It's a mom-and-pop market

Common Monkeyflower asks an extremely astute question about the nature of local real estate markets.

One of these days, I need to learn more about urban land economics, as The Way Things Are just doesn't seem to jive with what local prices would seem to call for. In some cases, it seems the problem is foolish land use laws; these kinds of examples are high on the list of reasons I don't like certain land use controls. For example, there's the old Olga's Kitchen building on State and (mumblemumble) in Ann Arbor, across the street from the Frieze Building. This is the terminal lot on a stretch of campus-oriented retail and restaurant properties that is known for having incredibly high rents. One would expect that, after Olga's went out of business, the lot would be bought up pretty quickly and redeveloped, as desire for space in that corridor is high, and somebody could make decent rent. Instead, the lot sat empty for about 5 years, and only this summer began to be redeveloped, in a plan for an 8-story building with ground level retail and upper level residential, including a couple of "affordable" units. Why so long?

My take? Obviously I cannot comment on the specfic parcels mentioned by Murph. But generally, look to the nature of ownership, the size of the parcels, the scale of investment, the time-frame in which people invest, the overall "stickiness" of real estate as an investment...i.e. in short, commercial real estate is not a perfect market because people are not perfect and do not act with perfect information. Real estate is not a fungible commodity (unlike one bushel of wheat which is more less the same as another).

Consider a typical 60' by 100' lot in a commercial district. It has a 2500 square foot, somewhat shabby one-story retail building on it. The owner bought it 25 years ago, ran his business there for years, has now retired and rents it out on relatively short-term leases (say 2-3 years.) The zoning might allow a 5-6 story building and there is strong demand in the area. Obviously the property is ripe for redevelopment.

But the owner isn't. He knows little of real estate development and knows no one who does.

Yes he could sell the land and make a big "profit" (remember he bought it 25 years ago) and then pay lots of taxes and not know what to with his cash (he doesn't know much about the stock market either --- who does?) But he forgoes an investment he knows for the risks of...of what? So why sell.

Or he could partner with someone who know development. But who? The transaction costs of required trust, knowledge etc on both sides for such a partnership are extremely high. And after all, it's actually a fairly small site and would not be of interest to any developer large enough to be listed on the stock exchanges, so the owner has to deal with a much smaller entity which raises the risks etc etc. Development is a troublesome prospect for an amateur, even as it also is for professionals.

So the owner does nothing but rent it out. And for him that is a very rational choice because he does not have access to the information needed to develop the property and so the "do-nothing" alternative is the smart one.

His heirs may not see it that way and so that's why so much property changes hands via estate sales.

And I would not agree that zoning is much of an impediment to redevelopment unless the "bump" provided by a tear-down & rebuild scenario is simply too small to justify the work. And in that case the matter might not be a "flaw" in zoning but simply a choice --- unwise as it might appear to some --- that the height limits in a particular area should be low.

Comments

[Michael Jennings]

Also look at the physical geography and the infrastructure. I come from Sydney, which has an ocean in the east, national parks limiting growth of the city to the north and south, a harbour in the middle, extremely rugged hills, valleys and gorges within the populated area to the north of the harbour, and a poor transport system, all of which means that land on which it is possible to build houses and from which it is possible to easily commute to the centre of the city is in short supply. All this leads to high house prices. Melbourne on the other hand is flat, extents in most directions without any barriers, and has excellent transport. Melbourne is not much smaller, and not very much poorer, but house prices are about half what they are in Sydney.

[Michael Jennings]

Yes, I am talking about residential and you were talking about commercial. It's still interesting though.

[JRoth]

I just want to say that I find that to be an excellent analysis. Although any mid-sized city has so many lots of similar that it would seem to present the bases for a reasonable market, I think that the truth is far from there, largely for reasons you outline. It largely comes down to the simple fact that every (urban) site is unique; even if you picture a row of 3 buildings of the same, recent vintage and design, there's still inevitable differences both in the reality (the middle building has 2 comparable neighbors, one end unit abuts a rundown building, the other end a historic storefront - slight but real differences) and in the circumstance.Given the volatility of real estate markets and the financial markets that underlie them, one building may have gone for 125% of the others, and that owner begins acting based on his investment in the building - not on its theoretical market value.

Furthermore, I think (and I could be wrong) that real estate is more personally held than other investments. Only a fool holds onto fading stock, but even property professionals will hold onto a building in a fading neighborhood, convinced that it's worth more than it is, and that the right buyer will walk along any minute. And that's not even touching on the issue of actual sentimentalists, who can save or ruin a neighborhood despite what "the market" would have.

Last thing: as Stiglitz and a lot of others have shown in economics, information is the sine qua non of markets - bad or unbalanced information hopelessly skews transactions. Information in real estate markets is notoriously inadequate. There may be no truly comparable sales in an area; the true pluses and minuses of a building may be hidden to buyer or seller; the intentions of neighbor (which have enormous effect on property) are effectively invisible, and so on.

General trends in a neighborhood or city may be attributable to zoning - that's the point, frankly. But it's hard to imagine that many sites/buildings are really unused due to zoning. More often, it's a convenient scapegoat for indecision, inadequate financing, or plain old inertia.

[Brian Miller]

I am a city planner and one of my focus areas is exactly this scenario. You have outlined one situation perfectly: a key corner location next to downtown, underutilized (half vacant) and completely occupied with subpar files storage (strictly speaking not allowed under our zoning ordinance :) )

But, it is owned by a family partnership with (relatively) elderly partners who are completly disinterested in selling.

I enjoy your site , David, even as I enjoyed your book. Have you ever considered creating an ezboard discussion forum?

[David Sucher]

The idea of creating an "ezboard discussion forum" has never even remotely crossed my mind --- but only because I have never heard of such a thing.

What is it? Links? Examples?

Thanks very much!

[Brian Miller]

It may require more time and effort (and bandwidth) than you are interested in, but...

www.ezboard.com

An example of such a forum is associated with an interesting city lovers' site called urbanphoto.net. http://pub42.ezboard.com/bcafeurbanite

There is always the infamous skyscraperpage.com forum, also, full of 19-year olds arguing about whose city skyline is better.

I'm sure over time you could get people to volunteer to monitor it. But again, I know you are busy and it may be too much to suggest :)

[Murph]

(To continue the topic drift...)

The difference between a blog (as you have here) and a forum is the style of discourse. On a blog, you set the topics (by posting) and people respond to these topics on their own blogs and in your comments sections. In a forum, you provide a space (and a rough subject area) for other people to discuss things.

A blog is much more *your* space, while a forum is a service you provide to others. I, personally, think the blog setup fits your particular goals better than a forum, but some example forums you might want to take a look at are:

bBlog's forums (discussion by developers and users of the blogging software I use)

Cyburbia's forums (sort of the discussion-based sister site to PLANetizen)

Free State Project's forums (discussion by those ambitious libertarians)

Just to name the three that I've looked at most recently...

[Barry]

Just in the remote case of somebody still caring....
I live in Ann Arbor, and noticed the old Olga's building, walking by it most days. I asked around, and was told that there was an ownership dispute, from the company/partnership/whatever which owned the place.