The lead article in this Sunday’s New York Times Business section was entitled “Ruins of an American Dream”. The accompanying picture, shown in the article, was of fully framed but incomplete single family homes in Merced County, California; the far fringes of the San Francisco Bay area.  Selling prices on average in Merced County have fallen by 50% over the past year… 50% is a number never, ever achieved in American history.  The Great Depression never saw anything approaching this decline in housing values.  We are in new, uncharted territory.

As I have quoted in the past, Jim Kunstler’s most famous line is that drivable sub-urban development “represents a prodigious, unparalleled misallocation of resources”.  We are just beginning to realize how much of a mistake we have committed as a society.  We have put in place a series of subtle but effective subsidies that make it economically idiotic to do anything but to build drivable sub-urban development.  We have and continue to charge drivable sub-urban infrastructure at prices that would have to be increased by 10 to 20 times for them to cover the costs our society have expended to extend the roads, cable, power lines, sewer, and water lines and ever other of the 15 categories of infrastructure.  Then, just to make sure we got a mono-culture of development, we have and continue to make low density, car-dependent sprawl the law of the land through our zoning.

Those houses pictured in the article will all have to be bulldozed.  They have been exposed to the sun and rain for over a year and given the cheap building materials used today. They are now structurally ruined.  What we have not yet come to realize is that the same fate will await tens of thousands of foreclosed and soon-to-be foreclosed completed house on the fringe.  The market pendulum began to swing back toward demanding walkable urban development over the past decade or so, well before energy prices exploded, but the subsidies and zoning laws (not to mention NIMBY opposition) continue to stunt the efforts to give the market what it wants… and needs.

This country is just beginning to recognize that we have been going down the wrong path over the past 10-20 years.  The market and the world have changed but the subsidies and laws that dictate how we invest 35% of the country’s wealth have not.  We have to first recognize that we have a massive problem; only then can we begin the painful process of correcting it.  This is going to take a generation to do but the longer we ignore the extent of the problem, the more painful it will be.

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Christopher B. Leinberger is a land use strategist, developer, teacher, consultant and author, helping to make progressive development profitable. He is currently a Visiting Fellow at the Brookings Institution in Washington, D.C. He is the author of The Option of Urbanism: Investing in a New American Dream from Island Press.

Much pain has been experienced in the American and world economy due to the collapse of sub-prime mortgages. This slow motion car wreck has resulted in:

• massive commercial and investment bank write-downs,
• the beginning of a series of bank closings,
• destabilized the two largest mortgage guarantors, Fannie Mae and Freddie Mac, resulting in an explicit Federal guarantee for them
• the recent federal stimulus package that has temporarily kept the economy from recession by borrowing over $100 billion from the Chinese and other holders of US Treasuries.

The sub-prime mortgages represent about 4-6% of the total $12 trillion US mortgage market and the damage they have caused so far seems to be worse than the damage caused by the meltdown of the S&Ls in the early 1990s. The S&L crisis was referred to as “the greatest collapse of US financial institutions since the 1930s”, according to a Federal Deposit Insurance Corporation (FDIC) report issued in 2002.

The sub-prime mortgage crisis appears to be nearing its end. The number of “resets” have been peaking and going down.

But, there is another shoe left to drop…

I have written about the overhang of drivable sub-urban houses on the extreme fringe of our metropolitan areas in The Option of Urbanism and in The Atlantic Monthly article, “The Next Slum?”. They are the result of the de facto domestic policy that has been in place for over a half century that legally mandates and subsidizes development of single family homes on the fringe. The housing market is now demanding more and more walkable urban product, providing transportation choices in how to get there and a walkable community in which it is located. Many drivable sub-urban houses and the commercial that supports them will never be worth what it cost to build them. The land under these houses is worth less than zero. Arthur C. Nelson of Virginia Tech has estimated that 35% of the drivable sub-urban houses may be in this situation over the next two decades.

Today in The New York Times, the front page story is entitled, “Housing Lenders Fear Bigger Wave of Loan Defaults”. The sub-headline is “Economic Ills Take Toll on Higher Grades of Mortgages”. This next wave is primarily caused by the fall of housing values on the fringe of our metropolitan areas. For example, the Los Angeles metro area had an annual price decline between May of 2007 and May of 2008 of 23%… a decline we did not even see in the Great Depression of the 1930s. However, West LA, which is a high density set of neighborhoods in the economic center of the metro area, saw slight price gains. The bulk of the housing value decline was on the fringe; Palmdale and Victorville, which are 40-60 miles from West LA, lost 43% year-to-year!

The big question is how will the economy fare after taking a body blow from sub-prime mortgages defaults, which represented 4-6% of outstanding mortgages, if 10-20% of additional mortgages go bad in phase II of this crisis? The Federal Reserve and the US government seem to be out of levers to pull.

Jim Kunstler is infamously known for saying “sprawl will be seen as the greatest misallocation of resources in history”. He seems to have had amazing foresight.

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Christopher B. Leinberger is a land use strategist, developer, teacher, consultant and author, helping to make progressive development profitable. He is currently a Visiting Fellow at the Brookings Institution in Washington, D.C. He is the author of The Option of Urbanism: Investing in a New American Dream from Island Press.

Previous blog posts by Chris:

• TOD Opportunities

• Where the Next Big Real Estate Opportunities Are

• Out with the Old Concepts

• Eco-Density - Coming to a Town Near You

• Financial Power of Walkable Urban Development

• The American Dream has Changed in the Past and is Changing Again

San Francisco ranks at the top in walkable urbanism on countless surveys. In the Brookings’ survey I released in December of 2007 (Footloose and Fancy Free; A Field Survey of Walkable Urban Places in the Top 30 US Metropolitan Areas, www.brookings.edu/walkableurbanism), it ranked #3. In the recently released version 2.0 of Walk Score (www.walkscore.com), the city of San Francisco (as opposed to the metropolitan area I ranked) ranked #1. Yet take a ride on the CalTrans commuter train from downtown San Francisco south through the mid-peninsula and pay attention to the development around the many stations…or should I say lack of development. Yes, 19^th century suburban towns like Menlo Park and Palo Alto have impressive development around the stations but most are vastly under-developed and in some cases, entirely undeveloped, surrounded by dirt, not even park and ride lots.  

Start by looking at the existing rail passenger stations you have in your metropolitan area; Amtrak, commuter, heavy or light and trolley/streetcar. A landmark study by the Center for Transit-oriented Development (CTOD) in 2004, “Hidden in Plain Site; Capturing the demand for Housing Near Transit”, is the place to start (go to http://www.reconnectingamerica.org/public/reports for the study and a recent update). I actually find the study conservative in its demand projections of how much housing, as well as commercial development, will also concentrate at TOD locations. 

Then, determine which of the nearby rail transit locations have an overlay zoning district that makes it legal to do high density, mixed-use development. If the zoning does not exist, you have to be prepared to get the local jurisdiction to put one in place, working with local property owners, the business community and smart growth advocates. Finally, having a Main Street program or, better yet, a business improvement district (BID) in place is crucial to the success of the redevelopment of the TOD district.  

Then, draw a radius 1500 to 3000 from the rail station and begin to look for opportunities to control land for future redevelopment. The timing of when you put the land under control is crucial. There is a classical “risk/return” relationship in the timing equation. Putting it under control before the zoning and the management infrastructure is in place means you will probably get it at the most favorable price and terms. But then again, you may fail in getting the zoning and management in place. Putting it under control after the zoning and management is in place generally means the property owner has “visions of sugar plums dancing in their heads” regarding the price. 

It is important to note that there probably is or will be a “right-side” and a “wrong-side” of the tracks, the creation of a developable and not-so-developable side of the tracks. However, if the station is underground like some subways stations are, there tends to be no distinction and development can go in a 360 degree radius. The tracks themselves will be a barrier, much as a freeway is a barrier, to pedestrian movement and development potential. This is a major reason why, given the will and foresight, stations and tracks in a TOD should be underground if at all possible; it increases the development and tax revenue potential literally by a factor of two, which will pay for putting it under ground.  

Many more opportunities exist than rail stations. Many metro areas do not have rail transit which will be the great infrastructure challenge this country faces. However, if your metro area has rail transit this is where to focus your development efforts over the next generation.  It will be the most sustainable from an environmental, fiscal and financial perspective.

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Christopher B. Leinberger is a land use strategist, developer, teacher, consultant and author, helping to make progressive development profitable. He is currently a Visiting Fellow at the Brookings Institution in Washington, D.C. He is the author of The Option of Urbanism: Investing in a New American Dream from Island Press.

In these recessionary times, it is easy to be depressed….and there is good reason given how poorly this economy has been managed and the many fundamental financial imbalances (private and public debt, declining dollar, declining confidence in the US economy and financial system here and abroad, massive unfunded liabilities, trade and budget deficits, etc, etc.). Whether the US dollar remains the global reserve currency and US Treasury bonds the lowest risk, hence lowest cost, global asset are both in doubt. It will probably take decades to right the reckless mismanagement of this administration and the rash spending spree this country and its consumers have been on this decade.

However, the country has too many basic strengths and resiliency to be written off. So where should real estate developers and investors focus now and in the future? Transit-oriented development (TOD). This means high density, mixed-use development around rail transit stations, which includes commuter rail, subway and other heavy rail, light rail and even trolley stations.

According to a Brookings survey I released in December of 2007 (Footloose and Fancy Free, A Field Survey of Walkable Urban Places in the Top 30 US Metropolitan Areas www.brookings.edu/walkableurbanism), there are 157 regionally significant walkable urban places at critical mass in the top 30 US metros. That turns out to be one for every @ 900,000 residents (1.1 place per million population) and 2/3rds of these places are around rail transit stations; they are TODs. The DC metro area has one walkable urban place that serves regional needs for every @250,000 people (3.8 per million); more per capita than any metro area in the country. Surprisingly, 70% of the DC walkable urban places are in the suburbs.

If the rest of the top 30 metros came up to DC’s number of walkable urban places, there would be an additional 365 places…that is a stunning number and represents hundreds of billions of dollars of real estate and tax revenue opportunity. Most will be around transit stations, existing or to-be-built. The big questions are where they will be and what can you do to take advantage of the opportunity?

I will talk about possible answers to those questions next week.

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Christopher B. Leinberger is a land use strategist, developer, teacher, consultant and author, helping to make progressive development profitable. He is currently a Visiting Fellow at the Brookings Institution in Washington, D.C. He is the author of The Option of Urbanism: Investing in a New American Dream from Island Press.

There is a debate going on since the beginning of the year regarding the future of housing and the built environment (real estate and the infrastructure that support the real estate). It has been taking place in periodicals and broadcast media such as The Atlantic Monthly, The New York Times, The Wall Street Journal, Business Week, Newsweek, CNN, ABC, NBC among many others. This debate has been fueled by rising gas prices, the sub-prime crisis, the credit crunch, climate change and many other factors.

The debate has revolved around simplistic concepts such as “the death of the suburbs”, “the return to the city” and “the decline of the suburban American Dream.” These are simplistic because they reflect an early to mid-20^th century, industrial economy concept of how we build the built environment, not the realities of 21^st century, knowledge economy concepts. It is perpetuated by the U.S. Census Bureau which divides the world into “central city” and “suburbs” when they compile their information. But it also infects most people’s thinking.

In my book, The Option of Urbanism, Investing in a New American Dream, I use the phrases walkable urban and drivable sub-urban to describe the only two ways we can build the built environment. Walkable urban places are high density (FAR of at least 0.8 and generally much higher), mixed-use places that have many means by which to get to them (car, transit, biking, walking , etc.) but once you are there, it is walkable. That means that within walking distance (1500 to 3000 feet or 100 to 500 acres), one can get most every daily need by walking. Drivable sub-urban places are low density (FAR between 0.05 and 0.3), modular-use places that you can only get there and only get around by car.

The key issue is that walkable urban places are both in the central city and in the suburbs, as the Census defines them. In addition, drivable sub-urban places are both in the central city and in the suburbs, as the Census defines them. In other words, the old terms and concepts of central city and suburbs are pretty worthless.

It is my estimate that 70% of the pent up demand for walkable urbanism will take place in what the Census calls the suburbs so it is not “back to the city” or “death of the suburbs” issues. There are many situations when drivable sub-urban development should take place in the central city; office parks and big box retail with surface parking lots are and should be built in central cities to broaden their economic offerings.

Let’s get our terminology up-to-date. It gets real confusing otherwise.

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Christopher B. Leinberger is a land use strategist, developer, teacher, consultant and author, helping to make progressive development profitable. He is currently a Visiting Fellow at the Brookings Institution in Washington, D.C. He is the author of The Option of Urbanism: Investing in a New American Dream from Island Press.

Over the next few months or the next year or two at most, a new concept will be embraced by real estate developers, civic leaders, and environmentalists; eco-density. I hijacked the term from the mayor of Vancouver, who coined it to explain why he was a proponent of much higher density development around rail transit stations. In spite of devising a very clever term, his concept and term were viewed quite negatively. This is due to the oft used expression that “there are two things people hate; density and sprawl.”

Yet we are shortly going to embrace density as one of the most important solutions to energy security and climate change. High density living and working is far more energy efficient and less green house gas-emitting than any other alternative. Soon to be released Brookings research shows that there is a three to one relationship between drivable sub-urban household energy usage/GHG emissions versus a walkable urban household. When you live and work in a walkable urban place, you walk, bike, or take transit for most trips from the home and you unintentionally share your heat with neighbors. Given that the built environment (buildings and transportation to get between those buildings) are responsible for 73% of all American GHG emissions, using this three-to-one lever becomes crucial if we have a hope of addressing climate change. This is the major reason eco-density will become accepted.

There is another reason, however. These include the improvement in quality of life of those who most oppose density, the nearby single family neighborhoods. This may seem counter-intuitive but it is true. If the negative externalities of a high density walkable urban place are managed properly, such as keeping noise and traffic contained within a walkable urban place and designated corridors, while keeping parking out of the neighborhoods, these neighbors are going to find that they have a much higher quality of life. The reason? They can live in suburban splendor yet be within walking distance of great urbanity. The end result is their housing values will increase. Shortly, there will be enough evidence that this is the case and the most extreme opponents will become reluctant supporters.

Civic leaders are going to understand the need for high density around rail transit when they learn how this high density and high value real estate will pay for the capital and operating costs of the transit system itself. Known as “value capture,” there have always been ways through history to pay for the very transportation improvements by the increasing land values made by those improvements. See the blog entry from last week to see how powerful it can be. Having a way to pay for needed infrastructure and giving politicians ribbons to cut in front of the camera is highly attractive.

Ultimately, it is going to come down to building high density, walkable urban places, i.e., eco-density, particularly around rail transit stations, or not address climate change. Let me see; status quo around rail transit stations or save the planet? Let me think….

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Christopher B. Leinberger is a land use strategist, developer, teacher, consultant and author, helping to make progressive development profitable. He is currently a Visiting Fellow at the Brookings Institution in Washington, D.C. He is the author of The Option of Urbanism: Investing in a New American Dream from Island Press.

I recently stumbled on an example of the economic power of walkable urban development, which can be sparked by rail transit and appropriate mixed-use zoning. A small Washington Post item in the local news section, buried on page B4, announced the sale of two pieces of land by the Metro transit agency (it could just as easily have been another government agency or for that matter a private party) to real estate developers. The land is located in a formerly very troubled southeast neighborhood, adjacent to the Anacostia River. Five years ago, this neighborhood was home to the worst DC housing project, where hundreds of murders took place during its infamous history, and was the drug dealing center of the region. A creative redevelopment plan, removal of the housing project (replaced by a Hope VI development), the new major league baseball station, significant private and public investment and an expanded Metro station, all fueled by the massive pent up demand for walkable urbanism, has resulted in one of the most remarkable turnarounds taking place in the country today.

Land value in this area before the successful redevelopment and expansion of the transit station was between $5 and $10 per square foot. The land would generally have been used for light industrial uses; storing trucks or gravel behind high security fences. The land totaled 97,000 square feet—about two football fields in size (using the most important American unit of land measurement). At $10 per square foot valuation, that comes to a little less than $1 million.

The Post reported that the Metro transit agency yielded $69 million from the sale of the land, averaging $712 per square feet. That is 70 times the pre-redevelopment value of five years ago. That is a demonstration of  the power of rail transit and appropriate zoning, which catalyzes high density walkable urban development.

The opportunity exists to take advantage of this value increase within walking distance of a new or expanded rail transit station to help pay for the building and operations of the rail transit. If 20-40% of the $68 million from the southeast DC example of increased value was captured, that means that between $14 and $28 million could be invested in building or operating the rail transit.

We need to learn lessons from our planning and development predecessors a hundred years ago; they knew that transportation drives development. And the very development sparked by rail transit can help pay for the rail transit.

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Christopher B. Leinberger is a land use strategist, developer, teacher, consultant and author, helping to make progressive development profitable. He is currently a Visiting Fellow at the Brookings Institution in Washington, D.C. He is the author of The Option of Urbanism: Investing in a New American Dream from Island Press.

In the agricultural age, the 18th and 19th century, the American Dream could have been summarized as “40 acres and a mule.” An independent Jeffersonian “yeoman farmer” was an ideal that attracted many immigrants here. In the industrial age, the early and mid-20th century, the American Dream could have been summarized as “a single family house in the suburbs with a white picket fence around it,” what I call drivable sub-urban. That industrial age was predicated upon steel manufacturing, automobile manufacturing, marketing and maintenance, auto finance and insurance, road-building, tire manufacturing and marketing, finding, processing and distributing petroleum and all the great drive-in possibilities that unfolded.  As you “saw the USA in your Chevrolet,” you were making yourself wealthier.

Today’s knowledge-based economy is “driving” yet another redefinition of the American Dream as it plays itself out on the ground. This new version is based upon choice; choice of living as either a rural gentleman farmer, in suburban splendor or in a vibrant walkable urban place… or all three depending upon time of life and financial resources. However, there is a severe supply shortage of the walkable urban version, which has driven up prices, gentrified urban neighborhoods and called upon the real estate development industry to build something they know very little about. And there is a supply glut of suburban single family homes. It will take a generation for the pent-up demand for walkable urban development to be satisfied and the drivable sub-urban glut to be worked out, converted to rentals or bulldozed.

Related: “Is America’s suburban dream collapsing into a nightmare?”: CNN.com

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Christopher B. Leinberger is a land use strategist, developer, teacher, consultant and author, helping to make progressive development profitable. He is currently a Visiting Fellow at the Brookings Institution in Washington, D.C. He is the author of The Option of Urbanism: Investing in a New American Dream from Island Press.