Saturday, February 28, 2009

Is it time to impose a long cooling off period on development?

Watching the market work and fail to correct itself.

Too often our elected officials subscribe to the false notion that all construction is good. They adhere to the "build it and they will come" theory of real estate development. This theory falsely holds the new supply creates demand. One need only look around Lawrence to see the error in this type of thinking. We have empty homes, apartments, retail stores, and offices throughout the community. In fact, demand ebbs and flows; the supply that can be supported is not a function of what we build but of the amount of demand that exists in the community.

The success of our real estate markets depends upon us keeping the supply in balance with the demand.

Why is this? The development industry is not good at pacing itself; it is prone to overbuilding. When it overbuilds, the taxpayers suffer.

We pay for the roads, utilities, plus police and fire protection for these excess developments. Example: Since 2000, the developers built over 3,200 home more homes than the population growth would support. The only good thing that you can say for the current credit market freeze is that it called a halt to the overbuilding spree.

We also suffer from the blight created by the reduced value to the neighborhoods surrounding the empty space. Example: North Lawrence is hurt by the blighting effect of the dead Tanger Mall.

We all lose directly through lost investment in redevelopment plans. Example: The empty $8 million parking garage in the 800 block of New Hampshire Street. The City built the garage on the promise that a developer would redevelop the surrounding area in mixed-use buildings. All that was built was the small building that contains PepperJax. The rest of the development was halted by the overbuilding that created too much competing space, mostly in the west side of town.

We lose indirectly through the diminished efforts to redevelop our downtown. Examples: The Hobbs-Taylor Building is unable to attract retail tenants and the redeveloped 600 block of Massachusetts Street has vacancies. These two attractive developments should be the most valuable space in town. Unfortunately, the City has done its best to hurt these investments in our downtown by approving excessive amounts of competing retail space elsewhere, more space than the spending in Lawrence will support.

Two quick facts show the pace of the overbuilding:


1. From 2000 through 2007, the builders built 800 homes per year when the population added only 400 households per year. Over and eight-year period, this was about 3,200 surplus homes.

2. From 2000 through 2007, the builders built over 160,000 square feet of retail space per year when the growth in retail spending would support only 50,000 square feet per year.
This shows that the construction industry was vastly oversized, and we are now paying for it.
We need a City Commission that will keep the construction industry in check. It is not that hard to keep the pace of growth of housing in line with the growth of population. The City simply needs to plan for the pace of growth, approving only as many subdivisions as are really needed. It is not that hard to keep the pace of growth of retail space in line with the growth in retail spending. The City simply needs to pace the growth, approving only as many new shopping centers as the growth in retail spending will support.

This has been made harder by the current City Commission’s excessive allegiance to developers. The City Commission has approved virtually every development approval brought before it when the market analysis told it that the city could not absorb all of the new space without harming existing developments. Because of this excessive amount of space both recently built and under construction, the city needs a long cooling off period.

The economic recession is having some positive effect in that is it slowed down the building spree. However, recession is too crude a tool for this job. The City Commission should have managed the pace of growth in real estate, keeping it in line with the growth in demand for that real estate. Having failed to do that, we must now recognize that it will be a long time before we will need any significant additions to the supply. We have too many single-family homes. We have too many apartments. We have too many retail stores. We must wait for the demand to absorb this space before adding to this damaging oversupply. If we fail to impose a cooling off period, the development industry will only repeat its mistakes as soon as the recession bottoms out and credit markets thaw.

We should learn from out mistakes and prevent future cycles of overbuilding. It is what good planning and good growth management is all about.