New Jersey Future Blog
Urban Centers on Rebound
April 9th, 2010 by Tim Evans
- Between 1990 and 1995, New York City accounted for 15 percent of the residential building permits issued in its larger metropolitan area. Between 2003 and 2008, however, it averaged 48 percent of the metro total.
- Philadelphia’s share of its metropolitan area’s building permit activity jumped from a mere 3 percent to 13 percent between the same two time periods. In 2008 alone, Philadelphia accounted for 16 percent of total metropolitan building permits, retaining its improved stature even in the face of the real estate downturn.
- Similar spikes in central-city permit activity in the mid-2000s occurred in many other large and mid-sized cities, including Chicago, Portland, Denver, Seattle, Milwaukee, Miami and Atlanta.
- The eight “urban centers” identified by New Jersey’s State Development and Redevelopment Plan (Newark, Jersey City, Paterson, Elizabeth, Trenton, Camden, New Brunswick and Atlantic City) accounted for only 3 percent of residential building permits issued statewide between 1990 and 1995—but jumped to 14 percent of those issued between 2003 and 2008.
Cities Experience Dramatic Increase in Residential Construction
In a recently released study, the U.S. Environmental Protection Agency examined building permit activity in the nation’s 50 largest metropolitan areas from 1990 through 2008 and compared the 2003-2008 period with the 1990-1995 period. The study, Residential Construction Trends in America’s Metropolitan Regions, found “a dramatic increase in the share of new construction built in central cities and older suburbs. Specifically, in roughly half of the metropolitan areas examined, urban core communities dramatically increased their share of new residential building permits.”
The fact that central cities and core suburbs are largely built-out from a land-development perspective necessarily implies that this residential building activity is taking place primarily as redevelopment—things like the conversion of non-residential buildings to residential use, infill development on land that has already been subdivided or demolition of older buildings, to be replaced by new housing construction on the same site.
This marked shift toward redevelopment sheds further light on the phenomenon of stabilizing—or even increasing—city populations noted by New Jersey Future last summer, and echoes a key theme of the annual New Jersey Future Redevelopment Forum last month.
A New Jersey Future analysis of building permits at the municipal level (a finer level of geography than the EPA study was able to consider) in New Jersey for the same time periods covered by the EPA study unmistakably produces the same pattern—a resurgence of activity in already-developed places. The eight “urban centers” identified in the State Plan accounted for a substantially higher percentage of total statewide building permits issued between 2003 and 2008 when compared to the early 1990s. And these gains are not limited to the major cities. Looking at all 204 municipalities that were at least 90 percent built-out as of 2002—a diverse assortment of urban centers, older suburbs, standalone towns and shore communities—these places as a group were responsible for 38 percent of all building permits between 2003 and 2008 (and 42 percent of those issued in 2008 alone), a better than three-fold increase over their 12 percent share for 1990-1995.
The resurgence can be seen throughout the state but was most dramatic in what can be thought of as the North Jersey “urban core”: Hudson, Essex, Union and Bergen counties, plus the lower neck of Passaic County (everything from Wayne east) and Middlesex County north of the Raritan River. This group of counties and county segments more than doubled its share of statewide building permits, from 16 percent in the 1990-1995 period to 34 percent in 2003-2008. Not coincidentally, Hudson, Union, Passaic and Middlesex were four of the six fastest-growing counties between 2008 and 2009, a position in which these counties had not found themselves in years—or, in some cases, decades.
No matter how we define “redevelopment” areas, the same phenomenon is apparent: After a long spell of stagnation, New Jersey’s already-built towns and suburbs are showing signs of life, in many cases outstripping the still-undeveloped fringe suburbs in terms of residential construction and population growth. Given that the market appears to be heading in the direction of redevelopment, it is clearly time for New Jersey state agencies and municipal governments to realign their growth policies to make redevelopment the default development pattern for the future.
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For most of my professional life in banking, working on public/private redvelopment initiatives, our cities were disadvantaged because of destructive tax policies. While the increase in residential construction suggests cities have made real changes in how they raise revenue so as not to discourage either population growth or commerce, the truth is that suburban communities have lost one of their long-time advantages — much less costly land and fewer restrictions on development.
Demographics has also shifted in favor of cities, as higher income retirees and others without children find urban living enjoyable.
Still, the financial stability of our cities remains a real issue, as infrastructure (e.g., water and sewer systems) need to be modernized or substantially replaced.
City leaders need to examine how revenue is raised, starting with the property tax. Assessments are universally out of date and assessments as a percentage of market value are inconsistent — advantaging some and disadvantaging others in violation of state law. Moreover, there is an optimum amount of revenue to be raised from the taxation of real estate, an amount equal to the annual potential rental value of each land parcel (exempting buidings and other property improvements from the tax base). A plan to move to a land-only tax base should be developed for implementation over a period of years. The end result would be two-fold: (1) to discourage speculative holding of land for long periods of time; and (2) to encourage highest, best use of locations by rewarding new construction and building renovation. Adoption of the land-only tax base would eliminate the need for government to award controverisial piecemeal tax abatements to encourage development.
The analysis of residential building permits does not necessarily mean that urban centers are “on the rebound” and that this could be extrapolated to any point in the future. The period of 2000-2008 was the period of insane construction because of the credit markets, bundled financial securities, and the unjustified extraordinary increases in real estate prices. Now that people are losing the same homes that were built during this period with many being empty, and the fact of construction companies filing bankruptcy and real estate projects halted in mid-stream, the number of building permits issues is not a relevant factor to judge urban rebound. Downtown Miami is a ghost town with half built projects. Atlantic City construction has stopped dead. Construction activity is way, way down in NJ and does not appear poised to rebound.
Joan, you wrote:
The period of 2000-2008 was the period of insane construction because of the credit markets, bundled financial securities, and the unjustified extraordinary increases in real estate prices.
Ed Dodson here:
Property markets rise and fall in fairly consistent 18-year cycles, driven by what amounts to speculative fever by participants expecting high nominal returns on investment. There were numerous externalities that made the implosion of this property market deeper and global. One such externality was the global deregulation of banking that began with creation of the money market funds in the 1970s and precipitated the bailout of the thrift industry in the United States.
Joan you wrote:
Now that people are losing the same homes that were built during this period with many being empty, and the fact of construction companies filing bankruptcy and real estate projects halted in mid-stream, the number of building permits issues is not a relevant factor to judge urban rebound. Downtown Miami is a ghost town with half built projects. Atlantic City construction has stopped dead. Construction activity is way, way down in NJ and does not appear poised to rebound.
Ed Dodson here:
An Australian market analyst named Phil Anderson produced a remarkable book recently titled “The Secret Life of Real Estate.” In this book he tracks land markets as a distinct component of property markets and notes that land prices are the major stress on regional economies. Skyrocketing land prices force developers to built higher and higher buildings in order to achieve workable profit margins. And, one of Anderson’s observations is that an announcement that a developer is about to break ground for construction of the highest building in a city is an advance indicator of a property market crash on the way (because, of course, the sale of the land to the developer occurs at the peak of the land market).
When the property market crash occurs and a general economic downturn results, there is always going to be a good deal of vacant space in just-completed or partially-completed buildings (commercial or residential). Banks are not able to hold onto these properties throughout the bottom of the economic and property market cycle; thus, when foreclosures mount the properties are sold at fire sale prices. Those banks that were too heavily invested in property mortgages will fail, adding to the number of workers competing for jobs in a contracting labor market. It takes quite a while for building owners to attract new business tenants, even when leasing costs have fallen back from previous heights.
There are measures government could enact to achieve sustainable economic growth, but our system of privately-funded elections, constant campaign fund-raising and widespread lobbying against the public interest all combine against the kind of reforms required.
It’s important to remember that we’re looking at the performance of urban centers (and of already-developed places in general, a larger group than just the big cities) in relative terms, not absolute. When the whole economy tanks, this may take the form of one subgroup performing “less bad” than the state as a whole — which is, in fact, what has happened. The real estate downturn has hurt everywhere, but the redevelopment areas seem to be impacted not as severely. The size of the pie and all its slices has decreased, but the urban centers’ slice of the pie is now bigger in relative terms.
[…] ago, New Jersey Future looked at residential building permit data and found that New Jersey’s urban centers were faring better, relative to the rest of the state, in permit activity over the 2003-2008 period, mirroring a trend […]
[…] Jersey Future has certainly been part of this “drumbeat” (see here, here, here, and here) heralding the urban comeback. So have many national sources, including USA Today and […]