The Cycle of Undevelopment
When I first moved to the U Street Corridor in DC, there was only a handful of business open east of 14th street. In the intervening five years, a ton of new stuff has opened up. But the pace at which vacant spaces get renovated and occupied has been frustratingly slow, and much the same is true along potential retail corridors on 9th Street and 7th Street heading south of U. What makes this especially frustrating is that these aren’t depressed areas anymore — buying a new condo in the area will cost you a pretty penny, and buying a single-family home would be very expensive. And yet, places go undeveloped with some parcels just resting vacant. The causes of this are multifaceted, of course, but the most maddening is this collective action problem highlighted by Ryan Avent: “if you have a piece of property in an up and coming neighborhood, you can develop and sell it now for $500,000 or wait three years and get three times that. As such, everyone is waiting for everyone else to build.”
And as a result, nothing happens and everything moves at a snail’s pace. I don’t have any policy ideas on hand to help break the logjam, but the mayor who does come up with a good solution to this problem will do her city — whichever city it may be — an enormous amount of good. Dense areas are full of feedback loops — if retail exists in an area, then it becomes desirable to live there, which makes it a more desirable location for retailers, etc., etc. — that can run in either direction. Measures that help push the ball in the positive feedback direction, even if modest on their own terms, can wind up having a huge impact.
36 Responses to “The Cycle of Undevelopment”
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August 18th, 2008 at 12:57 pm
As far as the kids were concerned, it was better to have one or two vacant lots.
There was Tobin’s lot across the street and off to one side (so named because it was owned by a mean old man named Tobin who would come by sometimes and wreck our jumps with a shovel; he couldn’t wreck the burms because they were part of the hill).
Then some other mean guy bought Tobin’s lot and built this house that looked like a Habitrail. The fundamentalists directly across the street (who lived in a house they looked like a church [people would come over and say something like "what kind of church is that?"]) got mad because it blocked their view.
Soon there were no vacant lots around. It was sad after that.
August 18th, 2008 at 12:58 pm
Taxing lots at a significantly higher rate than improvements might do it.
To keep an undeveloped (or underdeveloped) property, you want the increase in value to be larger than the tax + the money you could make from investing the proceeds of sales plus whatever meagre rents you obtain from how it is currently used. If taxes on the lot itself are high, you can’t afford to keep it undeveloped.
This tends to screw over homeowners though. Homeowners vote. You could make a provision to discount lot taxes on residences occupied by the owner.
August 18th, 2008 at 12:59 pm
Same problem on the west side of H street, NE. Very frustrating.
August 18th, 2008 at 1:00 pm
Isn’t that what the vacant property tax is meant to address?
August 18th, 2008 at 1:09 pm
I’ve been reading Kunstler’s Home From Nowhere and his take is that by instituting a site tax, while removing the improvements tax would go a long way towards eliminating the type of lot/land hoarding by speculators that leads to empty lots and decrepitating buildings. Since I’m not very well versed in the arcana of tax code, I can’t tell you how good it would work but removing barriers to urban development would probably help break the log jam.
August 18th, 2008 at 1:11 pm
Find a way to tax underuse. Tax vacant lots the most, vacant space less, and occupied space the least. It’s only fair, since vacancy puts a burden (financially and psychologically) on the neighborhood.
It would create an incentive for those who can’t or won’t develop in the near term to sell to those who would.
It’s not perfect, but as a Philadelphian, I can say that the current alternative is catastrophic.
August 18th, 2008 at 1:16 pm
Does Ryan Avent actually have any idea what the phrase “as such” means? Or does he just think it sounds nice?
August 18th, 2008 at 1:19 pm
As other commenters here have pointed out, there is a rememdy: it’s having a punitive rate for vacant buildings. That’s the case in DC at least. The problem with this is enforcement. Records are often out of date, and occasionally a legit property owner gets caught in the dragnet.
Personally, I think the benefits far outweigh the costs. I might feel differently, though, if I came back from a long vacation to find my tax bill had gone up 500%.
August 18th, 2008 at 1:20 pm
This is exactly why we should all take pause before signing on to new legislation making it difficult for municipalities to use eminent domain as a development tool.
We are all offended by the abuses, and there are abuses everywhere, but throwing the baby out with the bathwater is never a good idea.
The city should be declaring properties like the one pictured as ‘blighted’ and dangerous to the public safety and taking them for sale to developers willing to develop now.
There has to be a way to check abuses in ED without stopping redevelopment in underdeveloped areas.
August 18th, 2008 at 1:25 pm
Set up improvement districts. The first (some number) businesses in that area pay no property, income, or capital gains taxes for the lifetime of their business, as long as they stay in the neighborhood and maintain their place.
August 18th, 2008 at 1:29 pm
If the problem is as described - properties remaining vacant in an area that has been revitalized - then there really isn’t much of a public policy issue. If vacant properties are dragging the neighborhood down and chasing away investment (ie, the actual meaning of the term blight), then by all means, take the properties. But if it’s not - if it really is a revitalized area - then the “issue” is limited to the use and condition of someone else’s property not being what you want it to be for a time, and that’s not a good use of resources.
You need to take the long view. A building getting renovated in 2010 instead of 2008 in the midst of a longterm upward trend in the neighborhood is barely worth noticing.
August 18th, 2008 at 1:33 pm
I was also going to mention Kelo. Generally, exercising eminent domain is a standard answer to these sorts of collective action/holdup problems involving real property. And high taxes for vacant properties can be just a fancy way to get the same result–if you are deliberately making the tax higher than any plausible return on the vacant property could support (which you need to do in order to solve the problem), then the hypothetical resulting tax lien basically amounts to the threat of eventually taking the property.
August 18th, 2008 at 2:01 pm
Consider that the problem is a little bit more nuanced than simply the expectation that the owner can get more later. That may be true, but there are other possibilities. Near my block, there is a parcel of land that has been vacant ever since I moved there nearly 20 years ago. But it’s sided by parcels that are subject to long term leases — but that have received “variances” from zoning rules — so I assume that once these long term situations play out, someone is going to consolidate ownership of all of these adjoining parcels and develop it as something.
In DC, any given lot might not be big enough to be worth developing — developers might be buying up lots one at at a time as they are able until they get a critical mass that makes it worth expending the rather substantial sums for design and approval.
Clear title to many parcels might also be in doubt, particularly if the parcel was inherited at any point, and the owners are the “issue of” so and so. This alone will scare off a lot of developers.
If the lot isn’t the site of criminal activity I don’t see why it’s such a big deal.
August 18th, 2008 at 2:15 pm
I’ve been a city planner in down-at-the-heels older cities.
If a neighborhood in such a city gets to the point where developers can make money renovating old storefronts, and expect that the value of properties in the neighborhood is only going to go up over the next few years, we go to a bar, order pitchers, and spend the night yelling “woo-hoo!”
You’re there, dude. I favor a pretty expansive role for government in promoting urban revitalization, but the goal of public-sector planning should be to change the underlying conditions so that the private sector will eventually step and revitalize the neighborhood. There are always going to be some vacant properties in even the hottest neighborhoods, due to churning and individual variation. There is no purpose in putting any time or resources into such properties in such areas (unless they reach the stage of public nuisance). There are plenty of genuinely needy neighborhoods out there.
August 18th, 2008 at 2:18 pm
By leaving the building vacant, the owner is saving on heating, cooling, lighting, commuting, parking and other impacts. Under some schemes he could be earning valuable carbon credits.
August 18th, 2008 at 2:20 pm
To add to Barbara’s list, there is also the possibility that the property is in tax title limbo.
1. Owner abandons property. Leaves it vacant, stops paying taxes, bails.
2. The city demolishes the collapsing firetrap ten years later, puts a lien on the property for the cost.
3. Years later, there are now more back taxes and liens on the title than the property is even worth.
4. The city goes to court to take the property for back taxes. This takes a long time under the best of circumstances, and sometimes…
5. The owner of record cannot be located, stalling the process even longer, as notice to the owner is a necessary condition for a tax-title taking.
In Lowell, we used to take undersized lots like this that came out of tax title and sell them to abutters for off-street parking, with a lien preventing them from being built on, for the reduced value of the lot with such a lien. Vacant lots get cleaned up, the buyers’ property becomes more valuable, abutting properties don’t have a vacant lot to worry about anymore, and the parking crunch gets a little better. In the best circumstances, more than one abutter was interested and we could split the lot.
August 18th, 2008 at 2:27 pm
Cities could provide more and larger expiring subsidies and loans with interests structures to provide incentives to develop and sell quickly. That way property owners who develop their properties, especially those who work together to forge a realistic development plan, and then rent them out will be able to overcome the collective action problem and still reap the benefit of the gentrification bump their property would accrue. This would also help to spur owners who don’t wish to do the work to sell to others who will because of the value premium it would create. You still might have a problem with hold outs to a development plan, but that can be fixed easy enough with a little temporary regulatory flexibility.
Also, the police presence could be upped to ensure that the risk of vandalism and other crime can be reduced. And the city could try to work insurers and other investment to develop more support earlier after a few of these re-developments worked out.
All in all, it’s not that hard a problem to solve, which is why so many U.S. cities have been gentrifying at such a steady (if not maximally rapid) pace. The much more complicated issue is what to do about those that are priced out of the market and the potential soft factors involved in that process like a city’s culture or racial and economic demographic change.
August 18th, 2008 at 2:39 pm
I really like taxing undeveloped values of property at a significant rate. It is one of the most efficient taxes because it doesn’t really distort incentives and it is one of the most progressive taxes since rich people own more valuable property than the poor. It is probably the best non-pigovian tax around.
August 18th, 2008 at 2:39 pm
One of the other reasons why lots, even some fairly large ones, often sit vacant for years in major cities is the permitting and planning process you have to go through in order to make anything happen. As I understand it, here in San Francisco if you can put down the first brick a mere two years after purchasing the property, you’ve got a lot of powerful friends. Otherwise, think five.
Not only does that create a serious amount of flat out delay in getting buildings up, but it creates strong disincentives towards ever doing it. A) It adds so much aggravation to your life that private citizens with other employment just write the idea off entirely and B) the amount to which things can change in the intervening 5 years means that you as the developer are accepting an appalling amount of risk. If you could have the property built, sold, and someone else’s problem within a year, you’re eating a lot less of that volatility.
Want to help get vacant lots built and vacant storefronts rebuilt? Fast-track the planning and permitting process in depressed areas.
August 18th, 2008 at 3:44 pm
Why would anybody spend good money to open a business in this neighborhood when all the potential customers are moving to Phoenix?
August 18th, 2008 at 4:34 pm
Market solution: buy 10 under-used properties in the same area, develop 1 or 2 of them to start the feedback loop, then sell the rest of your lots for a huge profit.
If this won’t work, then maybe Yglesias and Avent are wrong about the collective action problem.
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