U.S. Cities Are At A Crossroads

[M II A II R II K]

U.S. Cities Are At A Crossroads


July 5, 2021

By Noah Smith

Read More: https://www.bloomberg.com/opinion/ar...-in-u-s-cities

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U.S. cities have arrived at a crossroads. Explosive growth in the South and Southwest, heightened awareness of inequality, an aging population and technology that redefines transportation and buildings are changing priorities for development. Like never before, Americans have an opportunity to ask themselves how and where they'll live over the next few decades. The past century has brought two huge changes in urbanization in the U.S. The mid-20th century saw the expansion of the suburbs, increasing auto dependence and an evacuation of affluent residents from urban cores. Then, beginning roughly in the 1990s, there was a move back to cities, especially by highly paid knowledge workers.

- But this urban revival, driven by clustering in industries like technology and finance, was generally not accompanied by enough housing and transit construction to accommodate all the new arrivals. The result was skyrocketing rent, with landlords and incumbent homeowners profiting handsomely, and working-class Americans exiled to city fringes where their commuting options were limited. — Meanwhile, the suburbs kept right on building up through the middle of the 2000s. Houses got larger as the exurbs spread farther from city centers and commuting times rose accordingly. That process seemed to hit its natural limits in 2007 and 2008, when the housing market crash sent construction plummeting. — Exurban development is limited by commute times, while urban cores have become unaffordable because of NIMBYism's chokehold on new housing. And now the pandemic has unleased new forces to disrupt that uneasy equilibrium. The rise of remote work, in particular, promises to allow at least some knowledge workers to live outside of expensive city centers.

- Pro-housing movements are springing up across the country. In Minneapolis and in the state of Oregon, these movements won their first big victory, bans on zoning laws that restrict neighborhoods to single-family homes. Now some California cities are following suit. There’s even talk of action at the national level: President Joe Biden’s infrastructure proposals include handing out money to cities that end the historically discriminatory practice of banning multifamily residences. — So what would denser U.S. cities of the future look like? Those who fear density often imagine so-called “Manhattanization” forests of gleaming towers rearing into the sky. But while these do occasionally get built, the vast majority of new housing won’t look anything like a giant futuristic hive. That's because most people in the U.S. don’t live in dense city centers where such towers make economic sense. Much new housing will come in the form of low-rise apartment buildings.

- You can expect subtler variations on America's existing single-family landscape. Duplexes, fourplexes, accessory dwelling units, townhouses and small, house-sized apartment buildings are all ways to fit far more human beings into existing neighborhoods while retaining the general feel of single-family housing. They represent an appealing compromise between the natural human desire for more living space and the need to live cheaply in neighborhoods that are relatively close to retail and offices. — This so-called “missing middle” housing might not seem like it would add much, but it could give density a huge boost if states simply allow it. Despite high-profile battles over housing in New York City and San Francisco, most of the places that need higher density are the sprawling suburbs. Those places could easily increase density by 50% by adding more middle housing, an enormous increase in supply for relatively little change in neighborhood character.

- Most importantly, middle housing is far easier to get past the NIMBYs. Indignant homeowners may rally against a big new apartment complex, but will be effectively powerless to stop a flood of new duplexes and townhouses. Thus, for political reasons if nothing else, it’s clear that modified suburbs full of middle housing are in America’s future. — How people travel between their homes and work, retail and leisure is another key aspect of any city. Despite the many drawbacks, most modern American cities are built around the automobile. Changing the country to a train-centric landscape like Japan is both politically and practically a nonstarter; it would require tearing up and rebuilding too much existing infrastructure and housing. So cars and roads will continue to be Americans’ main transportation option. Technology, however, will drive some important changes. While everyone is waiting for self-driving cars to arrive, there's been a subtler revolution: the arrival of electric scooters and e-bikes.

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[jd3189]

A paradigm shift is gonna happen, no matter what.

[JManc]

Don't you ever post stuff about Canada? You know...the country you actually live in?

[sopas ej]

Originally Posted by JManc

Don't you ever post stuff about Canada? You know...the country you actually live in?

I've asked him that some years ago, and don't recall ever having gotten an answer. My question was more like "Why do you constantly post stuff about the US?" and I got chastised by some other poster.

[jmecklenborg]

The "missing middle" isn't going to save us. Banks won't finance its construction because small multifamilies don't make money because their management is inefficient compared to larger multifamilies.

Minneapolis legalized triplexes in 2018 and nothing has happened.

[Steely Dan]

I feel so lucky to live in a city that has ass-loads of this mythic "missing middle" housing.

It's not a goal or an aim in Chicago, it's just how our town got built a century ago.

Normal shit that apparently isn't actually all that normal in the outside world.

[mhays]

Originally Posted by jmecklenborg

The "missing middle" isn't going to save us. Banks won't finance their construction because they don't make money because their management is inefficient compared to larger multifamilies.

Minneapolis legalized triplexes in 2018 and nothing has happened.

Of course banks will, if things pencil. The missing middle is hard to scale up in many cases, but cities with high growth pressures do get a fair amount of it. The concepts work.

Of course we're talking many concepts -- townhouses, attached accessory units, detached accessory units, small garden apartments, three-flats, and so on.

[Camelback]

First thought when I read the thread title:

• Video Link

You have to play this song while reading through the thread.

[jmecklenborg]

Originally Posted by mhays

Of course banks will, if things pencil. The missing middle is hard to scale up in many cases, but cities with high growth pressures do get a fair amount of it.

The bank is not going to lend you the money to build a 2-4 family building unless you have an established a history as a landlord. If you are an established landlord, you're more than likely trying to sell your small multifamiles and and consolidating your operation into a single 20+ unit complex. It's way cheaper to manage and maintain 20 units in a single building as opposed to five fourplexes or 10 duplexes.

Here we also see why there aren't many buy-and-hold developer/property managers - the whole business is usually separated into developers and buy-and-hold investors. A developer builds or renovates a building, gets it leased, then sells quickly to buy-and-hold investors who hire professional management. They are two entirely different businesses with two entirely different financial situations.

Think of the issue from the bank's perspective - imagine if Boeing not only built the planes but also ran an airline. That's conceivable (although probably not legal). But what if you - yes, little 'ol you - asked to borrow a million dollars to build your own airplane and then fly your own routes. And you've never done this before.

Asking the bank for $1 million to buy land in Chicago or Philadelphia or LA and then build a 4-unit building that you're then going to manage yourself is the same thing as my above example.

Why would the bank take on this risk? And why would an established developer bother with a tiny 4-family unless it's in an ultra-luxury location?

But hey, Citylab, etc, get tons of clicks for promoting the "missing middle", so here we are.

[xzmattzx]

Aren't cities always at a crossroads?

[mhays]

Originally Posted by jmecklenborg

The bank is not going to lend you the money to build a 2-4 family building unless you have an established a history as a landlord. If you are an established landlord, you're more than likely trying to sell your small multifamiles and and consolidating your operation into a single 20+ unit complex. It's way cheaper to manage and maintain 20 units in a single building as opposed to five fourplexes or 10 duplexes.

Here we also see why there aren't many buy-and-hold developer/property managers - the whole business is usually separated into developers and buy-and-hold investors. A developer builds or renovates a building, gets it leased, then sells quickly to buy-and-hold investors who hire professional management. They are two entirely different businesses with two entirely different financial situations.

Think of the issue from the bank's perspective - imagine if Boeing not only built the planes but also ran an airline. That's conceivable (although probably not legal). But what if you - yes, little 'ol you - asked to borrow a million dollars to build your own airplane and then fly your own routes. And you've never done this before.

Asking the bank for $1 million to buy land in Chicago or Philadelphia or LA and then build a 4-unit building that you're then going to manage yourself is the same thing as my above example.

Why would the bank take on this risk? And why would an established developer bother with a tiny 4-family unless it's in an ultra-luxury location?

But hey, Citylab, etc, get tons of clicks for promoting the "missing middle", so here we are.

First, you're talking a single segment of the missing middle. I listed several. Most aren't apartments...they're accessory units, townhouses, and so on. Actually apartments aren't in my definition of missing middle at all...the idea is housing that's neither full-sized house nor multifamily.

Townhouses tend to be sold as houses, without condo arrangments except for minimal common areas and shared infrastructure. Some are fully detached. Depending on the location that's a big advantage in avoiding collective liability risk. My city has thousands of new townhouses built 3 or 4 at a time. One hotspot.

Accessory units can be managed by a resident or a management firm. I don't have stats but I bet most go the informal route. When the laws liberalize (more than Minneapolis for example) they do get built, though the numbers might never be huge.

Yes it's tough to make small multifamily pencil. In my area, defect liability and cost/risk/reward make townhouses easier in low-height multifamily zones. But raise the height limit a couple stories and apartments proliferate. The big key is not putting in much if any parking, since that can be a physical limitation on a small site. In a walkable/transit area, you can easily do 40 studios on a 7,000 square foot site, which gets to your economy of scale point. But thats not missing middle.

Anyway, this stuff is getting built in many cities.

[jmecklenborg]

Originally Posted by mhays

My city has thousands of new townhouses built 3 or 4 at a time. One hotspot.

A lot of that has been going on in Nashville (a strip of new single-families built perpendicular to the street or four homes in a 2x2 pattern where one stood) since they changed the zoning around 2010. Unfortunately, the form is often super-ugly, and the developers go cheap with the exterior materials despite the high cost of the homes. Over 50% of some neighborhoods have been torn down and replaced by narrow row homes:
https://www.google.com/maps/place/Sp...!4d-86.7432738

Almost every structure in the Great Lakes area where I live has a basement, which means they have a built-in ADU waiting to happen. That is not the case in Middle Tennessee, where the bedrock lies just below the surface, and basements are rare.

Many of the small multifamilies where I live in Ohio have basements that could be turned into additional units. You sometimes see one, but the market is not so intense as to have motivated many of them. Also, the banks consider a four-unit to be a home and so will do a conventional mortgage whereas a five-unit is a commercial structure and requires a commercial loan. This means a higher down payment and much more scrutiny. So building a fifth unit in the basement actually makes the building more difficult to sell. It cuts out all of the small landlords and the big guys don't want to bother with something as small as five units.

Originally Posted by mhays

The big key is not putting in much if any parking, since that can be a physical limitation on a small site

No kidding. You can see that in West Hollywood and many areas of LA they were forced into the building patterns we are discussing back in the immediate postwar decades. You see tons of apartments built on a concrete pad over a surface lot. This is a recent example of such an approach in Cincinnati:
https://www.google.com/maps/@39.1337...7i16384!8i8192

Buildings of this size are rarely built in the Midwest, as I mentioned above, because investors don't want to screw with small and mid-sized multi-families. This is an exception because it's next to a university.

Around the corner we see a rare example of a 21st century triplex - all of the adjacent homes are gone and this owner is holding up progress on what will be a mega-development:

https://www.google.com/maps/@39.1344...7i16384!8i8192

[Steely Dan]

Small unit count multi-family can definitely still be funded and built in cities where the existing culture and construction industry are accustomed to it. I wouldn't be able to count the number of brand new 3- & 6-flats that have been built in my neighborhood over the past handful of years.

But the people and banks of Chicago are VERY used to this housing typology from a 150 year history of building it, so there's no aversion to it. In other markets where this typology is more unusual, I can see it being a tougher hill to climb to get one funded

[jmecklenborg]

Originally Posted by Steely Dan

But the people and banks of Chicago are VERY used to this housing typology from a 150 year history of building it, so there's no aversion to it. In other markets where this typology is more unusual, I can see it being a tougher hill to climb to get one funded

Many mid-sized and small cities don't have many or any local banks left. The varied built character of U.S. cities is partly a reflection of the history of a particular city's local banks.

Does Wells-Fargo treat its San Francisco customers differently than those in Charlotte? Does BOA treat its Charlotte customers different than those in San Francisco?

An old guy from my city told me about when he was starting in business each ethnic group had its own bank with its own skyscraper. There was the Protestant bank, the Catholic bank, the Jewish bank, etc. It had big advantages over our current "equitable" system because you could cultivate a relationship with the bank over the course of your business career that is impossible today.

[mhays]

If a business model pencils well enough and the team is solid, lenders will come. It doesn't have to be banks. And everything changes with some good equity on the team. It would be accurate to say that lenders lag developers, and can take a while to leap into new concepts.

Yes local or regional banks exist even in small cities. They're just not very big.

PS, wouldn't a four-unit project be four homes? A home is any living unit.

Those Nashville houses are narrow, but they're not really that small of lots....something like 4,300 square feet. And two freaking parking spaces each.

[jmecklenborg]

Originally Posted by mhays

PS, wouldn't a four-unit project be four homes? A home is any living unit.

No. A 2-4 unit rental, anywhere in the United States, can be purchased with the same conventional mortgage, FHA, or VA loan as a single-family home.

It's been this way for decades, probably since the 1960s. You can buy a 2-4 unit building with a 3.5% down FHA loan, live in it for a year, then keep it and buy another at least 100 miles away and keep repeating the process. Some people have built real estate empires with this loophole.

https://www.etftrends.com/advisor-so...our%20expenses.

[mhays]

Originally Posted by jmecklenborg

No. A 2-4 unit rental, anywhere in the United States, can be purchased with the same conventional mortgage, FHA, or VA loan as a single-family home.

It's been this way for decades, probably since the 1960s. You can buy a 2-4 unit building with a 3.5% down FHA loan, live in it for a year, then keep it and buy another at least 100 miles away and keep repeating the process. Some people have built real estate empires with this loophole.

https://www.etftrends.com/advisor-so...our%20expenses.

Not what I'm talking about. If it's four units, it's four homes. This is about terminology.

[GreaterMontréal]

All you have to do is implement a law that imposes a threshold of density in new developments. In Greater Montréal, from 2011 to 2019, 41.3% of housing units were built in TOD areas. There are 159 TOD in the metropolitan area. The objective for 2031 is to reach 60%. Construction of Single-family detached home in Greater Montréal represents less than 10% of new housing, semi-detached house and row-house less than 10%, apartments - condo 82%.

In Laval for example, which is Montréal's largest suburb (pop.450k) , it's also an island, has 3 Métro station, commuter rail and soon the REM. Between 2011 and 2019, the density of dwellings built outside the TODs was 42 per hectare.

[AviationGuy]

Originally Posted by sopas ej

I've asked him that some years ago, and don't recall ever having gotten an answer. My question was more like "Why do you constantly post stuff about the US?" and I got chastised by some other poster.

Commenters from outside the U.S. have a strong presence in the C.E. section, and are welcomed (at least back when I used to look at C.E. at lot).

[jmecklenborg]

Originally Posted by mhays

Not what I'm talking about. If it's four units, it's four homes. This is about terminology.

If it's a four-unit rental, then it's a multifamily. The owner might or might not make his primarily residence in said multifamily. If the owner decides to kick everyone out and turn the small plex into condominiums then it becomes something completely different as defined by the county auditor and the banks. Like, you won't be dealing with the same department at the bank. The dudes you were working with before have never even heard of the guys you're working with now.

The reason why most large projects are single-use is because of the legal/financing complexity. Also, the multiple uses devalue the property when it comes time to sell, because the list of potential buyers is much lower. So while the diversification of a multi-use property (i.e. hotel/condo/office) is attractive in concept, in reality it's a turd.