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Recently, I've talked about the diminishing returns of Heroic
Materialism.
December
...
4, 2011: The Diminishing Returns of Heroic Materialism 2: End of
the Line
target="_blank" October
30, 2011: The Diminishing Returns of Heroic Materialism
Suburbia is certainly part of our Heroic Materialist modality. Like
other Heroic Materialist patterns of behavior, what once produced
stunning advances, and later produced steady benefits, it is now
producing more problems and increasing difficulties.
Before, I talked in a more general sense. But, today I will talk in
an actual financial sense, in terms of IRR, which is to say, the
profit from capital invested in new suburban development.
target="_blank" August
22, 2010: How to Make a Pile of Dough with the Traditional City
Any business or investment trend tends to have a certain pattern.
Warren Buffett called it: "Innovators, Imitators, and Idiots."
At first come the Innovators. (I would say the Visionaries come
earlier, but they usually aren't businesspeople. The Innovators take
the Visionaries' ideas and turn them into profitable business
ventures.)
target="_blank" June
6, 2010: Transitioning to the Traditional City 2: Pooh-poohing the
Naysayers
target="_blank" May
23, 2010: Transitioning to the Traditional City
The characteristic of Innovation is potentially very high profits,
but also high risk. You just don't know what will happen. If you
did, it wouldn't be innovation. For example, the iPhone turned out
to be a huge hit for Apple, with monster profit margins. However, it
might have been a dud. It was certainly innovative, when it first
came out.
As the Innovation becomes better understood, others attempt to
capture some of those large profit margins. Capital flows into the
sector, competition intensifies, and profit margins come down. The
Imitators arrive, in large numbers. At first, the competition can be
rather innovative too, but usually in terms of incremental
improvements, not the clean-sheet-of-paper leaps of the Visionaries,
turned into businesses by the first Innovators.
After a while, things become rather more commoditized. Incremental
improvements are still happening, but they are small steps now.
Returns on capital are falling to average historical levels, but the
risk is fairly low because the patterns are well established.
Toward the end of the cycle, you get two things. The first wave of
Imitators were fairly successful, and people say: "well, if that guy
can do it, I can to." You get successive stages of Imitators, each
one typically less talented than the last. Eventually, you get a
wave of Idiots -- people who imitate the outward form of the
Imitators, but often in a way that is almost certainly doomed to
failure. The Idiots think the risk is low, because of the large
number of successful Imitators preceding them, but actually the risk
is rising because the market is becoming saturated, profits are
disappearing, and the new wave of Idiots is not sensitive to risk.
Too much capital is invested. Returns on capital fall below
historical averages. At the end, there is typically a surge of
Idiots, and a large amount of capital is invested in projects that
have widespread losses -- losses that, in hindsight at least, seem
easily forseeable.
Today, we are talking about things from a developer's perspective.
This means the marginal addition to Suburban Hell, the next new
building project, not what is already there. For the last ninety
years or so -- basically since the introduction of affordable
automobiles like the target="_blank" Ford Model
T in the 1920s -- the basic pattern of Suburban Hell
expansion has been:
1) Single family homes built on greenfield, further and further from
city centers.
2) Larger and larger homes
3) Strip mall-type commercial/shopping areas to serve these homes
(i.e. big parking lots)
4) Lots and lots of very wide streets to accommodate all the traffic
implied by the above
5) Superhighways to make it easier to travel from these
ever-more-distant greenfield developments to elsewhere in the city
target="_blank" March
7, 2010: Let's Take a Trip to Suburban Hell
target="_blank" July
26, 2009: Let's Take a Trip to an American Village 3: How the
Suburbs Came to Be
target="_blank" July
19,
2009:
Let's Take a Trip to an American Village 2: Downtown
target="_blank" July
12,
2009:
Let's Take a Trip to an American Village
Not surprisingly, all of these patterns have reached something of a
limit:
1) New developments are too far from anything, and often imply
commute times of an hour or more each way
2) Homes are too large for people to afford
3) Waaaay too much strip-mall type development, plus the realization
that it is horrifically ugly
4) Land use patterns that are dominated by Non-Place (parking lots,
roadways, and "green space" to make it all a little less hideous),
i.e. "sprawl"
target="_blank" October
10,
2009:
Place and Non-Place
If these are the problems, the solutions might reasonably involve:
1) New developments that are closer to where people want to be (city
centers, train stations, beaches and other natural amenities, and
other centers of commerce or employment)
2) Smaller, more affordable homes
3) Much less strip mall development
4) Land use patterns that are dominated by Place -- pleasant
environments for people
target="_blank" September
20, 2009: The Problem of Scarcity 2: It's All In Your Head
target="_blank" September
13,
2009:
The Problem of Scarcity
Naturally, this fits right in with our Traditional City ideas. I
won't go on and on about that right now.
What I am hearing from developers today is that most of them plan to
sell to the "high end," that is, high income or genuinely wealthy
people. Why? Because these are the only ones that can you can still
sell the existing pattern of Suburban Hell development to.
They can afford to live in high-value areas, with shorter travel
times etc., they can afford the two cars necessary to live in
Suburban Hell, they can afford the high taxes necessary to pay for
all the public infrastructure (immense roadways) of Suburban Hell,
and they can afford the larger houses that developers want to build
(because that is what they have been doing for their entire career),
and still have enough of a profit margin to justify doing so.
You can't really sell a lower-priced house at all these days,
because they were so overbuilt in the 2000-2005 era that they are
now selling for well under construction cost. Obviously, you can't
compete with that, which is why overall housing starts are very low.
This is capitalism's way of telling you to stop building houses.
However, eventually that excess supply will be absorbed somehow.
Some of it will simply be abandoned and bulldozed. Even at a price
of near-zero, it is in a location that is not worth occupying. This
is the case in Detroit, but also in the farthest-flung outskirts of
the California suburbs. Over time, the houses will be abandoned and
deteriorate, and not be worth the money to renovate and repair.
Also, they will be occupied by the sort of unpleasant people and
activities (squatters/welfare cases/meth labs) that nobody wants to
live around. The kind of people that might be interested in a cheap
house will find that they can't afford to commute from these
locations, and there aren't enough jobs locally. Thus, whether an
old city like Detroit or a development built in 2004 in the
California desert, the housing stock will simply disappear.
In those more attractive areas, like a condo in central Miami or San
Diego, eventually the excess supply will be absorbed by people
moving in.
After the excess supply is eliminated or absorbed, then comes the
question of what should be built next. What I think developers will
find is that it is simply no longer practical (i.e. profitable) to
expand further outward into new greenfield development. Also, houses
will become smaller -- a lot smaller. I think they will go back to a
1950s standard of about 1000sf, as an average for new residential
development.
Both of these are related to cost, and also benefits. These distant
greenfield developments are not particularly pleasant places, so the
only way to get people to live there is to have a low price, which
also means a low profit margin, or perhaps no profit. Also, the
further away you are, the more you have to drive, which is also
quite expensive.
Developers are genuinely not evil people. If the profit is there,
they will build whatever you like. Also, developers are, for the
most part, an imaginative and flexible bunch. They are inherently
creators, and thus, in a sense, creative people, open to new ideas.
Every new construction development begins as a new idea, a business
dream, so this is something they are very accustomed to. Much of the
problem lies with the people that developers work with, such as
architects and planners (i.e., architects who help build whole
developments, not just a single building), municipal bureaucrats
("urban planners"), banks (very risk-averse, and who favor
tried-and-true), other investors and so forth.
We are now in a period of "debt supercycle" credit contraction, in
my view. At least, the private economy is, while governments are in
their own phase of debt self-destruction. This period could last a
long time.
What this means in a practical sense is that potential purchasers of
new property will be fairly conservative regarding the ratio of
purchase price to income. The notion of "three times income" for a
house is considered "conservative" today, but that is actually an
estimate of the most you can borrow, while having a fair
chance of actually paying off the debt. That is, actually, the
redline for family finances. There's nothing conservative about it,
it is pushing things to the limit. So, we should be thinking more
like about 2x annual income. (I previously suggested 1x income, but
realistically Americans will still buy as much house as they can get
away with.) With household income in the $50,000 range, and stagnant
for decades on a CPI-adjusted basis (especially since the trend
towards two working parents is exhausted), developers will find that
their average residential customer is looking for a
$100,000-$150,000 house. This translates, in practical terms, to not
much larger than 1000sf, and probably smaller than that (more like
500sf) in areas where land prices are significant.
If you take the typical sf/person for new
houses in 1950 (296), and multiply it by the typical household
size today (2.55), you get a unit of 755 square feet.
Which, you might have noticed, is the midpoint between
500-1000sf.
Per capita income, after adjusting for currency devaluation, is
back to a 1950 level.
It makes sense that the same per-capita income would translate
into the same per-capita floorspace of 1950.
Plus, new buyers will likely be looking for a location that is not
too insane regarding travel times and so forth. This all translates
into infill development, rather than further greenfield development,
and also a lot more multifamily because if you're making 500-1000sf
units it makes a lot of sense to put a bunch of them in one
building. For infill, land costs will be an issue, and the easiest
way to ameliorate the land cost issue, while fitting into a budget
of $100,000-$150,000 per unit, is to make more attached (townhouse)
or multifamily (apartment) units. A developer has to be able to
build a unit for less than the sale price (obviously), and also make
an adequate risk-adjusted return on capital. Also, there is often a
lot of infrastructure (electric, sewage, roads, parking, parks and
other amenities etc.) that goes along. What it means is that, for a
unit selling for $100,000, the actual per-unit construction cost
might have to be around $70,000. With construction costs ranging
from $100 per square foot (cheap wood framing) to more like $200/sf
for steel and concrete multifamily, you can see that we are going to
end up with a lot less square footage.
Probably, the idea of "selling to wealthy/affluent people" will be
exhausted soon enough, because we already have waaaay too many
houses that are basically for wealthy people (2500sf+), and also,
with everyone trying to sell to wealthy/affluent people, supply will
probably meet and exceed demand before too long. Maybe we are
already in the idiot phase there.
The first thing that everyone will try to do, in the United States,
is to imitate 19th Century Hypertrophism, or, in other words,
Brooklyn. This would seem to solve the problem of higher
density/more multifamily/infill etc. It is what everyone reaches for
when they think of this, because it is so familiar. (Basically, "New
Urbanists" in the United States want to imitate the failed and
unpopular 19th Century Hypertrophic pattern.) This won't work very
well. Why not? Because we already have a ton of 19th Century
Hypertrophism in a lot of existing cities, and everyone knows that
it is not really all that great. That is where everyone was fleeing
from to get to the suburbs, for fifty years. If they wanted to live
there, they would already be living there -- but instead, these
places have been slums for years, and "Main Street" has been a
business disaster for decades (no parking, among other problems).
The suburbs were supposed to solve the problems of 19th Century
Hypertrophism. Potential buyers will understand immediately, if they
see the basic features of 19th Century Hypertrophism (very wide
streets with four lanes of automobile roadway, typically on a grid
pattern, with multistory buildings), that we are basically talking
about living in Queens, except for a few high-income neighborhoods,
which will always be a small portion of the overall simply due to
statistics. Even the highest-income neighborhoods, in the 19th
Century Hypertrophic pattern, are not all that great. New Yorkers
who got fed up living on the Upper East or Upper West Side are so
common as to be a cliche. They often end up with horrifying commutes
just to avoid it, or perhaps end up in another city altogether.
target="_blank" February
21, 2010: Toledo, Spain or Toledo, Ohio?
target="_blank" January
31, 2010: Let's Take a Trip to New York 2: The Bad and the Ugly
target="_blank" January
24,
2010:
Let's Take a Trip to New York City
target="_blank" October
3, 2010: Let's Kick Around the New Urbanists
The proper solution is the Traditional City, perhaps updated to
accommodate more parking, which is what I have been describing in
detail for about two years now. Eventually, we can add a proper
train system so we don't need so many cars, but there is no need to
wait around. We can get started today.
I think that forms of shared transportation will become more
popular, if only because the average American family can't afford
more than one car, which is problematic with two working parents and
some active teenagers. A car typically costs about $7,000 a year
all-in, which is a big chunk of a $50,000 household income. Before
taxes. Two cars pretty much breaks the meter. Most car costs are
marginal costs, however. A car that you don't drive costs perhaps
$2,000 a year, for insurance and depreciation ex-mileage. So, you
can still own a car if you don't drive it much -- for example, if
you do most of your weekday commuting and around-the-neighborhood
tasks without a car.
target="_blank" December
27, 2009: What a Real Train System Looks Like
From a profit standpoint, the Traditional City makes a lot of sense.
You create a very pleasant environment -- even the low-income areas
of Tokyo or perhaps southern Italy are quite pleasant and livable --
which can also be quite inexpensive to build, because you're making
500sf units. If you give people real value and a good price, there's
room for a decent profit margin, even on a $100,000 unit. Or a
$50,000 unit. Developers are happy to make $10,000 on a $50,000
unit, over and over, all day long.
What about the commercial areas of Suburbia -- the suburban outdoor
strip mall or big box shopping "power center"? Many of these might
get bulldozed. Why? Because we are talking about infill development
here, which means that you have to bulldoze something, and
the thing you bulldoze is the thing with the lowest value. The
typical large suburban house, in a good location, will still have a
fair amount of value, because you can either use it with a larger
household (extended family and friends), or split it into two or
three units fairly easily. It is a lot easier and cheaper to split a
2500sf house into three 800sf units than it is to build three 800sf
units from scratch, so the demand for affordable 500-1000sf
residential units will, at first, be met in that fashion. However,
you can't really do much with a strip mall without tenants.
Suburban Hell retail/commercial is facing three issues now:
1) There's just waaaay too much of it.
2) Families, no longer able or willing to tap ever-expanding debt,
and generally facing a shrinkage real income, will buy less.
3) Competition from online retailing, including the used market
(eBay/Craigslist)
Heck of a lot of retail space here in the U.S.
Driving -- the heart of the whole Suburban Hell lifestyle
-- is on a decline, probably for the first time since
automobiles were introduced. Too expensive and not that much fun
anymore.
After a century of decline, U.S. per-capita mass transit
ridership is rising.
Online retail is killing brick-and-mortar.
The nature of retail is such that many shopping
centers will become totally unviable. When a shopping center
falls below about 70% occupancy, it is pretty much dead. The
remaining businesses relocate into other shopping centers,
raising their occupancy. The natural pattern is one of
success/failure, rather than occupancy simply sinking lower
across the board. This will likely produce a supply of dead
retail properties.
Online retail at 8% of the total might not seem like that much.
However, a lot of retail is in relatively online-proof sectors
such as groceries (13%), gasoline (11%), restaurants (11%),
motor vehicles and parts (19%), building materials (6%), and so
forth. The remaining 50% or so of retail sales are under serious
pressure, with those on the front lines, such as books, music,
video, electronics and so forth being crushed altogether. This
is spreading to general merchandise, stuff you buy at Walmart
for example.
That is why, it is quite likely that a common avenue of infill
development going forward will be to bulldoze the big box or
strip mall shopping center.
target="_blank" November
11,
2012: HTMAPODWTTC 10: Let's Bulldoze a Big Box Shopping Center
2: No, Seriously
target="_blank" April
1, 2012: How To Make a Pile of Dough With the Traditional City
7: Let's Bulldoze a Big Box Shopping Center target="_blank"
At first, these Traditional City-type developments will probably
have to be compatible with Suburban Hell as it exists today. In
other words, the stuff surrounding the big box shopping center
that you bulldozed. This means that people will need
automobiles, and parking for those automobiles. This is not
really as hard as it sounds.
target="_blank" July
31,
2011:
How
To
Make a Pile of Dough With the Traditional City 5: The New New
Suburbanism
target="_blank" July
17,
2011:
How
To
Make
A
Pile
of
Do...
the Traditional City 4: More SFDR/SFAR Solutions
target="_blank" June
12,
2011:
How
to
Make
a
Pile
of...
City 3: Single Family Detached in the Traditional City Style
November
11,
2012: HTMAPODWTTC 10: Let's Bulldoze a Big Box Shopping Center
2: No, Ser target="_blank"iously
target="_blank" July
1, 2012: How To Make a Pile of Dough With the Traditional City
9: Townhouses With P target="_blank"arking
April 22, 2012: How to Make a Pile of Dough With the
Traditional City 8: Shared Parking
April
1, 2012: How To Make a Pile of Dough With the Traditional City
7: Let's Bulldoze a Big Box Shopping target="_blank"Center
target="_blank" May
15, 2011: How To Make A Pile of Dough With the Traditional
City 2: A Ski Resort Village
September
23, 2012: Corbusier Nouveau 3: Really Narrow Streets With
High target="_blank"-Rises
August 26, 2012: Corbusier Nouveau 2: More Place and Less
Non-Place
August
19,
2012: Corbusier Nouveau
What I am saying here is, basically, that developers will start
building something like the Traditional City whether they
want to or not, because it makes financial sense. Some
developers will land on a more-Traditional-City-like format --
in other words, one that produces the highest value outcome
with the least cost, which is appropriate and
attractive to the largest segment of the population (the
median-income middle class), and thus has the highest
potential profit margin -- and serve as the template for
the laggards among their group. It would be nice if we could
avoid fifty years of failed experiments, as people stumble
toward this outcome in a confused fashion, and just build
something great, right now, today, and laugh all the way to the
bank.
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