 11, 2006

What does Lawrence need in a Director of Planning?

Successful planning is much more than zoning administration.

Lawrence has confronted many difficulties as it seeks to cope with the rapid growth of its population. This led the prior Director of Planning to be overly focused on current planning at the expense of long-range planning and the ability to investigate the implications of public sector participation. Too often, the Director of Planning accepted that keeping developers happy was the measure of successful planning. Rather, the measure of successful planning is guiding the development process toward the successful implementation of the community’s comprehensive plan. The plan does not call for deteriorated neighborhoods and blighted shopping districts, but this is what we are getting. Given this focus on current planning (zoning administration) the staffing of the planning department failed to acquire individuals skilled at long-range planning and real estate development.

A few quick facts demonstrate the problems resulting from this process.

First, from 1990 to 2000, the housing stock grew by 27 percent while the population grew by only 22 percent. This 5 percent surplus corresponds to units and population lost to the City’s older central neighborhoods. The planning staff should have monitored these conditions and advised the Planning Commission and the City Commission as the pace of subdivision approvals began to outpace the population growth. It would have been very easy for the community to slow the pace of subdivision approval, but discussion of this pacing problem was not even raised by the staff and made part of the deliberations. In a growing community, there is no need to accept decline in any neighborhood. Successful growth management can direct some investment into all areas.

Second, from 1990 through 2005, the supply of retail space grew by 4.1 percent per year while retail spending grew by only 1.6 percent per year. Thus, the pace of growth of retail space was about two and one-half times the pace of demand for that space. The outcome has been the many empty shopping centers and strip malls blighting many areas of the City. A further outcome is the many retail buildings being converted into office space, spreading the problems of glutted retail market into the office market. Again, the staff failed to carry out normal planning analysis alerting the Planning Commission and the City Commission on these matters as the development proposals have moved forward.

Under the prior Director of Planning, staff did not evaluate or attempt to correct market analyses submitted by developers. Developers are required to submit a market impact analysis with their development proposals. The simple submission of even a flawed analysis was accepted as meeting the market analysis requirement. This renders the requirement meaningless and misinforms the decision makers.

These problems suggest that the new Director of Planning needs to have skills far beyond zoning administration. While zoning administration is important, it is only a portion of the work that needs to be conducted by the Planning Department.

Smart growth requires skills in market analysis, real estate investment analysis, and economic development analysis.

Skills are needed in:

Long Range Planning. The Director of Planning needs to understand standard procedures of market analysis. One of the key roles of planning is to help keep the pace of growth of supply in balance with the pace of growth of demand. It has long been known that real estate developers are prone to over building various markets, leading to empty and blighted older spaces. It is much easier and less expensive for a city to prevent blight than it is to attempt the redevelopment of blighted space after the available demand has already been satisfied by a glut of new space. The practice of depending upon market analysis from developers leads to poor decisions. Developers will always find a way to twist the numbers to justify their developments. If the City is to make good decisions on its pace of growth, it must receive valid, professional market analysis from its own staff.

Real Estate Development Negotiations. The Director of Planning needs to understand how to negotiate public-private partnerships in real estate. Too many times, the City has entered into a partnership only to have the deal fall well short of its goals. Examples would be the Riverfront Mall and the Downtown 2000 project. In other cases, the Planning Commission or the City Commission asked for input on the financial feasibility of reducing the scale or changing the design of a proposal. The staff failed to answer the questions because they did not know how to address these issues of financial feasibility given their single-minded focus on zoning issues. Examples would be the Border’s Bookstore and the Hobbs-Taylor development. If the City is to make good decisions on its role and participation in developments of this type, it needs to have guidance of planning staff skilled in understanding real estate feasibility analysis and in negotiating the level of public participation needed to bring projects to feasibility.

Economic Development Planning. The Director of Planning needs to understand how to evaluate and implement successful public sector initiatives directed at business development and retention. The community has too long equated business advocacy with local economic development. This has led the City into the embarrassing position that more recipients of tax abatements are in non-compliance than in compliance. This reduces, even eliminates, the City’s capacity to effectively negotiate economic development packages. If the City is to make good decisions on its level of public subsidy to private firms, it needs planning staff informed on current practices in economic development and skilled in these negotiations.

For a Director of Planning to be successful, this person must, at least, be conversant in all of these areas. For the Planning Department to be successful, the staff must possess skills in all of these areas and have the courage to guide the City well, even when this means denial of a developer's proposal. All growth is not good. The Director of Planning and the staff working for this person need to know the difference between growth that is supportive of the City and growth that is harmful and need to guide the City accordingly.

Tuesday, October 03, 2006

Why do developers overbuild?

In theory, the market for real estate should be self-correcting. If prices fall and vacancies rise, developers should take these signals as indicators that no more space should be built. If prices rise and vacancies fall, developers should take these signals that more space is needed in the market. This is good theory, but it does not work. We know that developers are prone to building more space than the community can absorb. New space is added to markets that cannot fill up the existing space. So why do developers overbuild?

1. Developers will take any tenants.

Developers are concerned that their own space becomes occupied. It does not matter to them whether the tenants are new to town or are already in town and moving from an existing shopping center to the new one. Equally, developers do not care if the new center satisfies growth in demand only captures demand away from an existing center. If the new shopping center empties out an existing shopping center, this causes blight which is bad for the community. When Wal-Mart opened its supercenter, Food-4-Less closed. Wal-Mart is not satisfying new demand, it is simply capturing demand away from existing stores, leaving us with empty shopping centers.

2. Commercial development takes a long time.

Development is a slow process. A developer may read a signal saying that it is time to build in 2003. By the time the development is ready for occupancy, it is 2006. The market may change in the intervening time, shifting from a market needing new space to a market in surplus with no new spaced needed. The empty office structure in the 1800 block of Wakarusa is an example. The developer began in the belief that the office market would be strong. Instead, the structure has been empty for years because the office market turned soft.

3. Correct actions by individual developers do not add up to correct actions for the market.

Developers act alone. Several developers may read market signals to build. Individually, each is properly reacting to market signals. Collectively, the combined actions of all developers create too much space. We saw this in apartments in 1997. We normally add about 400 apartments per year, but that year we added about 1,200. Each developer was properly responding to market signals, but each wished that the other developers had not built. The resulting surplus hurt the older smaller apartment building owners hardest. It took about 3 years to absorb that surplus.

4. Tenants are more mobile than buildings.

If retail vendors see better opportunities in a different location, they will move when the net benefits of moving outweigh the costs. The commercial real estate left behind cannot be moved. Redevelopment of an outdated building can be costly, usually more costly than building a new structure on the periphery of the city. Redevelopment is tricky and generally has difficulty competing with newer, larger shopping space. The failure of the Downtown 2000 redevelopment plan is an example of this problem. There is simply too much supply for the few tenants seeking stores, and it is hard for expensive downtown redevelopment to compete with life-style centers at the edge of the City.

These conditions lead real estate markets to overbuild resulting in chronic vacancies and deterioration. When the vacancies and deterioration last long enough, blight is the result. Blight not only lowers the value of the surplus properties but it can lower the value of surrounding properties, causing a widespread loss in value. This is costly, ugly, and avoidable.

If a city like Lawrence wants to avoid such losses, it can correct the developers' propensity to overbuild through simple regulation of the flow of new space into the market. The rule is simple, do not allow the developers to build more space than the market can absorb. In retail markets, this means allowing the supply of space to grow only as fast as the growth in retail spending. In housing, this means only letting the supply of new units grow as fast as the growth in population.

Lawrence's failure to follow these rules has brought it to a very unfortunate position. The City has allowed so much retail space to be built that the downtown is being hurt along with several other older existing shopping centers. The City cannot proceed with its redevelopment plans downtown. Older shopping centers cannot attract new tenants. The City has allowed so much housing to be built that it is causing older neighborhoods to lose population and to lose investment needed to renovate older homes.

Lawrence needs to recognize that the real estate market is full of imperfections. Just because a developer wants to build does not mean that it is a good idea. Often the City needs to take the position that the developer must wait until the City can absorb the new development without harm to the remainder of the City.