Cities June 2010

Here Comes the Neighborhood

Conventional suburbs are overbuilt and out of favor. In cities and suburbs alike, walkable neighborhoods linked by train are the future. Here’s how a new network of privately funded rail lines can make that future come to pass more quickly and cheaply—and help reinvigorate housing and the economy.

Americans are not about to abandon conventional suburbs en masse; many prefer them. But demand for walkable urban living is rising, and today supply of that sort of housing is limited. As for conventional suburban housing, the reverse is true. In a 2006 article in the Journal of the American Planning Association, Arthur Nelson of the University of Utah estimated that, based on current supply and shifting demand, the nation may have a surplus of some 22 million large-lot single-family houses by 2025.

Some national home builders are still betting on conventional suburbs. Once the economy picks up, they’re planning to build more McMansions on the fringe, just faster and cheaper than ever before. With the price of existing fringe housing so low, they are hoping to offer competitive pricing by limiting the number of models, simplifying their plans, reducing house sizes, using more vinyl, relying more on factory construction, and shipping prefab housing parts in on a flatbed, so they can assemble some houses in a week. But this strategy may not have much further to go; the difference between site-built houses and mobile homes is narrowing.

“It is very unlikely that new projects in sprawl areas will be financed,” says Jonathan Rose, the CEO of the national development-and-investment firm Jonathan Rose Companies, based in New York City. “Urban areas with diverse transit options and thriving universities are the choice of Baby Boomers and young people.” Mark Falcone, the CEO and founder of the Denver-based firm Continuum Partners, which has experience redeveloping downtowns and dead malls, sounds much the same note: “It is clear that the primary development demand will come from closer-in locations over the next several years,” he told me.

Urban spaces of the kind that people want today feature mixed-use zoning and lots of stores and parks within walking distance. But most of all, they feature good public-transit options—usually rail lines.

Metropolitan voters in recent years have passed roughly two-thirds of all ballot measures calling for tax increases to pay for new or expanded transit. But asking cities and suburban towns, which are now strapped for cash, to shoulder the entire burden of rail-transit investment is not realistic. And in a variety of ways, federal funds have typically privileged road building over public transit. Progress will be slow unless something changes.

This problem has a solution, one that could be borrowed from U.S. history, and that might help our economy get up more quickly off its knees: What if developers and property owners build the transportation infrastructure themselves?

In the early 20th century, every town of more than 5,000 people was served by streetcars, even though real household income was one-third what it is today. By 1920, metropolitan Los Angeles had the longest street-railway network in the world. Atlanta’s rail system was accessible to nearly all residents. Until 1950, our grandparents and great-grandparents did not need a car to get around, since they could rely upon various forms of rail transit. A hundred years ago, the average household spent only 5 percent of its income on transportation.

How did the country afford that extensive rail system? Real-estate developers, sometimes aided by electric utilities, not only built the systems but paid rent to the cities for the rights-of-way.

These developers included Henry Huntington, who built the Pacific Electric in Los Angeles; Minnesota’s Thomas Lowry, who built Twin City Rapid Transit; and Senator Francis Newlands from Nevada, who built Washington, D.C.’s Rock Creek Railway up Connecticut Avenue from Dupont Circle in the 1890s. When Newlands got into the rail-transit business, he wasn’t drawn by the profit potential of streetcars. He was a real-estate developer, and he owned 1,700 acres between Dupont Circle and suburban Chevy Chase in Maryland, land served by his streetcar line. The Rock Creek Railway did not make any money, but it was essential to attracting buyers to Newlands’s housing developments. In essence, Newlands subsidized the railway with the profits from his land development. He and other developers of the time understood that transportation drives development—and that development has to subsidize transportation.

After the Second World War, federally funded highways slowly supplanted this system, creating a windfall for a new batch of developers. One Polish-refugee-turned-real-estate-developer, Nathan Shapell, who owned a large tract of land outside Los Angeles, was approached in the 1960s by the California highway department about the possibility of building a freeway through his property. Shapell was delighted at the prospect—and immediately offered as much land as needed, for free. He also offered to pay for an interchange to get customers to his land. The state official said that would not be necessary; the state would buy his land for the road and pay for the interchange. “What a wonderful country!” he recalled thinking, in a conversation I had with him many years later.

Transit lines, along with other sorts of infrastructure improvements, almost inevitably raise property values—and cities have recently begun to exploit that relationship, funding transportation improvements through the expected increases in property-tax collections. Chicago, under Mayor Richard M. Daley, has extensively used this “tax-increment financing” model of development to rejuvenate itself. In 160 neighborhoods, the city has funded more than $560 million worth of improvements in infrastructure.

But this sort of financing has a limited reach; annual property taxes are only about 1 percent in many parts of the country, so only 1 percent of the upside in rising real-estate values can be captured by the city. The rest is a bonanza for lucky private-property owners (or possibly a payback for smart lobbying). Many of these owners would be willing to pay directly to get these investments under way. A recent Brookings Institution analysis of a proposed $140 million streetcar line in the District of Columbia showed, for instance, that the line would create $3 in land appreciation for nearby private-property owners for every $1 it would cost to build. This is what Senator Newlands found out more than a century ago: transportation drives development, so development can and should help pay for transportation.

How would the private funding of public transit work? Most states already have laws in place that allow local groups of voters to create “special-assessment districts,” in which neighborhood property owners can vote to fund an upgrade to infrastructure by charging themselves, say, a onetime assessment, or a higher property-tax rate for some number of years. If a majority of the property owners believe they would benefit from the improvement, all property owners in that district are obligated to help pay for it. These districts can vote to fund new transit as well (potentially, the transportation-financing agency could even receive a minority-ownership stake in the district’s private property in return for building new transit). In the late 1990s, property owners paid for a quarter of the cost of a new Metrorail station in D.C. using this approach; after the station opened, an office developer told me he believed his investment was being returned manyfold.

However, this sort of private payment for infrastructure is relatively new in the U.S., and is growing slowly. Organizing these communities of course takes time, and cities and towns have barely begun to publicize their potential.

We could hasten the process by making a much-needed change in federal transportation law. The federal government typically provides 20 to 80 percent of the money for local transportation projects (with local and state governments paying the rest). Yet federal funding of projects that involve private partners is extremely rare—in large part because federally funded projects typically take years to approve, and private developers usually can’t tie up their capital waiting for the government wheels to turn. Over the past few years, private corporations and foundations in Detroit raised $125 million to help build a light-rail line, and have been working for some time to secure federal funds to complete the project. Fixing federal transportation law to expedite transit projects would allow faster development at lower public cost.

The encouragement of additional walkable urban development, which all starts with public transit, would have many benefits. Although building the infrastructure that supports dense development seems expensive, in the long run it’s actually much cheaper than conventional suburban infrastructure—at most one-tenth the cost per home. A mile of sewer line costs about the same to build whether it is on the metropolitan fringe or in a densely built inner suburb, but the line serves many more people in the inner suburb. And households in walkable urban areas use considerably less energy, in some instances at least a third less. High-density living even appears to spur faster rates of innovation; in a knowledge economy, ideas come faster and can be developed more quickly when more people can meet and mix easily.

But most immediately, investment in rail, bike, and walking infrastructure, laying the groundwork for developing the kind of housing that is now in demand, is essential if we want to restore the economy to health. In the mid-to-late 20th century, the growth of the suburbs propelled America’s economy. Growth of walkable neighborhoods in cities and suburbs can play a similar role in the decades to come, sparking growth in the broader economy—but only if we start preparing today.

Presented by

Christopher B. Leinberger is a visiting fellow at the Brookings Institution, a professor of urban planning at the University of Michigan, and a real-estate developer.

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