Economic and Political Challenges of Stranded Suburban Commercial Real Estate Assets
This transition is going to be hard, much harder than the last big one.
As retail stocks get pummeled again today it feels like we’re one step closer to the majority of the country’s malls being functionally obsolete, with many of them on the way to becoming “stranded assets.”
We’ve been through this transition before.The last time this happened, when we transitioned from walkable downtowns and Main Streets to booming suburbia, before sprawl was a dirty word, the politics were relatively easy. There was a lot more growth in the growing places than there was decay in the declining places. The Atlanta metro area is roughly 6 million people while the city of Atlanta’s population is around 450,000. If the city of Atlanta stagnated it didn’t matter politically, because the people in the much larger suburbs were pretty happy and had more votes. And the percentage of the nation’s infrastructure stock that was obsolete was becoming a smaller and smaller percentage of the nation’s total infrastructure stock.
A market libertarian would respond by saying that once the ground lease drops low enough people will move back in.
(This point, by the way, is something that I see discussed virtually never in the context of minimum wages. My understanding is that most minimum wage workers work at an institution that also pays rent. If wages are going up and the community can’t tolerate increased prices, then rents have to drop.)
That said, commercial real estate is full of inefficiencies and collateral impacts. One closed store can hurt a much larger area.
As to how to respond, (a) do nothing and let the market work it out, or (b) get the government involved. Create Business Development Districts and raise taxes on the whole business community to fund cleaner streets and increased police presence. Use redevelopment laws (not available in California) to condemn blighted property and move it to a willing buyer. Get the federal government to increase enforcement of the collection of sales and use taxes by internet sellers. Get city, county and state government to move to a tax system that reflects the current economic reality.Report
Or landlords just rent to businesses with higher margins.
The whole notion that our choices are to “do nothing” or do what needs doing to solve the problem is spurious. Sure, there are plenty of people who advocate for a free market approach that comes down to “do nothing,” but those people by definition aren’t really part of the conversation. The government is always already involved by default. The accurate free market insight is that incentives matter and that public choice theory is real.
The more you raise taxes, the more people move to lower tax jurisdictions or find ways to deflect and defer tax incidence. The more levers you pull, the more mechanisms there are to break down. The more ingenious schemes you come up with to incentivize certain behavior, the more individuals will do to get around those schemes. The history of cities is littered with big, expensive projects to revitalize urban areas. They generally don’t work out so well for the simple reason that politicians and planners cannot anticipate people’s wants nearly as well as they think that they can.Report
I had this thought as well. Some of it depends on where we’re talking about.
If we’re talking about a low-vacancy area with high-demand, then I would expect businesses with thin margins that are labor-intensive to be replaced with places that are not low-margin or can get by with less intensity.
If we’re talking about a place with low-demand, then it’s possible that rents will fall. But it’s not a given. I mean, units in these places do sit empty for a reason.Report
If that were an option, wouldn’t those high-margin businesses already have outbid the low-margin businesses for that space?Report
How about do nothing in lieu of passing bon bons to real estate interests?
If you’re in a metropolitan zone, one useful amendment to policy would be to change the mix of tax sources. Property taxes promote environmental damage of various sorts, including property abandonment.Report
Francis,
A market libertarian sees fucking opportunity.
Blaise saw the potential for indoor hydroponics — my friends were thinking greenhouses.
“people will move back in” is nonsensical.Report
People will move back in if you do something about the crime and disorder. Take the property taxes off the impecunious neighborhoods, send in extra street crews to hoover up the trash and sandblast the graffiti off the sides of buildings, hire more cops and allow them to do their jobs according to best practices.
As for the suburban zones, condemn their abandoned commercial buildings as hazards, raze the buildings, and auction off the land. The municipal government and the property owners can tangle in court over who owes what to whom given the auction proceeds, the costs of the razing and clean up, court costs, and compensation due for eminent domain seizures.Report
Art,
“People will move back in if you do something about the crime and disorder.”
… bullshit. Absolute and total bullshit.
People move to places because there are jobs.
Pittsburgh’s got a TENTH of the crime rate of Baltimore (pulling murders to cite an example) for half the population, and you don’t see people moving back in much because of “lack of crime and disorder.”Report
People move to metropolitan and micropolitan statistical areas because of jobs. Where people live within those areas is dictated by getting the best schools, lowest crime, and shortest commute to their jobs (in that order) for what they can afford to pay.
(edit, and out of metro and micro areas because of lack of jobs)Report
Get back to me when you learn the distinction between inter-metropolitan and intra-metropolitan migration.Report
Not too long ago on LGM (I think), people were discussing something like this on a thread. Basically most (maybe close to all) suburbs can’t afford upkeep on their infrastructure and that infrastructure is soon due for a severe overhaul. The amount of taxes that would need to be raised is simply too high and people will revolt.
I am not sure what the solution is. Jobs are flooding to a variety of metro areas. Shops and commercial retail seems to thrive in well to do suburbs and cities because the residents place a premium on it. Amazon seems to be more of a drain on communities with moderate economics. The other thing that towns seem to do is turn retail into performance spaces but only so much of that is feasible.Report
Basically most (maybe close to all) suburbs can’t afford upkeep on their infrastructure and that infrastructure is soon due for a severe overhaul.
This is a nonsensical statement.Report
EPA is very good at being nonsensical, I’ve found.
http://triblive.com/news/allegheny/10115306-74/fitzgerald-epa-garvinReport
Basically most (maybe close to all) suburbs can’t afford upkeep on their infrastructure and that infrastructure is soon due for a severe overhaul.
Pot, kettle. Crumbling infrastructure in urban cores — where massively expensive overhauls are long overdue, and can’t be paid for — isn’t a “soon” thing, it’s already here. In all seriousness, name even a half-dozen metro areas where the urban core’s infrastructure and finances are in as good shape as the surrounding suburbs.Report
pittsburgh’s better than the surrounding suburbs.
Probably Detroit, now that wall street’s done bear-baiting.
Buffalo, maybe? (don’t know that much about it).Report
That would be the same Detroit that averages more than one water main break per day? That went through bankruptcy so they could stiff a bunch of their bondholders? That got their bankruptcy settlement approved because they promised to spend $150M per year on infrastructure, but are now unable to raise the cash? Who said — really — that they’d be in much better financial shape if they could actually track property ownership and tax payments, but they can’t afford to upgrade their computers and software so that they can do that? Whose sewer system is going to be improved, but only because they severed ownership from the city and, in effect, the suburbs are guaranteeing the bonds?
That Detroit?Report
Michael,
If wall street’s investing in it heavily, Detroit’s fundamentals are better than they look. It’s easy to make someplace look a good deal worse off than it actually is.Report
Sorry Michael, not buying. Local pols and the civil engineering trade association have been pushing this line for 35 years, and the ensuing disaster seems never to appear. Maybe because it’s all a sales pitch.Report
I’m not disagreeing with you. I’m saying that anyone who asserts that the suburbs are facing an impending disastrous collapse of their infrastructure must also accept that such a collapse will hit the urban cores sooner.Report
The urban cores have a significant reason to be where they are. They are the locus of control of the area, often enough.
There’s no functional difference between one suburb and the next, other than schooling.
So if it’s more profitable to just build build build new suburbs, developers will.
And old suburbs will collapse… (20% vacancy is the number to watch, that’s when you hit death spiral).Report
based mostly on late 19th century transportation technology and the patterns it created for moving around stuff. There’s a large overlap between those patterns, and the patterns induced by late 20th century technology, but there’s wide divergence as well.Report
Truth. but it’ll take a huge drought to kill Phoenix or Atlanta, and anywhere else is even harder to kill without taking the whole metro with it.Report
I can’t speak to Atlanta, but a drought big enough to kill Phoenix? 70% of water diversions in Arizona are used for agriculture, by <5% of the population, generating about 2% of state GDP. When Maricopa and Pima Counties decide to sacrifice agriculture in the state, they can guarantee themselves enough water to survive.Report
The issue is more political–
http://www.latimes.com/business/hiltzik/la-fi-hiltzik-20140620-column.htmlReport
I don’t follow. Large-scale infrastructure is usually paid for by a combination of federal, state and local funds (whether by the developer or by property taxes). Urban cores tend to have much higher valuation and much higher density than the suburbs, which would generate greater tax flows measured on an areal basis.
While the scaling of infrastructure costs to density is very complex and depends a lot on the history of the urban design, I think you have this one precisely backwards.Report
The snarky me says, “Indeed. That’s why the urban cores’ public school buildings are the envy of everyone. And why all those nasty urban combined sanitary/storm sewer systems that dump billions of gallons of raw sewage into rivers and streams every year have all been replaced. And why the marvels of density have reduced urban utility rates to levels well below those found outside the urban core.”
The government budget accountant me says that today, federal funds generally represent a net transfer from rich states to poor ones. Within states, federal and state funds generally represent a net transfer from urban/suburban areas to rural ones. And speaking broadly, knowing there are exceptions, the suburbs get less back for each tax dollar they pay than the urban cores. (Yes, there are effects about net commuting that suggest the suburbs are getting credited for tax dollars that ought to count towards the urban areas. This is much less true than it used to be.)
The historian in me says that urban history is complex. The federal government built massive job centers outside of the urban core during WWII and kept them going during the Cold War. The federal government built roads culminating in the interstates because personal transportation became incredibly affordable and because the railroads forgot what business they were in. White flight happened. Corporate decisions to move out of cities/states where unions were strong happened. I think Kim has a point about percentage of population loss kicking off a death spiral, and that 20% is about right, but that it applies to urban cores as well as suburbs.
The realist me says what is, is. Will the suburbs have to change in the future? Absolutely. Denser, more efficient. Can they become efficient enough? Open for discussion, although I’m confident about some parts of the US (not so much about others). It’s not the first time the ‘burbs will have reinvented themselves. Eg, speaking broadly, the suburbs have left behind being the bedroom communities of Blondie 50 years ago and become engines for job growth.Report
We’re fixing our damn sewers, and yes it’s costing billions to do it!
(see the link i posted to art above).
EPA is riding people hard on that one, and deservedly so.
” I think Kim has a point about percentage of population loss kicking off a death spiral, and that 20% is about right, but that it applies to urban cores as well as suburbs.”
Oh, see, that’s totally wrong. Take Squirrel Hill, where I live — it’s lost 50% of it’s population since it’s high point, and it’s doing just fine. In fact, you’d see a virtuous cycle in housing values, if you just checked (I do check, I live here).
The key thing is that the city is centralized — there’s a strong “reason to live here and not somewhere else” for quicker commuting, if nothing else (and corporations like getting the entire workforce of an area as a potential worker-base).Report
Hey, I know, lets allow old malls to turn themselves into aptment and condos! Use the space as the owners see fit. We can have eficiancy apt’s and lux condos and whatever else the owners feel would be a good use of the space. Or they can leave old malls to die…Report
A better idea is medical use. Given the need for hospitals and health systems to expand into markets to provide preventative and outpatient facilities, a mall may provide an excellent footprint to use for a multi-speciality facility, especially given the common areas in place.
Look up 100 Oaks in Nashville and what Vanderbilt University Medical Center did there. Fascinating stuff.Report
Why does the author think people will stick around a dying suburbia right now if they didn’t stick around dying small towns and city centers a generation ago?Report
Where will people go if they do not live in suburbia? Are we going to see a return to tent living in the United States.Report
Like was said below, they’ll move to wealthy suburbs and gentrified urban areas – and exurbs, depending in what one can afford – just like people moved to the suburbs from the small towns and urban cores.
Abandoned suburban office parks and retail outlets are an eyesore, and not good for the tax base, but they’re not nearly the environmental headaches (and cost) that trying to redevelop old fashioned brownfield former industrial lots are.Report
@kolohe
I think people think it is easier to move than it really is. We are talking about people who might not have much savings and have most of the wealth tied up in the value of their homes. How are they going to afford new places (rent or own) if their housing prices plummet?Report
Immigrants don’t seem to have much of a problem moving from where they were born to where the jobs are.
But even within the context of domestic migration, the outflows are usually only highly visible over the span of a decade, as kids grow up and move out and never come back but for holidays.Report
Lee,
they’ll just build MORE SUBURBS. Duh. Maybe if we’re lucky, more walkable ones.
LAND is cheap, old suburbs are not.Report
Kolohe, are we experiencing a generalized demographic implosion? No, we are not. The number of metropolitan centers taken as a whole experiencing demographic decline is in the single digits (generally 3d and 4th tier cities in the eastern Rustbelt. Demographic decline of rural areas and small towns is a feature of fragments of Appalachia and swatches of the Plains states which never were all that populated to begin with. Your not going to have ‘everyone’ moving to tony suburbs because 85% of the population cannot afford the bulk of the housing stock in tony suburbs.Report
He acts like there *hasn’t* been a now over 60 year secular trend of population stagnation (if not outright decline) in the so-called rustbelt and shift towards the Sunbelt and coastal mega metroplexes. And like there’s already not been a serious decline in the political power of Ohio and Pennsylvania because of this shift. And like if there is an economically hollowing out of Northern suburban american, folks – more precisely, their kids, once they become of age – won’t just simply leave to places where there *is* economic opportunity (even if hella expensive – the two are intertwined) – further diminishing the political and economic power of the places they left. Just like what happened to the inner city in the late mid 20th century, and to small towns from the mid 20th century to the present day and beyond.Report
He acts like there *hasn’t* been a now over 60 year secular trend of population stagnation (if not outright decline) in the so-called rustbelt and shift towards the Sunbelt and coastal mega metroplexes.
There hasn’t been, for the most part. You have localized stagnation and even more localized decline. An example would be New York’s Southern Tier. The thing is, the population of the Southern Tier is about 700,000. For the most part, it is slow growth. Slow growth does not present many problems.
As for Detroit, the decline of the whole has been minimal. What you’ve had instead is a redistribution of population within the metropolitan zone. The reasons for that are weakly related to problems in industry and strongly related to the catastrophic decline in public order in the Detroit municipality after 1957. That wasn’r replicated to nearly the same degree in Buffalo or in Cleveland, which have had on the whole worse problems from industrial shifts but which retain healthier core cities.Report
It can mask a few problems though, mostly commonly, if a population in a location in the 2010 census is about the same as it was in the 1950 census, the population in the 2010 is a *lot* older, which dramatically affects the economics of that area and the public services that are demanded.Report
Cleveland… “the mistake on the lake” a healthier core city?
Dude.
This is a place that people say “don’t go to east cleveland or you’ll die”
… and they ain’t fucking joking.
About the worst I’ve heard about Detroit (and this from minions (not mine) sent on scouting runs), was getting harassed by militia members to join up.Report
I have been reading about this for about 15 years now.
The low density of suburban areas doesn’t generate enough tax revenue to fund the eventual replacement cost of the infrastructure. They can handle the yearly costs (usually) but the large capital expenses for total overhaul is usually beyond their means, because it happens just at the point in time when the suburb is becoming old and undesirable.Report
@chip-daniels
This is what I meant. My question is what makes a suburb desirable v. undesirable. Maybe I am in a minority here because I like older housing vs. living in a new development. Older suburbs also seem like they would be closer to cities for commuting.
I wonder what communities the OP thinks are doing okay.Report
Gentrified urban cores and wealthy suburbs.Report
Low and medium scale retail is doing better in urban neighborhoods than it is in the suburbs. The very economically mixed neighborhood I live in has prosperous retail aimed at all socio-economic levels from bodegas to very expensive clothing shops.Report
No retail is doing as well as it used to. People like shopping online, a lot.Report
Chip, they built the originals, right? Unless the income stream of the households in the suburbs has imploded (and that’s rare for suburban jurisdictions), they can handle the service charges on capital improvements.Report
Wilkinsburg. You saw the news reports.
Penn Hills — you haven’t seen the news reports.Report
“They” built the originals, yes – but on whose dime?
In my city, it used to be that suburban construction was all heavily subsidized by established urban areas. The city collected taxes into general revenues, and paid out of general revenues to build roads, sewers, electrical, fire and police stations, schools, recreation facilities, libraries, etc, in the new areas.
Nowadays they put more of that expense on the developers (developer now covers cost of water mains, sewers, roads, and power), but they can’t shift it all (city can’t get out of funding fire, police, rec centres, libraries, bus service, etc.). Even so the city’s analysis is that greenfield suburban development costs the city more than it can bring in in tax revenue.
The theory I guess was that tax revenue from the new areas would eventually pay for their construction. But either that analysis was never actually done, or things didn’t pan out according to predictions, or the plan was always to subsidize suburban living out of the pockets of urban dwellers. In any case, it has by now become amply clear, in our city, that by the time the infrastructure in the suburban areas needs renewal, the taxes from those areas still won’t have finished paying for their construction and operation in the first place.Report
What analysis has shown, is that suburbs demand heavy subsidy to maintain.
Ironically, dense urban development is not only more environmentally sound, it is financially sound as well. The reason we haven’t see calamitous infrastructure failures in the suburbs is that the suburbs are politically powerful, and can exact subsidies both hidden and overt.
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There was an example of this in my old neighborhood. The mall was essentially abandoned. No one went there. But there was one anchor store. I don’t recall the name, but it was a national chain. Because of it’s financial difficulties it was looking to get out of it’s lease and the mall owner was fighting it. It took several years to work that out. Meanwhile redevelopment couldn’t take place. Once that got resolved, construction started. It now appears much more thriving. Part of the reason is that folks are still moving to the area because housing is more affordable than surrounding counties.Report
Property is constructed, refurbished, and razed all the time. There are several policy problems associated with that, such as eyesores and hazards which result from abandoned property, construction which is functionally or aesthetically ill-fitting in its environment, and tangles over historic preservation. It’s not as if there are not solutions or meliorative processes which can address these problems. Manufacturing yet another social crisis and instituting yet more crony capitalism is not addressing those problems.Report
Hmmm….
How will that budget shortfall be made up if 60-80% of malls go dark?
The author makes two errors: 1) his estimate is way too high and will ensnare B and C quality malls that may not be great performers but have rents at levels where the occupancy costs make sense for retailers.
2) he fails to consider the redevelopment potential of dark malls. It won’t happen everywhere, but if there’s a good population center than can support open-air retail on a former mall site, developers will jump all over it. A dead mall may have no value but that doesn’t mean the land doesn’t either.
Back in 2009, at my last job, we were retained by a sovereign wealth fund to evaluate a portfolio of almost 200 regional malls. The data was pretty telling. I understand where the author is going , but his claims are way too general, at least as they pertain to malls.
Hell, I remember hearing about malls closing when Amazon first came on the scene. I also remember hearing a few years ago how Best Buy was going to be dead by now. Nope.Report