BOOK REVIEW OF FROM BOOM TO BUBBLE: HOW FINANCE BUILT THE NEW CHICAGO

November 14, 2016

 Since at least the 1980s, progressive planners, activists, and neighborhood residents have understood that property development – often very big projects – could hurt ordinary families and the neighborhood organizations that serve them. Activists and neighborhood residents defeated urban renewal, stopped massive highway projects and downtown development plans. But they did not stop the propaganda effect of a continuing rat-a-tat-tat of praise for the image of growth. They identified a “growth coalition” led by real estate developers and a diverse set of other actors. But the myth persisted that construction projects were a “rising tide that lifts all ships” and benefits would trickle down to small businesses, ordinary tenants or homeowners. And so the damage wreaked by development continued.

 

In From Boom to Bubble, Rachel Weber, a professor of urban planning and policy at the University of Illinois at Chicago, goes a long way toward finally demolishing the growth argument by describing the boom and later orgy of overbuilding office towers in Chicago at the start of the 21st century. She presents the real estate cycle as a flawed fable of growth and “market correction," getting beneath the abstractions. She describes the real estate developers, but also the supporting cast: brokers, appraisers, city planners, and financiers (typically "bankers").  The story they tell is one of Chicago’s office construction “boom” and subsequent “bubble” as driven by entrepreneurial risk taking and real demand for space, followed by a necessary correction dictated by market forces.

 

Weber presents an alternative narrative. Chicago’s boom and the bubble were not things of nature, they were “co-produced,” she writes, by the various parts of the real estate industry.  Skyscraper offices in the city’s West Loop gained tenants through the demolition of older buildings nearby, as real estate industry professionals concocted the idea of “obsolescence” in older structures and the superior functionality of the new. It was a race for profits. Developers and realtors won, city hall claimed distinction, and tenants gained nothing.

 

 

WIDER FOCUS

 

While sticking to her case – commercial real estate in Chicago – Weber draws out wider implications. Local real estate depended on national and worldwide capital looking for profitable investments. At the same time, investors had a preference for real estate. One might be tempted to see this worldwide capital preference as the main thing causing the Chicago building “boom” and “bubble.” However, in her research, Weber identifies coordinated pressures: international capital on the one hand, and the remarkable coordination of local interests on the other.

 

Weber notes the absence of and distortions in the public functions of the city. She reveals a process where a speculative frenzy displaces rational decision-making, deliberate planning, and care for the public interest, corrupting the capacity of government and the whole professional establishment. 

 

“She notes the far-reaching impacts of the U.S. housing bubble that occurred simultaneously, which when it imploded, “destroyed an estimated $4 trillion of household wealth” nationwide.

 

However, the real estate industry resisted intervention, counting on the market to right things, and preferring to wait for the next boom. Weber writes: 

 

Businesses, households, and developers are suspended in a time warp as they wait for the cycle to begin again. Ironically, experts and amateurs alike argue that more construction and new financial instruments are the only way to climb out of the economic decline and financial crisis caused by overbuilding and over-leverage.

"Weber notes the absence of and distortions in the public functions of the city. She reveals a process where a speculative frenzy displaces rational decision-making, deliberate planning, and care for the public interest, corrupting the capacity of government and the whole professional establishment."

A BETTER WAY?

 

Is there a better way?  Boom to Bubble deconstructs the real estate cycle in detail and identifies several ways to fix it: “in the face of the public costs that arise from what is individually rational yet collectively irresponsible behavior, state intervention can be justified.” Slowing down the real estate cycle is her main recommendation. To accomplish that, “the public sector . . . can administer incentives or apply regulatory friction to increase the cost of new construction; lower the expected return from new construction; or extend the time horizons of developer-investors.” 

 

Much of this would be supra-local. “Raising the standards of the banking and securities industry would reduce the amount of credit going to projects of dubious market interest.”   The Federal Reserve could play a role in accomplishing this and transaction taxes would help.  She notes that “the relatively low capital gains tax rates of the 2000s (reduced from 28 percent to 20 percent in 1981, and then again—to 15 percent—in 2003) presented no deterrent to transactions.”

 

But the distinct arena of Weber’s analysis is the local level. One of Weber’s contributions is the beginnings of an analysis of the role of city planners in the real estate cycle.  In the text, she lays out the logic and practice of the profession in Chicago. The elder Richard J. Daley, legendary political boss of the postwar “machine,” used his city planners to legitimize what he and developers proposed.

 

His son, Richard M. Daley, who was mayor from 1989-2011, presided over the restoration of the old machine (under new financing and other arrangements), and kept tight rein over the planners.

 

[He] presided over the downtown’s transition . . .through the entirety of the Millennial Boom. Its transformation is often attributed to him alone. . .A former city planner in the Central Area remarked, “There’s really only one planner in Chicago, and that’s the Mayor. The rest of us are just implementers”

 

Despite this history of planning as passive and subordinate to a city hall determined to maximize the role (and profits) of the real estate sector, Weber provides a good list of city hall functions that could – in principle – regulate and improve the public usefulness of that sector and enhance the planning function.

 

First, she argues, localities have the authority to regulate construction and development. She begins with the example of the Portland, Oregon growth boundary, which “. . . encumbers development at the city's periphery while streamlining the permitting process and allowing higher densities within the boundary,” and goes on to mention San Diego, California, Boulder, Colorado and variations on slowing speculative construction booms.   

 

Weber also focuses on historic preservation which represents “place attachment.” By regulating demolitions, it enhances the value of older buildings and has the potential to slow the real estate cycle when historically important buildings are at risk.

 

But regulation, per se, is a negative authority and not popular. However, while historic preservation is often implemented through restrictions on demolitions and construction, it also has a complementary, positive side: higher property values and heightened buyer interest. She suggests “If developers were more interested in rehabilitating buildings with the latest systems and technologies, they would have less motivation to build from scratch, especially during periods of lackluster absorption."

 

Weber then spins out the possibilities if analysis is added to regulation. For example, what if planners tied regulation to analysis of the real estate cycle?

 

Approving permits based on a market's point in the real estate cycle would require local governments to more carefully monitor demographic patterns, demolition activity, price movements, and the new supply pipeline. If they saw early signs of overproduction . . . local governments could limit the subsidies provided to developers during booms.

"[Weber] suggests 'If developers were more interested in rehabilitating buildings with the latest systems and technologies, they would have less motivation to build from scratch, especially during periods of lackluster absorption.'"

More generally, Weber advocates motivating developers to be more thoughtful: “Most property owners already plan for the future on an ad hoc basis;” and proposes the city “[formalize] future thinking through life cycle and reuse planning . . .”

 

 

IMPLICATIONS FOR PRACTICE AND POLICY

 

Future changes to the real estate cycle will have interesting implications for city planners, developers and other industry actors, including appraisers, brokers, financiers. Weber’s discussion of the multi-scalar nature of real estate markets, from macro-economic policy down to the local level, underscores the fundamental dilemma: real estate is not an isolated sector and one city cannot change independently of the whole nation. 

 

To her credit, Weber knows the problems.  Historic preservation provides an example: “Preservation policies will be ineffective, however, if the other dynamics propelling new construction remain intact. . . [Preservationists] would do well to move beyond site fights over individual buildings and esteemed architects to educate themselves about the drivers of new construction that result in specific submarkets and structures becoming threatened in the first place.”

 

She provides a fascinating set of ideas for slowing down the cycle. There is the implication that local policies can help “developers…think like planners” by requiring “new-build developers conduct impact studies for all construction over a certain size, “ giving time for developers to think about longer-term effects.

"Future changes to the real estate cycle will have interesting implications for city planners, developers and other industry actors, including appraisers, brokers, financiers."

Weber provides a cautionary note, highlighting the lack of political will to regulate the market: 

 

Unfortunately, most municipalities lack the capacity for such planning or, like the City of Chicago, cannot be bothered to adjust permissions and subsidies to market conditions. Asked about the prospect of regulating permits, one Chicago administrator responded, "Why would our market analyses be any better than the ones developers commission?''

 

Weber ends up ambivalent. She has described an industry that has remarkable power to shape the economy, sharing a determination with significant business and public leaders to resist external interference, and yet seems unable to exert responsible stewardship.

 

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