Y’all know me for long, rambling posts, so here’s a short one.
Fundamentally, three factors determine where development will go and what type of development will go there:
Government Policy
Government extensively regulates the scope and form of private-sector development, and influences development location through infrastructure, particularly transportation infrastructure. For instance, HCTRA builds the Westpark Tollway, and in turn the vacant swath of land between Cinco Ranch and New Territory becomes developable. On the regulation side, Houston doesn’t have zoning, but it does regulate street width and alignment, building placement, parking, and street network geometry.
Market Forces
The most obvious one – “what people want.” But what do people want? For my own purposes I typically dissect this into homeowner-driven desires and trend-driven desires. Homeowner-driven desires are lifestyle specific, and are usually constant across the decades, such as “I want a big yard” or “I want to be close to retail.” Homeowner-driven desires are heavily tied to demographics, so changes in homeowner-driven desires can be predicted based on changes in family size and makeup. Trend-driven desires are more difficult to predict, and are the result of a few intersecting factors:
— 1. The vast majority of homebuyers do so with the aid of a Realtor
— 2. US labor mobility means that the average home turnover is something like four years
— 3. From #2, homebuyers have an incentive to purchase something they believe will be attractive to other people, specifically future buyers, and
— 4. From #1 and #3, homebuyer preferences will reflect Realtors’ understanding of what’s “hot” or “trendy,” i.e., what will hold its value in the future.
Trends and individual desires combined create the market forces that drive development. But there’s another factor.
Developer Conservatism
This is the one I see missing from all the analyses and the think-tank reports. The public perceives real estate developers as a group of rich fat-cats, a perception that some developers intentionally cultivate for advantage in negotiations. But the truth is that developers as a class are an inherently cash-poor lot. Everything you see is built on layers and layers of credit. And real estate – any real estate – carries with it so much inherent risk that the design and layout of subdivisions tends to be as conservative as possible.
Thus it’s really proper to think of the supply of housing types and neighborhood styles as a lagging indicator of the demand for housing types and neighborhood styles. If everyone decided tomorrow that Tuscan was out and Tudor was back in, homebuilders would continue to build Tuscan until there was enough evidence that the trend back towards Tudor was solid. Likewise, if 1/3rd of homebuyers decided tomorrow that they wanted to live in a mixed-use, gridded, somewhat urban neighborhood, developers would keep building “loops and lollipops” exclusively until the demand for mixed-use grids was proven.
Understanding these three factors is the key to understanding why development happens the way it does, because the interplay between the three sometimes yields counterintuitive results. For instance: what would happen if the forces of developer conservatism and government regulation allied themselves *against* the market? This is a question that will be explored in the next blog post.
6 responses so far ↓
Brian Phillips // June 22, 2009 at 11:14 pm
Your identification of three factors is interesting, but I think it is flawed. While I would agree that many developers lag the market, there are some–the true visionaries–who anticipate the market.
For example, Randall Davis (I have no connection with him) anticipated a demand for downtown housing and renovated the Rice Hotel. He was the visionary who started a trend that others then followed.
If developers truly lag the market, how do consumers express their changing desires? Somebody has to anticipate these changes and satisfy them, and then the market sends new signals to other developers when consumers respond to the new offerings.
keephoustonhouston // June 23, 2009 at 4:20 am
…and that’s the paradox. Because if *every* developer takes a wait-and-see approach, housing options will never change. But once even a single forward-thinking, risk-taking developer has shown an alternative development type to be sufficiently profitable, many more will follow.
Supply lags demand because there are many, many more developers doing what’s “tried and true” than there are taking a “shot in the dark.”
TheNiche // June 24, 2009 at 12:21 am
Developers are themselves not conservative at all, although you’re typically correct in that they’re very cash poor. They will build anything for which they can get a lender to give them money. The crazier and more expensive, the better. But it isn’t just attributable to their massive egos, either–it’s because they charge a fee to their equity partners based on the cost to build the project. That’s the developer’s bread and butter.
The true source of conservatism are the banks, insurance companies, pension funds, and other big-name sources of debt and equity financing.
Mathieu Helie // June 24, 2009 at 1:49 am
There is one aspect missing in your model. Who owns the neighborhood after it has been developed? People take it for granted that the local government takes control of it, but to say that implies that it is not at all a “private sector” urbanization, but a government-contractor urbanization. The terms of the contract are that the developer pays himself by selling buildings financed by banks, and builds infrastructure to the government’s specs that they will take the responsibility for. It is no more a market than the private-sector arms industry.
keephoustonhouston // June 24, 2009 at 5:40 pm
That’s an interesting way of looking at it Mathieu. I put government policy as the first factor because I think it’s the most dominant – “growth management” plans everywhere from Maryland to Portland, Oregon have proven that when the government puts all its effort into combating market forces, it usually wins.
But I think that the developer-as-defense-contractor model applies better in more restrictive locales. For instance, in many cities I’ve worked in on the West Coast, it is required that all lots front a public street. Thus all streets comply with the specs set by the government. In a city like Houston, developers can (and often do) bypass that requirement by serving lots with PAEs. Granted that these *also* have standards, but it’s generally the bare minimum required for fire truck access, which I can’t argue with.
Sewer/water/gas infrastructure is another matter, but since that’s buried under ground people aren’t conscious of it. To the extent that utility standards influence subdivision design, they tend to make streets more straight – since bends require manholes, and manholes represent the biggest utility expenditure for the developer.
Neil // June 25, 2009 at 6:33 am
Interesting to keep track of circumstances when a proven concept nevertheless lagged, like mixed use from 1998 til 2004-5:
http://houstonstrategies.blogspot.com/2007/04/randal-otoole-on-houston.html