Thursday, February 4th, 2010
The Power of Greenfield Economics
I’ve touched on this before in other posts, but it is worth highlighting again. The great move from the city to the suburbs has been attributed to various factors: changing lifestyle preferences, the automobile, subsidies to sprawl, urban industrial pollution, etc. While there is probably truth in all of these, possibly the most powerful of them all is greenfield economics.
What is greenfield economics? This is simply the set of conditions that flow from building on new territory or exploiting new markets vs. redevelopment of old places, organizations, etc. Being able to start with the proverbial blank slate enables a huge number of benefits. Consider:
- Everything is new and state of the art. A brand new home in the suburbs is new, comes with a warranty, and probably needs limited maintenance for the first few years. Also, it is built to the current fashion, with the layout, square footage, and room sizes people prefer today. The kitchen has stainless steel, not harvest gold. Everything about it is what the market is demanding today. As fashions and tastes constantly change and evolve, it seems unlikely older homes are hitting the market sweet spot, often requiring renovations, plus they require significant maintenance just to keep them up
- No legacy costs. More broadly, the area has no legacy costs. There are no brownfields to clean up, no dead malls, etc. There are no unfunded pensions because nobody has accrued a pension yet. There are no bond repayments from yesterday’s boondoggles. And so on.
- No legacy institutions and culture. A greenfield isn’t saddled with bunch of deals, and accommodations made years ago. It’s isn’t saddled with a mayor who is the grandson of the city council president from 40 years ago. There are a limited number of powerful special interest groups. As anyone who has tried to change an organizational culture that no longer meets institutional needs can tell you, this is a daunting task.
- Ability to defer infrastructure costs. In particular, arterial street capacity and freeway capacity are built with a lag. This lets new towns avoid costs in the short term.
- Scale economics are in your favor. Costs consist of fixed components and variable components. In a growth scenario, the fixed portion gets amortized across more units, meaning your cost per unit drops. Also, this allows substitution of additional fixed costs for variable costs to gain further unit cost efficiency. As long as growth holds, that alone can drive down cost per resident and business. This helps keep taxes low.
- Efficiency of large lot development. New suburbs are usually developing relatively large parcels, which is efficient in that environment. For example, the land was probably acquired from a small number of original owners. The planning and zoning process is pretty much the same whether you are building five houses or five hundred. Again, there are unit costs efficiencies from building many units, etc.
- Few low income residents. Because new towns tends to feature owner-occupied housing and new apartments, a job and credit history is generally needed to get in. Thus the nature of new places is avoid low-income people, and the associated social service costs. Part of the reason that the outer suburbs experienced particular stress in the housing collapse was because the weakened lending standards allowed people with marginal finances to buy in. A return to the status quo ante means those types of buyers will likely be excluded in the future. That doesn’t do anything to help lower income and working class people – they still have to live somewhere – but it will keep them from newer suburbs, as will restrictions like large lot size zoning and building codes that mandate upscale materials.
It isn’t hard to see why building new and moving to new places, particularly when staying within the same economic and amenity region, is very attractive.
You might say that this is a transitory state and the problems of the city will eventually hit the suburbs as well. Very true. And indeed, that’s what we see. Inner ring suburbs across America are struggling. Some of them are failed towns worse than any inner city. Many of today’s boomburgs will no doubt share the same fate 30 years from now. As a general rule, it seems that only the most affluent suburbs have staying power. But that doesn’t help you if you are a central city or inner ring suburb today.
Eventually all of the items above go into reverse. The town becomes “full”, it gets old, and its own deferred costs catch up with it. Then all of the logic that made the greenfield so powerful works to equally devastating effect in reverse. As the population and tax base shrinks, fixed costs loom large, for example.
The kicker in all this is that the liabilities and costs almost all attach to the territory, not the people. Thus they can be escaped simply by moving to a new greenfield. It’s like prospectors skipping from one clapped out mining town to the next. Or being able to run up a huge credit card in someone else’s name and skip town.
This is a huge structural challenge for old places. There is certainly a lot of work to be done on understanding how to deal with it. But the first step is recognize that simple greenfield economics can account for Hazel Morrow-Jones finding that “people like new and big homes far from the central city.” That’s where the greenfields are and people implicitly get that.
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About the Urbanophile
Aaron M. Renn is an opinion-leading urban analyst, consultant, speaker, and writer on a mission to help America’s cities thrive and find sustainable success in the 21st century.
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Greenfield development without substantial corresponding population growth is just like the old Polish blanket trick: Cut the bottom three inches off your blanket and sew it back on the top to make it longer.
That’s a good one!
This constant build-abandon cycle is exactly what is happening in the Raleigh region of North Carolina. First Raleigh suburbs grew, costs/taxes went up, so people moved to the adjacent city of Cary. Now that Cary’s full and taxes are going up, people are moving out to nextdoor Morrisville and Apex. It seems the cycle will never end, and more of Raleigh’s city core is abandoned.
Slash and burn urban policy.
So…that leaves cities and other aging communities with the mandate to literally re-invent themselves..not through some new, contrived, identity, but rather by essentially starting over again…….clearing what is obsolete or encumbered with legacy issues, etc.
Barry, Jim Russell made a similar observation about recreating greenfield environments in the city here:
http://burghdiaspora.blogspot.com/2010/02/case-for-talent-attraction.html
Would a metro area in the midwest who imposed firm restrictions on greenfield developments see (1) reinvestment in the urban and older suburban areas, or (2) see a long term regional disinvestment as business and residents fled to metro areas without such policies?
I certainly do support restriction and disincentive for this cheap and wreckless practice, but worry about those cities trying to do the right thing losing out to irresponsible communities stuck on rapid growth.
This confirms an adage I’ve touted for a long time: America will never solve its urban problems until it runs out of room.
Martin, most “urban problems” will never be “solved”, just moved. They have mostly to do with people and societies, not cities as built.
JG, the short answer is something closer to “disinvestment”. Indianapolis competes with Columbus, Oklahoma City, Des Moines, Omaha, Kansas City and other non-geographically constrained (and growing) mid-continent metros. If one city somehow imposed a UGB and increased the cost of new development, jobs growth would likely stop.
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Aaron, another pair of driving (historical) factors for greenfield development were an expressed societal preference for less-dense living and the decline in average household size.
One is social, one demographic, but both have driven the economics for decades: more new housing units have been needed just to accomodate those shifts, which gave an extra push to suburbanization.
(For those playing without a scorecard, one of the rationales urban planners used for bulldozer urban redevelopment was “reduction in density.” In Indiana it is still enshrined as one of the statutory findings that can be used in declaring a redevelopment district.)
I’d add to Aaron’s list of greenfield advantages the lack of entrenched political power. I cite the following article often when discussing the creation of greenfield opportunities in brownfield backwaters:
http://www.newsweek.com/id/46123
“An intriguing pattern is that governance is best in coastal cities that had very little industry when reform began in 1978. Shenzhen now has the highest per capita GDP in China. The same holds in Jiangmen, Dongguan, Suzhou–all were industrial backwaters in 1978, and responded to China’s opening by creating good environments for private investment and learning from outsiders. Cities that already had industry tended to protect what they had and reform less aggressively.”
In my opinion, the greenfield economics paradigm is dominant. Sun Belt manufacturing communities such as Greenville, SC (textiles) struggle as much as Frost Belt manufacturing communities. Greenville was able to protect what it had and Charlotte was the Wild Southeast. We all know the result.
But how did brownfield Chicago, New York, Boston, and even Philadelphia make the globalization cut? I suspect we would discover draconian urban politics at its ugliest.
Jim, thanks. The other item I’d suggest about cities like Chicago and Boston is that they benefited enormously from the financialization of the economy and the large amount of money that brought in. The Bay Area similarly benefited from the tech revolution.
Beyond perhaps the ugly politics you mention, these cities had money to play with. We’ll see how that holds up.
Aaron,
Tell me more about “financialization”. I’m totally unfamiliar with that effect on the US urban hierarchy.
“So…that leaves cities and other aging communities with the mandate to literally re-invent themselves..not through some new, contrived, identity, but rather by essentially starting over again…….clearing what is obsolete or encumbered with legacy issues, etc.”
Consolidation is a big issue in the towns and villages where I live in upstate New York, which is an “old, filled-up” region with most of the “legacy” complications described here. Demographically, we are at a point where the population is aging and the kids of the local burgermeisters aren’t staying behind to take over the reins. This has an effect both of making some people want to dig in and cling to the old fiefdoms, but on a modest scale some people are also rethinking them as well. The region is in a state of collapse, which looks bad on the surface, but which just may eventually return everyone to a more sustainable state of lower complexity, where for example, dead malls aren’t demolished but simply repurposed economically (though not prettily). Example, in my city a huge hardware retail space that has been vacant for 10 years is now being repurposed into a honeycomb of low-rent vendor stalls. I don’t know if this particular redevelopment will fly, but this is the sort of economic redevelopment we will see played out all across America in the future – not flashy, not high-class, but possibly what local people need for day to day living in a collapsed society.
I just mean the growth of the finance sector generally: hedge funds, investment banks, securitization, venture capital, private equity, etc. These industries pay very high salaries to people who can afford to indulge in urban luxuries and for whom items like property taxes are not a major concern. This also generated windfall income tax revenue in cities like New York.
In Chicago, I think about the rise of firms like Citadel Investments and other hedge funds and such contributing significantly to that city’s transformation.
“In Chicago, I think about the rise of firms like Citadel Investments and other hedge funds and such contributing significantly to that city’s transformation.”
Cause or effect? Firms like Citadel Investments don’t pop up just anywhere.
That’s always hard to answer, but in Sassen’s work on global cities, a large number of them turned out to be pre-existing financial centers.
If we attribute the cause to political change to create greenfields, we have to determine why it occurred in Chicago, New York, London, Boston, etc. all at basically the same time. That doesn’t seem likely. The Sunbelt examples seem stronger to me.
Not all pre-existing financial centers prospered. That might be a good place to start the inquiry.
Aaron wrote:
If we attribute the cause to political change to create greenfields, we have to determine why it occurred in Chicago, New York, London, Boston, etc. all at basically the same time.
The Jacobean example would be that these cities generated capital by helping to plant the seeds for industrialization and international trade. Chicago’s place in the list was being at the top of the agricultural pyramid. You could also add Miami there for being the world banking city of Latin America — even for legitimate transactions. ;>
The banking economy, though, plays out in just about every sizable city. If you would look at the western settlement of the United States, the banker played a huge role. They just don’t get movies made about them because bankers aren’t as “visual” as frontiersmen or cowboys. :>
Small banks helped finance large-scale development, local businesses or resource extraction. As money was made from these, local banks became regional banks, and in some cases national or global banks.
The ones that became national or global powerhouses are often gateway cities to international markets. They didn’t choose to be gateway cities, a combination of economic necessity and good location thrust them there.
As they grew bigger, the banking portfolio was no longer centered around face-to-face transactions. Capital was deployed to where it could seek the best returns.
Jim, the Newsweek article on China neglects to mention the role of government policy in industrialization. Because the government was not sure economic liberalization would work, it started by only letting the poorest, least economically significant areas liberalize.
You are right on the money. I worked for many years as General counsel to a development company. We built office and industrial parks and residential developments, too, but always sought out greenfield sites, for all the reasons you mentioned above, and four other ones:
(a) most greenfield sites, at least around Chicago, tend to be in outlying exurban areas, where local governments and their land use regulations are less sophisticated (in part due to long traditions of proud land owners who resist any government regulation over their property rights). This makes it exponentially easier to get annexation, zoning and subdivision approvals, and, typically, a developer is hit with fewer fees and charges. This can also mean lower construction costs, since a developer will have freer rein when it comes to, e.g., erosion controls, landscaping. paving.
(b) large farm holdings frequently mean the developer doesn’t have to assemble land from multiple owners, another big time saver and cost saver (seems like there’s always one hold-out in an assemblage deal who wants double the price, or, in the city, there’s one parcel that turns out, for example, to be a sliver of an alley that was never vacated or slipped through the title cracks and now has 22 owners scattered over 8 states). Plus, legal costs are lower, since you may have only one or two closings instead of a dozen.
(c) related to (b), frequently — with some big weird exceptions — title is cleaner, since property has been in one family over a period of time. This cuts down on legal costs.
(d) all things being equal, you rarely run into serious environmental issues on greenfield sites.
Am I advocating greenfield development? No way. I was always actively lobbying for this company to look for infill sites in the inner burbs or go back into the city. But at least back in the 90s, Chicago and the inner-ring suburbs were not doing anything pro-active to make their developable sites competitive with greenfields (such as pre-assembling land, doing remediation or infrastructure in advance, offering financial incentives, etc.)
Explosive topic, Ironwood:
Should government pro-actively do the land assembly necessary to redevelop built-out areas?
The Supremes say they can, but since the Kelo case most states have passed statutes reinforcing private property rights and preventing eminent domain for purely “economic development” reasons.
This is just another thing mitigating in favor of greenfield development.
Those of us who work in urban redevelopment know very well the power of the holdout, and the power of the guy who thinks his old falling-down (or worse) place will be worth a million bucks if he just holds it long enough. But there is no political will to force those owners out, and the money they demand often blows up project pro-formas.
Paradoxically, it’s sometimes easier if a site is in fact a real “brownfield” in the environmental sense: owners are often happy to dump those liabilities, and developers love the fact that there is “free money” available to do cleanup and site prep.
The best way to deal with holdouts is to raise the cost of land banking through LVT, aggressive reassessments, and code enforcement.
Aaron, you nailed it right on the head. Also, Ironwood added very good insight to the issues.
In economic circles, this is an \externality\ that allocates regards and costs unevenly amongst citizens. It is one of the biggest in my opinion, and will not be solved easily.
Most of the big US cities with good economies, NY, Boston,San Francisco, etc., have essentially run out of room to grow. They either have insurmountable physical barriers and/or far exurban communities have thrown up multiple barriers to new development. This drives up land prices. Additionally the cost of transportaiton grows dramatically as a city spreads, acting as an equalizer on the economic equation. Chicago’s cost for land is probably one of the lowest of the biggies, because it has room to grow, although the transportation/commuting and barriers issues help push up prices somewhat.
Smaller cities have a much more difficult challenge. Most people do what’s best for them economically, which means that until the cost of living in the new exurbs outstrips the cost of living in the city, most of these places will have a difficult time revitalizing themselves. There will surely be exceptions, certain neighborhoods or even cities that do well, but overall it will be difficult to reverse the trend until one of two things happen:
1. The government steps in and enacts more comprehensive incentives and/or restrictions on development (a la Portland, OR)
2. The system winds itself out through stretching resources so thin that it basically grinds to a halt
The big question right now is-has #2 above already happened? Are we living in a time when the system has imploded, much like a tornado rips itself apart with its own fury? Or is this just an intermission? Time will tell.
George, to your list I’d add #3: External shock.
Gas in the $4-5/gallon range for an extended period (several years) would probably slow or reverse the greenfield trend. It’s really a separate case from your #2, as it would hit all exurban development everywhere instead of a single region.
“Jim, the Newsweek article on China neglects to mention the role of government policy in industrialization. Because the government was not sure economic liberalization would work, it started by only letting the poorest, least economically significant areas liberalize.”
Alon,
That may be the case, but doesn’t (necessarily) undermine the observation of political legacy costs deterring investment. But we could look at the data another way. Corruption is less evident in newer cities.
Corruption and a lack of transparency impeding investment is a well-established concept that is universal. Chinese urbanization is just another data point. I’d also give considerable weight to Dollar’s observation, “Cities that already had industry tended to protect what they had and reform less aggressively.”
Oh, sure, there are political legacy costs. I’m just pointing out that China isn’t really a datapoint. On the contrary, you could argue it the other way: once economic controls were lifted nationwide, the region that started growing the fastest was Greater Shanghai, which has been the richest in China for centuries, and industrialized in the 19th century. The stagnating regions are those that only industrialized later, under the Japanese occupation or under communism.
The power of greenfield is true mostly within metro areas. The way Krugman (as well as Glaeser) explains economic geography, the following questions help determine whether greenfield is more powerful between metro areas or countries:
1. What are the transportation costs? How is the transportation network configured? Lower transportation costs promote greater concentration of services in just a few regions – it’s easier to export then.
2. How good is the nationwide infrastructure? If it’s good everywhere, it helps set up factories in poorer areas. If it’s only good in rich areas, it doesn’t.
3. How big is the difference in income? You need a pretty big income differential to justify outsourcing to developing, more infrastructure-poor regions. On the international level, it only started in the 1960s, when the first world was 10-20 times as rich as the Asian countries it transplanted factories to. On a national level integration is greater so the necessary differential is smaller, but even then, poor rural areas in both the US and Europe remain depressed even as their incomes are half those of the rich global cities.
The greenfield hypothesis is the urban equivalent of the convergence hypothesis in international trade, which states that poor countries grow faster than rich ones. It’s not always true on the international level, and it’s not always true on the intra-national level.
“On the contrary, you could argue it the other way: once economic controls were lifted nationwide, the region that started growing the fastest was Greater Shanghai, which has been the richest in China for centuries, and industrialized in the 19th century. The stagnating regions are those that only industrialized later, under the Japanese occupation or under communism.”
That’s not much of an argument. So Shanghai is the exception, not the rule. There are outliers in any regression analysis. So what?
The obvious answer to this problem is what Oregon has tried with varying degrees of success since 1970- urban growth boundaries.
I believe everything the original article covered comes under the heading of “disinvestment”. To some extent, cities, suburbs, neighborhoods, communities, etc. are like everything else, whether it’s your car or your body. If you don’t invest in proper maintenance, repairs and replacements, nutrition, medicines, etc., the original structure deteriorates and fails.
We have seen in many of the cities mentioned that some neighborhoods get high reinvestment while others get little or none and fall apart in due order.
The purpose of creating local governments is to tend to the needs of the local population and raise the funds accordingly: from the local population. When local governments blow all their funds on extravagence and then fall back into a syndrome of looking to a higher order government to pay for the essentials, whether it’s the county, state, or federal government, or in the case of 3rd world nations, looking to their neighbors to pay the bills, then the local government has essentially abdicated its responsibilities, created a power vacuum, and left the way open for predators to move in, whether it’s a local drug dealer, a tribal warlord. Meanwhile Mother Nature also moves in and takes over in every case. Reinvest or walk away. It’s a choice.
What about rational gas-tax policies (where the price of gas comes close to reflecting the true costs of driving)? If these were in place in the United States, the choices people make and the landscape would be quite different.
No, the other cities you quote are either in the same region as Shanghai, or in Guangdong, whose economy the government opened early. Suzhou has been among the richest cities of China going back to the Ming dynasty.
Aaron, I’ve referred an individual who runs a website called YoChicago to this post, and he had some pretty harsh criticisms. I didn’t want you to be deprived the ability to defend yourself. The discussion begins from the 9:06 pm post on 2/4/09 and onward.
Warning: Mr. Zekas is a pretty stubborn Joek Kotkin-esque character and is “always right”. It’s up to you if you want to join the fray or not:
http://yochicago.com/the-fight-against-urban-sprawl-in-chicago/13844/comment-page-1/#comment-50205
“Suzhou has been among the richest cities of China going back to the Ming dynasty.”
So Suzhou wasn’t an industrial backwater in 1978 as Dollar contends? I just want to clarify if you think Dollar is wrong or that I misunderstand what Dollar wrote.
TUP: I don’t want to say that Joe Zekas is lying, so I’ll just assume he talked to the wrong developers. In general, mixed-use new urbanist developments sell faster and for higher prices than single-use developments.
Whenever someone argues personal knowledge, you should ask yourself, if he’s wrong on the things I do know the facts about, why should he be right on the things I don’t know the facts about?
Jim: I’m not sure Suzhou was industrialized in 1978, but it was certainly rich. It’s possible that in terms of heavy industry it was a backwater, making Dollar technically correct, but in general economic terms it wasn’t, making Dollar incorrect in reality. Bear in mind, the cities of Guangdong were poor in 1978, and it’s possible Dollar just assumed this was true for other cities.
Alon,
Thanks for the clarification. One more question, just so I understand you. Are you offering a different explanation for the pattern Dollar observes?
I read you as contending that the government strategy for liberalization was to target less significant areas as an alternative narrative to Dollar’s.
Yes, that’s what I’m contending. The way I understand it, late 1970s China wasn’t completely sure liberalization would succeed, so it wanted to experiment by just opening a few regions. Part of the reform program involved cutting taxes, so the government made sure to avoid opening Shanghai, which contributed a large share of the government’s tax revenues. Instead it opened Guangdong, which contributed almost no tax revenues.
Alon,
Thanks. I wasn’t aware of the regional strategy. Interesting alternative perspective on the pattern of urban growth in China.
Unless I receive an apology from Alon Levy for the way my views are misrepresented here, I’ll assume he’s utterly lacking in credibility.
http://yochicago.com/the-fight-against-urban-sprawl-in-chicago/13844/comment-page-1/#comment-50221
Joe, you said, and I quote,
Again, I’m going to assume good faith here. I’m going to assume the developer has just encountered the worse new urbanist developments, and just doesn’t know that in general, new urbanist developments sell better and keep their value better. I’m going to assume you’re reporting the developer’s views fairly. But then there’s the question: if that developer can be so wrong, why should we take it on faith that the developers you’re quoting who say greenfield development is hard are right?
And then there was Hong Kong very close by. Hong Kong’s rapid development up the food chain from what I think was barely a fishing village must have been a factor.
A lot of good points on this thread, mostly accurate from what I can tell.
I think the “financialization” issue is part of a wider story. Finance is part of the larger “trading” and deal making function of cities. The part, that is playing a bigger and bigger role in rapidly changing economies. Yes, there’s been a huge distortion and cancerous growth in this sector but I don’t think it fully accounts for everything.
As Jane Jacobs said, the primary function of a great city is trade in one form or another. Coffee shops and restaurants serve functions way beyond just being “amenities”. They are places to meet new people, make new contacts and make deals.
It seems like regions that could combine finance, and trade with nearby manufacturing really did well. The relative development of manufacturing in southeast China wasn’t too impressive, but the level of historic trade knowledge was huge.
Aaron, the article you bring up about Columbus makes me wonder. Columbus is a state capital and big university town, two sectors of the economy that have been somewhat detached from reality. I really think the big question isn’t if a lot of people might like new sprawl housing, but the actual economic viability of this desire. A state capital can run against the grain in terms of generating lots of jobs with no need for trade or the normal needs most businesses have.
We just had a huge storm in Pittsburgh. In the whole city there are almost no buried power lines, something Wall Street had by I think 1890. Can you really sell a city that hasn’t bothered to see the value in having buried power lines?
Alon,
In your quote you’ve made clear that I was reporting a developer’s view. That developer has substantial experience across the country with one of the nation’s largest builders. He’s a client. Will I betray a source by naming him? I don’t think so.
You shouldn’t take anything on faith. You should just assume away, and suggest that anyone who differs might be lying. It befits you.
This developer has experience. That’s really nice. It puts him at the same level of authority as the speakers at any new urbanism conference. The difference is, the new urbanism people have published studies on the desirability of new urbanist developments corroborating their view.
You’re not Bob Woodward, and your developer isn’t Deep Throat. At this stage, you’re more like a faith healer and the developer is like a person claiming to have been healed by prayer.