Wednesday, July 09, 2014

Which is better, smart growth or giveaways?

City commissioners Dever, Farmer and Riordan gave away a package of tax breaks worth over $5 million to developers of the mixed-use development at 11th and Mississippi Streets.  In this case, mixed-use means a combination of luxury apartments designed for students and a small amount of retail space.


Income Drives Growth in the Market, Not Growth in Buildings


The three commissioners who voted for this package of subsidies displayed a lack of understanding of basic economics.  Note that commissioners Amyx and Schumm voted against it.  


A community's economy grows only insofar as the income of the population grows, whether that growth is due to new households, higher wages or both.  The value of the real estate in the community is a function of the demand for that real estate which rises and falls with the expansion and contraction of the aggregate income in the community.  Adding real estate to a community does not add income to the households, thus it does not add value to the tax base.


Does this mixed-used development respond to growth in demand?  No. Lawrence has already allowed retail space to grow much faster than the growth in retail spending. The City’s own retail market study shows that retail spending since 2000 has been flat in inflation adjusted terms; it actually has fallen by 0.1 percent per year.  The supply of space has grown by 4.6% per year.  The fact that supply has grown much faster than demand over a long period is clear evidence that the market is in a surplus condition.  Lawrence has already allowed rental housing to grow faster than the growth of renter households.  From 2000 to 2012, the number of renter household grew 10.3 percent while the number of rental units grew 12.5 percent.  This is clear evidence that the supply of rental housing is in surplus.  Right now, the community has no pressing need for either more retail space or more rental units. 


Zero-sum Markets


Building this mixed-use development will not bring new households or new retail shoppers to Lawrence.  The development will only change the location where renters, who are already here, locate and where shoppers, who are already here, do their shopping.  Thus, the rental and retail markets are zero-sum markets.  Adding new rental units does not add new renter households; it simply pulls them away from elsewhere in the market.  Adding new retail space does not add retail shoppers; it simply pulls them away from elsewhere in the market.


Clearly commissioners Dever, Farmer and Riordan did not understand that these markets are zero-sum systems.  To be fair, the planning staff of the City deserves some of the blame for this mistaken understanding.  The staff prepared a benefit-cost analysis, as the law requires for economic development subsidy packages of this type.  Unfortunately, the staff made the mistaken assumption that the value of the new rental units increases the overall tax base of the city.  This is a mistaken assumption.  Because there are no new renter households with new income, there is no new value to the tax base.  The value of these new buildings will simply shift value away from existing rental units to these new units.  Thus, there are no net benefits from the project as the staff benefit-cost analysis assumed. 


Commissioners Amyx and Schumm understand that the new development will not bring new value to the tax base.   They are both downtown merchants who know that adding stores does not add shoppers; it simply spreads the shopping across more stores, lowering the spending per store for all stores.


Both commissioners Dever and Farmer made it clear that they believe the $75 million is net new value to the community.  This would be true only if the apartments and retail space would bring new income and new spending into the community, but they will not.


Good Growth Management


What should the City be doing?  The City should be regulating the growth of real estate in the community, whether that real estate is commercial or residential.  A healthy market keeps the supply of space in close correspondence to the demand for that space.  But developers are prone to overbuilding, leading to unhealthy markets.  We saw that with the housing bubble of 2000 to 2007 and the economic harm from its collapse.  Without good growth management, developers will overbuild and ask for public subsidies to as they do it.  We have seen with the mixed-use development at 11th and Mississippi Streets.


If the City practiced good growth management, the developers would be standing in line waiting for the City to grant permission to building only the amount of space that is needed.  Rather than subsidizing this space, the City could be exacting better designs and better community amenities from this space making the developers compete for the designation as the developer who receives permission to go forward with permission to build.




Rather than practicing good growth management and exacting greater community amenities from developers, commissioners Dever, Farmer and Riordan have contributed to the overbuilding of our markets and have subsidized luxury student housing in excess of $5 million.  We would be a better community with healthier real estate markets if we practiced good growth management.



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