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The Economics of Smart Growth

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by Roy R. Pachecano

_economic_trendThe economics of smart growth, as with most every industry sector, is highly dependent upon the availability of liquidity to the market place. For small businesses engaged in the smart growth sector in home building and development, capital for investment has disappeared, or has followed a different path in the United States. My educated guess, tempered with on-the-ground-experience, tells me both scenarios may have merit.

In the first scenario, it is widely understood that banks are no longer underwriting the types of deals they were financing five years ago—and why should they? The American public, still stunned, numb, in the aftermath of the single-most catacylsmic financial event in a half-century, is beginning to move away from the American Dream embodied in the form of cul-de-sacs, gated-communities and energy-loser dwellings. Why would lenders be willing to underwrite more of the same development that hastened the housing meltdown? Rare is the lender who is willing to underwrite the same type of development pattern that places houses further and further away from centers of employment, connectivity; isolated from the community and built to ‘keep out’ rather than be magnets for economic development. The first scenario lacks sustainable underwriting and therefore is likely, long-term, to die a slow death by decreasing demand.

In the second scenario, the movement of capital, I opine, has sought smarter corners of development. This different path of underwriting is turning to inner-city precincts in every major city in the United States. Spurred in part by federal stimulus for creating awareness of our inner-cities, public and private sector municipal investments are creating the new blueprint for the next generation of development. Private sector lending is witnessing a resurgence in downtown development—but still cautious, coming in only after a municipality invests in new bicycle stations, linear parks and urban renewal programs comparable to the magnitude we witnessed in the late 1960s.

Proponents of the New Urbanist model of housing and commerical development argue the economics for this type of development is not only more sustainable, but favors a healthier bottom line for all parties involved: municipality, developer and end user. If this pattern of development is exemplary and profitable, why then, has not more development ocurred? Many new urbanists planners agrue the overarching hurdle remains zoning—either “form-based” zoning that encumbers development, or conversely, the lack of foresight by muncipal and local authorities to leave old patterns of planning models on their ordinance platform is the single most adverse impact going against wide-spread adoption. Perhaps, but I contend zoning alone is not the deterent, nor are municipalities who are lax to update zoning ordinances primary villans. In Jonathan Levine’s new book, “Zoned Out Regulation, Markets, and Choices in Transportation and Metropolitan Land-Use,” the author points out that market pressures  create the demand: affordability and lack of options drive the suburban sprawl machine.

Unsustainable economics eventually catch up to unsustainable development. Or, as Forest Gump might say: ‘Unsustainable is as unsustainable does.’ It has been well documented by HUD, the Urban Land Institute and corrobrated with the Case-Shiller Index, that the vast majority of housing values that collasped occurred in the spawl sectors in the fringe arena of suburban land. Since 2007, the national banks have generally rejected the underwriting of the development patterns of yesteryear. When was the last volume/production community opened in your town with fan-fare and marketing gala? For most readers, it it hasn’t happened in this new decade.

Returning to “Who is lending?” This question may be replaced by asking “What kind of project-type is lending attracting?”  By focusing on the ‘what’ instead of the ‘who,’ we may benefit from clarity arising out of the housing product itself. Banks will be seeking to lend on new sustainable development in old neighborhoods. They recognize developers will not have the added risk of having to build infrastructure. And, smart growth proponents may be wise to emphasize the market advantages of smart growth policies: less transporation stess which equals more accessibility to a diverse segment of buyers.

Sustainable development loosens market restrictions that should not be held to the same burdens of proof other unsustainable projects are subjected to simply because of their age or pre-existng conditions. Many of these inner-city neighborhoods fall in a new land use concept called an Urban Growth Boundary (UGB). One of the best known UGBs surrounds the metropolitan area of Portland, Oregon, where a mix of “market-restricting” and “market-enabling” legislation create demand. Market restricting requirements allow municipalities to permit higher densities and a mixture of uses around transit stops. According to Levine, both market restricting and market-enabling legislation is a critical element of any UGB.

Banks lending on projects in your nearest UGB?  Answer: You bet. More likely than the sprawl projects that make lenders hide.

About the Author: Roy R. Pachecano is a Sustainable Business Program Manager for the Institute for Economic Development at UTSA--a US Department of Commerce/Economic Development Administration program designed to bring awareness of sustainable practices to the marketplace.

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