Public Comment

Attached below is a dialogue I recently had with my grandson about “Smart Growth”.. He had written to me critiquing some of the points I had made in my latest Daily Planet letter. He raised some objections and questions others have raised, so I responded in some detail. I hope you will find this "inter-generational dialogue" of public interest. 

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Hello Grandson Sam, 

Thanks for your very good comments. The piece I wrote was originally just an off-the-top-of-the-head email to a correspondent who posed a bunch of questions. It wasn’t meant to be an article, but after I wrote it I thought, “why not just send it to the paper and see what happens!”. So, it was a bit incoherent—but it nonetheless generated some reader reaction—which was the objective. Now, to the several questions you raised in your email: 

 

Q. 'I find intriguing your argument that the desirability of an urban area increases with the extent to which it harbors high-rise buildings. Based on my experience with apartment-hunting, and on that of numerous peers, I would counter that an apartment/condo's desirability is more strongly correlated with an array of other urban amenities (e.g. proximity to bars, affordable shopping and public transit) rather than with the character of the skyscape itself. After all, few people (especially my age) are going to be willing to pay premium prices to live in a commercial downtown area that offers few recreational attractions. San Francisco certainly seems to be attracting people in unprecedented numbers, but I think the drivers of this attraction are more complex than the city's skyline. Specifically, it has more to do with the allure of finding easy(-ish) employment in the lucrative computer programming industry. "

 

A. High rise RESIDENTIAL structures downtown help create density, and thus the cultural amenities that you mentioned, and that people look for. When I worked in Dallas as Director of International Affairs for the city we had high-rise BUSINESS structures but we lacked high-rise residential structures,and the city was dead at night. We worked to attract high rise residential structures. This was a successful endeavor. “Smart Growth” was a good strategy in the Dallas context. Dallas has lots of cheap land. It has lots of room, and reason, to expand—both outward and upward. But San Francisco is not Dallas. Also, concerning potential purchasers, these San Francisco structures are not intended for beginning professionals at your level. They are "luxury units” specifically intended for upper-income renters/buyers—many from overseas. In sum, the problem is that in San Francisco, and Berkeley, we are terribly land-scarce and adding more people and density to the mix just aggravates terrific existing problems of price, gridlock, and environmental degradation. The reasons people come here are complex, as you say, but high-rises are certainly one of the important drivers of demand. After all, high-risers create excitement. Why else does Dubai, where there is plenty of land to expand outwards, build the tallest residential structures in the world in the center city—even though they are at the same time starting to create gridlock on their freeways as commuters/ suppliers try to get into the central city. 

Q. "The argument about demand elasticity is good, but its precision could perhaps be enhanced. You say that demand is inelastic (i.e. it doesn't change) in response to an increase in average rent prices. However, you go on to suggest that the Bay Area is unique in that an increase in rent (presumably due to the construction of these luxury high-rises) actually leads to an increase in demand for said apartments and their accompanying "vibe" (if I have understood correctly). Technically speaking, in this case price is highly elastic with respect to demand, but in a negative fashion (since demand increases with price)." 

 

A. The demand elasticity argument is a bit complicated, but I’ll try to clarify—at least as it works in the San Francisco context: In SF they build more high-risers, throwing more floor space on the market—but they price this new, luxury floor space at ever higher levels. If there were a constant level of demand for SF floor space then the price that these owners could demand for this space would be seen as unrealistic—and wouldn’t sell, and over time would tend to fall. Simple law of supply and demand. This is the argument of the smart-growthers—that more supply will have a moderating effect on affordability for everyone. This argument probably is true for Wichita, Kansas where there is not a great, bubbling demand to be downtown—i.e. where demand for floor-space in the overall area remains relatively constant. In this environment, there is demand-price elasticity. People will only agree to buy the new space if the price is consonant with existing levels, or even dropped, given that the new space is flooding the market with new supply. But in SF, and potentially Berkeley, the demand for this downtown space is not elastic—it doesn’t respond negatively to asking price in relation to supply because wealthy buyers in this tech saturated area, and from overseas, are prepared to pay almost any price just to get to the “heart of the action”—to the “vibe”, and a key “icon” of this vibe is the residential high-rise. And foreign buyers believe this even more strongly. High wealth individuals all over the world—in the Middle East, Russia, China etc. etc. see hugely tall, residential high-risers as a symbol of success and wealth. To have a penthouse on the top floor, or an apartment on almost any floor, of one of these monsters means you have arrived. 

 

Q. "I would caution when attempting to directly associate high-rise construction with rent increases. After all, average rents in San Francisco have been growing outrageously on their own. If these planned "smart growth" buildings are simply satisfying this demand, who is to say that they're accelerating the increase in rent relative to what it would have otherwise been? I think what you're getting at is more along the lines of: these new luxury buildings aren't going to do anything to stem the recent and ridiculous growth in rent prices. Instead, they could end up perpetuating it, which nobody wants (except maybe developers). "

A. I would agree with your comment that “after all, average rents in SF have been growing outrageously on their own”. True enough, but the point is that High-risers just help bump this to a new level. Instead of being a partial solution to the problem, as smart-growthers argue, they are actually dumping more fuel on the conflagration—for the reasons described above. 

 

Q."Your point about "absentee ownership" is interesting, although it seems a little incongruous with the rest of the discussion. After all, why would these wealthy Chinese businessmen (who by definition rarely stay at their apartments) be so concerned about how many skyscrapers are visible from their windows? Perhaps these are the buyers whose demand is price-inelastic, since they'll pay for a place to park capital regardless of price. But we don't necessarily know that they're the same buyers who will gravitate the most toward the new units created by smart growth development. If they're truly absentee, their perception of the city's "vibe" is likely only weakly correlated with proposed smart growth strategies. "  

A. The Chinese buyers buy into these buildings for a variety of reasons: The apartments may be parking lots for capital, better for investment speculation than negative interest return Swiss accounts;; they are occasional second-homes; they are vacation pied-à-terres; some are going to AirBnB; some are for offspring attending college, etc. etc. There are many, many reasons why they find these high-risers VERY attractive—but they do. 

Q. "I found the discussion of the other factors (e.g. drought, fires, Dodd-Frank) stimulating yet a little misplaced in this piece. You rightfully suggest that these factors will contribute to the real estate bubble's inevitable burst, but the implication of this is that virtually all development in the area (not just "smart") is inadvisable. This may be true from a long-term investing perspective, but I'm not sure that it furthers the debate surrounding the nature of optimal urban planning practices for the next few decades. (Also, I found myself wanting more details regarding your Vancouver example, since I'm not very familiar with the city.)"  

 

A. My cautionary note about the economy was meant just as “an anchor to windward”—in nautical terms. Right now, we’re in a rapidly expanding, classic, fiscal and economic bubble. I do not believe the time horizon for this is “the next few decades”, as you suggest. I believe it is much. much closer. This doesn’t mean, however, that I am against all real estate construction in the Bay Area as a result of this prediction. I wouldn’t be involved in downtown, mid-rise construction of apartment buildings if I felt otherwise. I simply feel that urban planning needs to take a cautious approach. If we hit a really severe recession, vacancy rates in half empty, luxury high-risers have a much greater impact on the local economy, and city budgets, per square foot of floor space, than on far smaller, low and mid-rise residential structures. Urban planners need to be Swiss-like in their caution. 

 

Q. "While your last piece discusses a specific proposed development in Berkeley, this article appears to focus mostly on San Francisco. Since the causes and effects of heightened urban development vary between the two locations, I think your argument would benefit from a clearer scope."Your solution of "modest, midrise, in-fill and affordable housing options" is appealing, yet lacking in specifics. I am certainly no expert in urban development (in San Francisco or otherwise) but as I mentioned on our recent call, perhaps one way to strengthen this argument would be to point out opportunities to re-purpose existing, dilapidated buildings in the city (which is exceedingly land-scarce) as a more tenable form of smart growth."

A. My argument applies directly to San Francisco because "the proof is already in the pudding” in that city. But, the same, underlying factors of demand inelasticity are working their way through the Berkeley economy as well . And the question we face, as we are today on the cusp of beginning to build a series of high risers, is: do we want to create the same tsunami of construction here as well, when it clearly is absolutely unnecessary for the future health of our city. We are already, as you propose, re-purposing dozens and dozens of existing, dilapidated buildings in the city—and there is potential for a GREAT deal more of this. We simply don’t need the high-risers to succeed. But the question is: how to wake up the populace in time! 

Keep the informed criticism coming. As you know, I always love a good debate! 

Love, Nonno