2004 - Gruen Gruen + Associates

THE INSTITUTIONAL
REAL ESTATE LETTER
was, Do people with different pnor
travel propensities select themselves
into residential neighborhoods that
supportthosepropensities,or doesthe
A study of the impact of residential New Urban-styleneighborhood cause
land-use configurations on travel th6se who live within it to walk and
behaviorreminded me of the current take transit rather than drive? As they
controYersy about kissing in the wrote in their article, the resultsof their
Moscow Metro stations. In the June research suggest "when attitudinal,
2002 issue of The Annalr of R4ional lifestyle, and sociodemographic
Science,Michzel Bagley and Patricia variables are accounted for,
Mokhurian summarizedtheir research neighborhoodtype has litde influence
in five San Francisco Bay Area on travel behavior."
neighborhoods.The five were selected
"to representa rangeof valueson key Theseresultsshouldnot be ta.kenasan
characteristics of land-use type, argument against new urban
inciuding pubiic transit accessibility, developmentsand certainlynot agzlnst
land use mix, residentialdensity and relatively high-density developments
employment mix." Including z variety around tansit per se. But the study
socioeconomic,travel doestendto confirm the beliefthat real
of demogra.phic,
and attitudinal lifestyle data, the estate is more likely to respond to
researchersbuilt a stn:ctural equations cultural and socialattitudes that convey
model that included the feedback behavioral tendencies than to act as a
relationships betvreen the land-use determinant of behavior. ClearlS there
c h a r a c t e r i s t i c s o f r e s i d e n t i a l is some feedback between the built
neighborhoods and the types of environment and the behavior of
people, but the attitudes that shape
residentsin those neighborhoods.
behaviorareinfluencedby much more
The purpose of their researchwas to than real estate.
testt}repropositionthat higher-density
mixed-use traditional, neo-traditional, Which brings me to the current
urban or new urban neighborhoods controversyaboutkissingdrinkingand
induce fewer vehicletrips and shorter spitting in the museum-like, beautiful
trips tian what is likely to be generated stationsoFtle Moscow subway,which
by typical low-density suburban transpotts 9 million passengerson
more tian 4,000crowded trains dailp
enqfonments.
Sincethe fall of the Sovietpolice state,
Advocates of New Urbanism have the freedom granted to the system's
argued that the relatively high-density passengershas led to behavior that
urban neighborhoods with few some Muscovites think is unciyil.
accommodations to the auto will Sunday night is reported to be
enhancesustainabilityby encouraging notorious for station drinking parties,
walkingand transit use at the expense frghting and kissing. Concerning
of the automobile. Their advice has kissing one Muscovite told The Tinet
beenheededby many public agencies, (London), "The young kiss on the
including the U.S. Environmental Metro to shock. It is exhibitionism.
Protecdon Agency, which allows air Kissing hello is one thing but
quality improvement credits for straddling a man is another. There are
developmentsthat Frtthe New Urban other placesto makelove."
mold.
Valera and Natasha Cherkashin,two
installation and conceptual Moscow
Mokhtarian
and
Bagley
The question
sought to answerwith their research artistswho stageda weddingbetweena
Kiss and Ride
Can Real Estate Alter Behavior?
January, 2004
PASC1
scantily clad beauty and one of the
statues in a Metro station, arguedthat
the proposedlaw againstsuchbehavior
won't work. "The only v/ay to stop
young people kissingis to shoot them.
These laws are made by people who
never loved," they told TheTinet.
Whatever the outcome of the current
debate in Moscow, the lack of safety
and what most people considercivility
certainly affects travel behavior in away
that is more important than
neighborhood configuration or even
the aestheticsof the buiit environment
Looking a litde closerto home, recendy
a teenagertragically was shot to death
while riding on a San Franciscobus.
And my sons,who useBay Area Rapid
Transit frequendy,havewamed mywife
not to ride the systemalone at nighg
when they consider some of the
stationsto be dangerous.If always-on
cameras, rapid-response police
protection and rules that discourage
panhandling and loud muslc were
employed to make tansit riding safe
and civil, I believe the result would,
over time, exceed the effect of any
changesin developmentpatterns *
Dr. Claude Gruen is e Principal with
Gruen Gruen f Associates, a research
and consulting frrm with offices in
San Francisco and the Midwestwww.ggassoc.com
TIIE INSTITTIIIONAL
REAL ESTATE I,ETTER
Born to Shop . . . Elsewhere
February,2004
By Nina Gruen
Dear DepartrnentStore ChairExecutive:
Shopping pattems today are driven by
demographicsand an economytJratare
very diFferent from the consumer
milieuand economicenvironmentthat
give birth to departrnent stores and
made them profitable for over 100
years. This trend will be even more
pronounced in the future. In light ot
this very changedset of businessand
ciilf,-iial citcumstances, condnuing
businessas usual can only lead to
stagnantsales,shdnkingpro6S and, in
time, death. What should you do?
Future retailing successstories will
cometo thosemerchantswho canbest
servethe massand luxury markets.
IF I vzeredevelop a shopping mall in
2004, it would be anchored by a
Neiman Marcus and Targeg a Saksand
Kohls, or a Nordstrom and Wal-Mart
In our increasinglybi-modal society,a
high percentageof thosein the middle
income categoryare shoppingat WalMarg Target, Kohls and RossDress for
Less rather than at Macy's, Dillard's
and Robinson's.The wisdom of the
strategyof going for these tenants and
the specialtystoresthat attract upperincomeshoppersis confirrnedby 2003
holidaysales.
In terms of same store sales, luxury
stores did the besg while moderatepriced specialtystores did far better
than mid-line departrnentstores,with
the exceptionofJ.C. Penney.Neiman
Marcusled the packwitl a 14.8percent
increasein same store szles,followed
by Nordstrom (9.1percent),Costco (8
percent),and Saks(5.1 percent).WalMarg J.C Penney,Target and Ross all
experienced4.0 to 4.3 percent sarne
store sa.les
increases.
At the other end
of the sDectrum ale Federated
Deparrnent Stores (1.2:percent) and
SearsRoebuck(0.8 pecent).
pase2
electronics and services,with the latter
including a tattoo parlor, yoga sp4 and
eateriesappealingto the Ys palette.
Let's saythat you agreethat your chain
hzs to shift to a strategrthat can attract The key to re-inventing your chain to
the two potentiallyprofrtablebulgesof attract these trendy buyers cannot be
consumerdollarson both ends of the found in the hands of financial wizards
income distribution. F{ow do you or managementmavens. To createthe
implement that strateg5r?
magnets that will pull in luxury dollars
and the trendy young you need to
First, weed out your weakest sales attfact and, motivate entreoreneurial
locations and consider converting at merchants.When merchandis'lnggenrus
leastsome of thesestoresto housing. Rose Marie Bravo took over the
At somelocations,retailspacecould be Burberry chain,I knew the future would
maintained for first-floor srreer not be a repeat of the past. I v/asnot
frontage use. Many converted stores surprised to see her chaage the
would make ideal assisted-living perception of Burberry from a store
facilides becauseof their central or that cateredto middle-agedtrad.itional
near-to-shopping locations. Other customers seeking raincoats to a
obsolete departrnentstores could be purveyorof stylishclothing forwomen,
adaptedto houseyoungdr,non-family men, childrenand yes,evendogs.
workerswho frnd urbanlocationscool.
To sum up, your future doesnot need
For store locations where sales are to be businessor lack of business
as
good but not greag consider the usual.But itwill require a radical change
London Selfridge merchandising in departrnent store concept and
approach. Turn the store into a truly management. Because retailing as a
exciting set of specialties.At one sector employs more people than
extreme,thesespecialties
canservethe manufacturingthis is not only an issue
luxury market strong accessories for you, your stockholders and the
includingthe$1000to $5000watch,the consumingpublic, but for the economy
right-hand diamond ring for the aswell. In the United States,16percent
independentrroman, and other bling- of all employment in 2000, or about
bling stylesthat cater to the trendy, one out of everysix workers,wasin the
higherincome buyer.
retailing sector.We all have a stakein
your following tl-risunasked-foradvice.
Rememberthat much of today'swealth
and income are in the hands of the Cordially,
baby boomers.There arb 85.3 million
boomers betweenthe agesof 37 and Nina T.Gruen *
56. Combine this demographicreality
with the largenumber of women who
are in their high eaming years, and
luxury demandwill staystrongunlessa
recessionlastslong enoughto become
a depression.
At the other end of the specm;mis tl-re
youth market Generation Y is the
Nina ]. Grueu is a Principal with
largestsingledemographicage group, Gruen Gruen * Associates, a research
witil 88.7million youngpboplebetween
and consulting firm with oflices in
the agesof 7 and 26. Imagine a store
San Francisco end the Midwest
with only the coolest clothes,
www.ggassoc.com
THE INSTITUTIONAL
REAL ESTATE LETTER
History Repeats Itself:
Maliing the Economy Work
for Middle America
March, 2004
even the richestdid in the early1800's.
PASC1
competition.Needlesslydriving up *re
costof living increasesthe costoflocal
labor per unit produced.
The paceand scaleof recentinventions and
conceptualizations in electronics,
communication and organic science,along 5. SubsidizeU.S. agriculture so that it
anificially. drives dorvn wodd food
During the early 1800's,state, local and with cost saving improvements in
prices at rhe expenseof farrnersin
bansportation, have increasedproductivity
federal dollars v/ere spent on dams, Iocls
usher
in
a
new
developingcountries.
to
once
again
enough
the
markets
of
to
expand
and canals
few
phase.
there
are
a
economic
Ofcourse,
laying
the
farrners and manufacturers,
foundation for an economic boom that differences.This time, the labor force D o :
expanded urban America and is middle competingforAmerica'sentrenchedjobs is
Focus on education.
class.But not everyonebenefitedfrom dris not limited to the importation of brawn;
both brawn and brain jobs are being
nnovauon.
Invest in the infrastructure neededto
exported to India, Chh4 Russia and
serve expanded and more affluent
The open:ngofdre canalsleadto a decline elsewhere.
population and businesssectcjrs.
h employment opportunities for tearnsters
and the industry that supported them. Secondly, the U.S. economy should be
Workers arrdi:ovestorsli '.hisscctor had to adjusteC so that it can benefit others 3 . Recraft the tzx lav/s to encounge
innovation, on-the-job training and
lnd odrermeznsof eaminga livelihood or besides the CEOs of multi-national
job-enhancementprograms by U.S.
a pauciry
jo:n the ranksof the unemployed.But the corporations.Recenrdararevea.ls
domiciled companies, while
is
suspicion
in
the
growth
of
and
rhere
cost cuts and new markets fac itated by
1obs,
eliminating ta-rbenefits that encourage
cheaper trzrsPortation increased the the number of low-wage workers being
firms to domicile outside the United
demandfor a broadenedoutput of goods, pa.rdby householdsandbushesses"offthe
States.
w h i c h b r o u g h t i o b a n d i n c o m e books" has increased.Jobs and rncome
opporunities to those who could master opportunitiesneedto be expandedto raise
the techniques and endure working in living standardsand grant more Amelcan /1 Require transparency in financial
dealings while simultaneously
manufacturing, distribution, retail and householdsthe eamingkeysto the middle
reforming our own legal system and
class.
production.
agncultural
those of our global parmers,so laws
are
usedto protect human and property
is
how
to
adjust
the
Following
advice
on
The cycle of market extensions,
rights,
not to raise *re prices through
it
can
productivity enhancementand sector-by- American economy so that
lawsuits that specify exaggerated
sectoradjustrnentrepeateditself when the accomplishthesegoals.
punitive claims.
rariroadskickedoffanother maior upward
shift in the American economy. As the Don't:
Stickwith and wrn the war on terrolism
loc}s became inoperative and the canals
to safeguard democracy and market1. Put up tariffs and other uade barriers
siltedup, the canalboarnan lost work. If
"
r
e
v
e
r
s
e
driven economieseverywhere..
jobs
i
n
a
n
a
t
t
e
m
p
t
t
o
railroad
track,
they
laying
they sought
job
growth
is
in
globalization."
Most
found themselves competing with low
the servicesector,so our chancesof
wageworkers brought in from overseas,as
-;/ell as uhesteampile drivers tlat hested
killing globalizationare much lower
than the likelihood of crippling the
Henry.
John
incentivesfor continuing productivity
increases.
Despite some tough times, the economtc
expansionspurredby the steamengine,the
Squander resources on expenslYe,
railroads and a spate of industrial
image-building margina.l actrvities,
product
inventionsled to price cuts and
suchas explorationof Mars.
improvements.As a result,the majority of
Americanscameto enjoybetterhealthand
previouslyunimaginableluxuries,including 3 . Encourage the rmmigration of lowskilled "guest workers." We need to
indoorplumb:ng store-boughtclothes,and
hcrease the sk ls of the U.S. work
a vasdy expanded array of food,
force and keep the pressure on all
Dr. Claude Gruen is a Principal with
and
educational
and
culn:ral
entertainment,
in
productivityinvest
of
sectors
to
Gruen
Grueu + Associates, a research
expansion
offelngs. In trme, the
and
techniques.
enhancingequipment
and consulting firm with offices in
indusuy, distributron, finance, medicine
San Francisco and the Midwest.
and ocherservicesmade possibleby the
www.ggassoc.com
productivity and transportation gainsof the 4. Drive up the cost of living through
restrictions on development and
post-Ciyil War decades enabled most
resource exEaction thar consuain
Americansto live better and longer than
THE INSTITUTIONAL
REAL ESTATE I.ETTER
PASC2
Pittsburgh and shoe and leather
businesses in St. Louis found
themselvesadvantagedby the specialty
supplies,labor base,shipping facilities
and other logisticalsupportsthat were
readilyand relativelycheaplyavailable.
More recently, the build up of
university-based research and
pioneeringtechnology firms clustered
within the Palo Alto, Califomi4 area
provided agglomerationeconomiesto
what Peter Drucker has termed the
"knowledgeindustnes."
If interest rates are kept low, the
upcoming wave of new innovations'
increasing business investments'
continuing strong consumer demand
and gtowing exports will continue to
keep the GDP growing a.lbeitat a
somewhatslowerratethan at the endof
2003.But globalcompetitionForiobs
and ouput will remaintough. Regions
with stronghigh-tech'gglomerationsin
high-cost and congestedareaswili see
relativelygood output growth but weak
job gtovth.
The natural resourcesthat facilitated
grovth in the manufactudng era
includedproximity to the materidsthat
were extractedor grown. Nearbywater
or rail transport hubs facilitated the
import
oFraw materialand the export
in
new
a
ushering
factors
Among the
finished
goods.Todaythe perdnent
dayfor regronaleconomicdevelopment of
are the intensification of global natural resourcesinclude the climate
competitionemphasizingcost control, and recreationalamenities that help
increasing outsourcing of jobs, the attract and keep highly skilled and
waves of electronic and biological creativeworkers.
innovations, the ability of firms to
managefar-flungoperationsand, most Robert Putnam's 7997 book, Making
importangcongestionandhighhousing DemocraglX/ork,has led us to include
costsin some regions.To predict the the concept of socialcapitalas a third
winnersin the fight for output and jobs ingredient necessary for regional
growth, we must review the three economicdevelopment.A May 2001
concepts that drive regional report from the Organisation for
Economic Co-operation and
development.
ofNaion::
Development, The lVell-being
C@ital,
Hunan
and
Social
Regionaleconomicgrowth caanottake The fuh oJ
off without the presence of natura.l defrned social capital as "networks
resourceand agglomerationeconomies togetherwrth sharednorms,valuesand
appropriateto the technologicalbaseor understandings that faci Iitate
development stage o[ the times. cooperationwithin or amonggroups."
Agglomerationeconomies refer to a Socialcapitalrefers to the commonly
spatiallyconcentratedcapitalbasethag held attitudesthat shapethe openness
from increasingretums to scale,gives of individualsand firms to new ideas
cost and revenue advantages to a and ways oF doing business,and the
regon's expanding and new firms' willingness of the body politic to
encouragethe changesneededto offset
Theseadvanugesare "e4temal to tle
firm," because they benefit all the the physicaland socialcongestionthat,
companiesengagedin a given rangeof with growth, become bariers to the
acunties within a parucular place, expansion of agqlomerationbenefits
without firms having to shellout extra and continued access to natural
In the globalenvironment,
advantages.
resources,
Iack of social capital will discourage
V/hen manufacturingwas the industry further job growth in the short run and
most attuned to the contemPorary eventua.llydecreasethe rate at which
economic technology, steel plants in output cangrow.
Lower-cost regions that can create
or
knowledgeindustry agglomeradons,
that already ha're such agglornerations
along with the natural and built
excitementsthat canattractthe creative
young and hold them, will grow in
ouput and jobs. Good caadidates
include the Phoenixregion and regions
such as Las Vegas, with a strong
entertainment agglomerationand the
social capital to facilitate growth in an
expanding artzy of activities.Regions
based on historic manufacturing
agglomerations or non-innovative
service activities are likely. to see a
continued decline in both jobs and
oubut. +
Where Will the Economy Grow?
Basic Concepts Still APPIY in
Assessing Regional D eveloPment
April,2004
My graduateschoolstatisticsprofessor
taught that "usually, past data is the
best basis for predicting the future."
When predicting where economic
output (GDP) and jobs will grow,
however,his advicedoesn'tapply.Since
the U.S.GDP startedgrowing againin
November 1991, some regions have
experiencedoutput gro$rthwhile their
employrnent bases declined. Other
regions have seen output and job
growth, rvhile slll other areashavehad
declinesin output and iobs.
Dr. Claude Gruen is a Principal with
Gruen Gruen * Associates, a research
and consulting firm with officesin
San Francisco and the Midwest.
www.ggassoc.com
THE INSTITU:UONAI
REAL ESTATE I.ETTER
PASC1
how much the United Stetescould reduce In the United States, farming is treated
its present agricultural capacity and still differendy ftom all other industries, not
have the potential for self-sufficiency, but only in terms of supports but by
erperiences during Wo d War II suggest dis couraging innovation. University of
Wisconsin-Madison researchersRodolfo
a significant reduction would be safe.
Mznuelli and Ananth Seshadri found the
Driving past farms and ranchesgives me the farm lobby also argues v/e must dming of improvements in the design of
maintain farming as a way of life ot as a tractors and their use on American farms
a pleasantfeeling of mythic nostalga. It
does that to city folks all over the unioue sub-culture.A revie.pofthe costs could be erplained by following the path
of real farm wages. During the
develq>edwodd, regardlessif they sprang of pieserving farms and farming sugests
that even ifyou feel farm preservationis Depressiorl when farm wageswere loq
from farm families. This motivates us to
accept polemics in support of public worth the price, we are going about it farmers did not have the incentive to
badly. Woddwide, the annual direct costs switch from horses to tractors. Only in
policies that preserre farms and putative
agricultural lands. This emotional feeling of farm subsidiesare estimatedat about the 1940's, srhen farm wages rose, were
also causesus to shrug off the taxes we $235 billion. The Organization for tractors widely adopted.
pay for thesepolicies and to minimize the Economic Co-Operation estirnatesa fullindirect costs of maintaining the rural time farmer in the Eurooean Union Yet rather than supporling improvernents
receives$17,000per year in cashor price in the desigr of harvestingmachines,the
farmscaoe.
U.S. govemment is trying to help farmers
supports, while the average full-time
cut costs by encouraging the immigrauon
Although the acreage planted in Americaa farmer gets about $16,000.
of workers. I agree with agricultural
artichokes has decreased by half, for
economists such as Phillip Martjn at
recipients
largess
get
up
ofthis
example,I pay less for superior-quality Not a1lthe
artichokes now than I did 40 years ago. eady in the moming to tend to the co\zs University of Califomia, Davis, who
The prices of most other crops also have or fields. In August 2002, rhe San believes introducing machines will enable
'60s, and the quality of Franci.tto Chmniclc rcported discount farms to compete arrd also a1lorr them to
dropped sincethe
produce available year-round in the broker ChadesSchwabput his1600-acre increase the pay of the workers they do
developedwodd has improved because rice farm up for salebecausehe no longer need.
have had time to go duck hunting on the
increases in productivity
property. The article noted the S4rether we use our excessfarm land for
dramatically increasedyields.
Environmental Working Group estimated needed housing and urban development
The content-ionthat we have to maintain the Schwab family collected more that or as public open space, a tztional
the present supply of farmland or fzce z $730,000in subsidiesfor the farm over a reduction in the costs of agricultural
preservation would pay large benefits to
five-yearperiod.
vsoddwide food shortage is flat out
taxpayers, workers and the health of our
wrong. We are in an upside-down
production
at
in
Ma.lthusianwodd with incteases the Farm subsidiesencourage
urban places.*
food supply outpacing increases in Ievels above what the wodd can buy at
arrything close to the actual costs of
population. This relatiorxhip is not likely
production. The wodd price of food has
to change in the future, as population
growth is ptedicted to stop long before dropped to the point where small farmers
in developing nadons carrrot compete.
technologic al and capital improvements
ceaseto increasewhat can be grown ot For many of these countries,the type of
farming that could succeed-- if they did
raisedper acre.
not have to compete with the subsidizing
Many of those who atgr-refor subsidies, nations -- offers their best path out of
price supports and farmland protection poverty. A Mttdn 276 New York Tinet
xecogoizethat even while famine stalks article discussedthe economicmalaiseof
many poor lands, the cause of this farmers in rura.l Polarrd, Slovaki4
tragedyis not a shortage of food in the Hungary and the Baltics. The article
'that
after Poland enters the
developedwodd. They recognize, too, sugeste4
that creating more surpluses in the rich EuropeanUnion May 1, some small-scale
farmers may be bought out by \vealthy
countries is neithei a temporary nor
Dr. Claude Gruen is a Principal with
perrnanent solution'to the problems of investors from Denmark, Finland and the
Gruen
Gruen * Associates, e research
developingnations.One argumentheard Nethedands, who will consolidate the
and consulting firm with offices in
from those vrho understand this is that farms and apply For and receive the
San Francisco and the Midwesr
each nation or region needs to be self subsidiesfrom the European Uruon.
www.ggessoc.com
sufficient.I haveyet to seean analysisof
Trends
May,2004
Expensive Nosalgia:
The High Cost of
Farm P reservation
THE INSTITUTIONAL
REAI ESTATE LETTER
Trends
June,2004
In Defense of Dumb Growth:
Dissecting Studies on the
Impacts of Suburban Sprawl
Ever since "Tbe Cost: of SPraul" was
published rn 1974, people have been
trying to scientificalln or at least
the negative
accurately, quantifr
economic impacts of urban gro$th on
the suburbs. The studywas initially hailed
as a breaktluough proof of the economrc
damagedone by suburban development.
But subsequent analysis of its basic
assumptions lead to the conclusion the
study proved litde excq>t that higherdensity development chewed up less land
than lower-density development. Most of
us would stipulate to this even in the
absenceofa study. Furd:ermore, I think
many ofus would agreelarge lot zoning
and other land use regulations that &ive
down the per-square-foot cost of lald
and encourage high density are neither
nor
equitable
economically
environmentallysensible.
But generalizations continue to be made
about the economic benefits of reducing
incentives for all but very higfr density
development and redirecting growth away
from the suburbs. T'hese include urban
limit lines and measures aimed at
directing z gteltet share of regional
growth to central cities and the older
places near them. In recent years,
particulady
Iimitations on gro.*th,
along with
suburban growth,
requirementsfor mixed-usedevelopment
and design features that make
development appeai rnore urban, have
been given the heroic tjde of "smart
gro.*th."
In'olhe Activities and Benefits of Smart
Growth" (Spring 2002 lVhartun Rul
ErtateRrriee), k)tgers Professors Robert
Burchell and David Listokin, Brookings
Institution Seniorl Fellow Anthony
^
Downs, and Catherine Gallen
Rutgers,
at
associate
postdoctoral
estimated that limiting development to
such "smart growth" would save
"govemment, developers' homebuyers,
and citizens$250 billion over the next 25
years, or $10,000 a dwelling unit." The
article explained this estimate vzas
developed from "the pooled results of
findings from studies conducted in New
Jersen Mclugan, South Carol.in4 Florida
and the Delaware Estuarf."
When I read this, I had two reactions.
First, I thought that if America's
homebuyers were given the choice, they
would gladly pay $10,000more per unit
to have what they preferred. That
reaction, of course,is a value judgement
which I cannot back up with survey data.
But my second reaction, that I believe the
estimates to be wron& is based on the
experienceof conducting more than 100
fiscal impact studies for projects and
municipal programs over the last 30
years.
Before writing this column, I wrote 6rst
to Downs and subsequendy to Burchell
and l-,rstokirL asking them to explain the
sources and methodology by which they
obtained the estimates stated in *reir
art-icle. Downs wrote back that Burchell
did the numbers. Burchell did not repln
nor did Listokin.
V&y don't I believe generalizations about
the high costs of suburban grouzth?Firsg
when I cal decipher how the numbers
were derived it is usually &e casethat a
sigrifi cantproportion ofthe "savings" are
based on the assumption that suburban
growth, or even infill growth, induces the
need for roads, sewers and other
infrasftucture forwhich it doesnotpay.If
that is trLle, then all it shows is the
jurisdictions vrithin which the nevr
developmenttakesplaceareunderpricing
tJreir impact fees. Cetainly this need not
be the case, and it is not in manY
jurisdictions tiat use nexus studies to
calculatethe cost of capitalimprovements
needed if the new growth is not to lower
existingstandardsfor loca.ltransportation,
sewage, flood control water and other
urban infrastructure.In some cases,new
development pays for its share of newly
induced demand for public services,and
also is forced to pay for improvement of
existing conditions.
Second, data on public employees per
PASC2
household does not substantiate the belief
that the price of public employees is
higher in suburban communities than in
central cities. Salaries, pensrons,
equipmeot and supplies make up the bulk
of any municipaLity's costs. Finally, and
this is ken decreasing the amount of land
that builders can buy will increase land
rents and land prices.As economistshave
shown, the resultingincreases in what can
and vrill be charged by those who are
allowed to develqr and re-develop their
laads ryill more than wipe out any savings
in capital or other costs.
Stopprg suburban growth is not smarq
rather it interferes with the cycle of
outward grornh that over t.ime will cycle
back to re-grow the central cities.
of
Furthermore,
as University
Permsylvania Professor of Urbarusm
'aneasuring
Witold Rybcznski v/rote in
Sprawl" (Spring 2002lYbartonBealEwa
Bcuiew),commwnities such asI-os Angeles
and Phoenix, often cited as being
examples of sprawl, actually have higher
population densities than older metro
areas such as Chicago and Boston.
Rybcznski surmises fast growdr, rather
than sprawl, may be the red target of
people's concerns.To that I would only
add that attempts to stq> suburban
residentialgrowth at reasonabledensities,
say eight units to the acre or more, is not
smart. Nor is attempting to justify it wids
unsupportable allegationsof cost savings.
*
Dr. Claude Gruen is a Principal with
Gruen Gruen * Associates, a research
and consulting firm with offices in
San Francisco end the Midwest
www.ggassoc.com
THE INSTITUTIONAL
REAL ESTATE LETTER
Trends
Living Museums:
How Special Interest Groups Prevent
the Evolution of U.S. Cities
July, 2004
The socialcapitalof a city or region - its
attitudesand socio/polit-rcalorganization is one of the most important influences on
d:re area's economic development, The
processthat allocatesresourcesto the built
environment and how and where places
will be built is one of socialcapital'smost
important roles. In tum, how well the built
environment serves the members of the
community and how well it adjusts to
economic and social imperatives affect the
growth of the econornic resource base.
This has always been true; what has
changedover time is who has the powet to
allocateresources.
never have been able to give birth to the
?aris of today if he had been forced to
contend with such naysayers."If she v.rere
alive today, shewould be astonishedto see
how far the pendulum has swung in the
direction of giving power to a minority of
c1lzens.
When renowned Dutch architect Rem
Koolhasswas hired by Prada to design a
new struchJre on the site of afl older
lacklusterbuilding in San Francisco,antimodem activists tied to run hrm out of
town. Not suqprisingly,small groups of
activists find it eveneasierto stop things in
Berkeley, Calif. The Mzy l0 San Francivo
Chmxicb rcported a petition signed by 50
people rvas enough to prohibit removal of
a tar papercoveredhouseon a weed-f led
lot that had beenbought by a couple who
wanted to build six new homes there. The
reason given for keeping the dilapidated
'When
Pharaoh Akhnaten bu t his capitol housewas that it had been built in 1878,
3,340yearsago, only he and his priests had the year Berkeleybecamea city. To date,
a say in city planning and construction that city's landmarks commission has
decisions.By the time King I-ouis XIV set prohibitedbuilding on 270 sites,ncluding
the stage for the emergence of modem a parkrng lot that may contain American
Paris, the attitudes and motivations of the Indian artifacts and a field vrhere a lonsgone 1868mansiofloncestood.
businessmenwho invested their frrancial
capital in private buildings had to be
One getsa feel for how the power of such
considered.By 1850, when Napoleon III
gaveBaron George-EugeneHaussmanvast activists is embedded in contemporary
pover to transform the streets, public social capital by the reverential way
buildingsand utilities of Paris,hjs vision nevspapers srschx Tbe Naz York Tinn
would not have been tealized without a report on their activities. In a fi:ll pageMay
multitudeof subsequentbuilding decisions 96 zrticle,:d:reTinesran a picture of the two
foundersof the 125-memberDefendersof
by French entrepreneursand financrers.
the Historic Upper East Sideand portrayed
SinceColonia.ltimes,the businessclasshas as heroic their tough stance against
played zn irnpocant role in the vzay projects.
planning and building decisionswere made
in the United States, but individuals or I arn not so naive asto believe the structure
of contemporary social capital can be
groups of neighbors had relatively litde
altered
to silenceor disenfranchisesuch
By
the
power over urban development.
.
eady1960s,the acceptanceof the "citizen groups But I believe an increasingnumber
participation"conceptin many U.S. cities of planning cornrnissioners and elected
was begrnning to shift power to leaders zre recognizing that the entire
neighborhoodgroups and a new breed of communityIosesif rhebuilt environmentis
urbanactivistwho organizedaroundissues kept from changhg and growirig to meet
nev/ economic and demographic
and oppositionto individual proyects.
circumstances.Some also are concemed
was working as an about fie aesthedcstagnationthat sets in
In the mid-1960s, I 'assigned
to prepale a when places are treated like historic
economist on a te2rn
community renewalplan for SanFrancisco. museu[$, and some see the ironY of
At that time, Planning Commission Chair activists fighting to preservewhat was built
the
Julia Porter bemoanedthe emergingpower in the years when only City Hall and
in
planning
had
much
say
class
of smallgroupsto veto plansznd proiects, business
'Baron Haussman would
Finally, the growing use by plairners and
commenting,
PAEC1
would-be builders of workshops and
surveys with groups reptesentative of the
broader civic constituency is providing
inforrnation that servesas a counter to the
pleas made by narrowly dehned interest
groups.
RecendyNina and I took part in a well
publicized and attended workshop in
Brentwood Califomi4 a fast growng Bay
Area community. Planners from the firrn of
Freedman Tung & Bottomley, who had
beenhired to preparea specificplan by the
City of Brentwood, used the workshop to
gah insight from citizens about the design
char cter that was acceptable to the
community before they began to plan. As
one citizen sard,'1 fecl they are trying to
fmd out what features attracted us to the
commr.rnity so that they can tailor the plan
to preserve as much of that feel as
possible."
The future of our urban regions will be
brighter if *re deliveryof such informadon
to public decisionmakers,who are willing
to consider the rnpact of a place'sparts
upon the whole, tempersthe influenceof
droserrrho seekto tum cities into museums.
*
Dr. Claude Gruen is a Principal witl
Gruen Gruen * Associates, a research
and consulting firm with offices in
San Francisco and the MidwesL
www.ggassoc.com
THE INSTITUTIONAI
REAL ESTATE LETTER
Trends
A Glimpse of Russia's Future
August, 2004
Russiadoes not have the degreeof
democracythat exists in the United
States, nor are Russian instrtunons
expectedto be as transparent.But it
has only been 13 years since the
RussianFederationbroke free of the
latest in a long string of tyrannical
rulers.Although 30 million of Russia's
roughly145million residentsare livrng
rn poverty, the vast majority of its
people have more freedom a.nd a
higher standard oF living tl'ren t}ley
would have thought possible when
Gorbachevintroduced perestroika17
years ago; in 2003, Russia's gross
domesticproduct grew by 7.30/o.
Page2
prime minister. He spoke of the to privauzeits vastempireofbusinesses
national commitrnent to reducing in a mannerthat gaveassetsto t-hevell
povertyand improvinglivingstandards. placedwith the chutzpahto grab them.
He descnbed
his governmends There is no doubt the Russianlegal
approachto threekeyareas:healthcare, system is primitive. But as Ron
education and vrelfare. It plans to Chemow demonstratesin his current
increasethe effrciencyof the hea.lth b est seller,AlexanderH amilnL it to ok 30
program with a hybrid system that or so years and a tough fght by
providesa minimum of care to a.llbut Federalists like Hamilton and John
permitsthosewho canafford it to buy Marshall to createthe foundation of a
superiormedicalservices.
Officialswant better legalsystemin the UnitedStates.
to improve the ability of their already
excellenteducationsystemto provide The glimpseof Russiathat I took away
trainingthatwill equipgraduatesfor the with me suggests
today'sRussianleaders
workplace.
understardt-hatmarketsystemsrequire
a systemoF laws that prorecrprivate
Currendy, the social welfare system properry, a workable tax system tiat
providesmany free servicesthat are a permitsgovemmentto provide needed
hangoverftom Sovietdays.Theserange infrastructure,and a dependableand
from free bus rides and free food to reasonablytranspafentbarking system.
surqivorsof tie siegeof Leningradto Becausetoday'sKremlin Ieaderspnze
food and service vouchers for wat economic growth the way tleir
vetera.ns.
Zhukov sardthe govemment predecessors
prized military power,the
warts to allow t-hosewho truly need future will seegradualevolution toward
thesebenefitsto continueto receive a much more just legal system and
them as subsidies,but to eliminatethe something much closer to what those
free goods and servicesto those who countrieswith al Anglo Saxonttadition
can now afford to purchasethem.
considerto be democracy.*
During my first trip to Moscow and St.
Petersburgin 1990, the people were
drably dressed, gim-faced and
sometimes hungry. This year, the
throngs on the streets were well
dressed,well fed and smiling.Russians
expect to be better off in the future
than they ^re todzy,and this is clearly
the intentof theirgovemment.
As I listenedto Zhukov discussthe way
he wants to handle non-needy
Russia's march toward a market freeloaders,
I re-playedthemoviePower
economyand democtacybeganonJuly Trip in my head.This docudramashows
12,1991,when the new constitutionof how the well-meaning U.S. power
the RussianFederationshook off the company AES Corp. bumed through
vestiges of tyrannical Soviet millions after buying the Georgian
communism.
OnJune12,2004,Isattn power companyTa.lasi.After a heroic
the reviewingstandsin Red Squarefor effort to sell power in the Georgian
a spectacular display of gymnasts, capitalof Tbilisi, AES gave up. The
dancers,historicallycostumedmilitary movie drzmalizes the expensive
units, and musiciansfrom 89 et-hnic inabilityof American-stylecapitaliststo
groups.This celebrationreplacedthe collectfor the power they deliveredto
former May Day paradewit]r a patnotrc peoplewho arelong usedto electricity
but very non-militarisdcspectacle.In beinga "free" public good.
his speech to the nation t\at dzy,
PresrdentMadimir Put.in emphasized I don't pretend to understanda.llthe
the primacy of his countr/s goal of nuances oF the ongoing trials of oil
continuing to grdw gross national billionarresMikhail Khodorkovskyand Dr. Claude Gruen is a Principal with
product.
Platon Lebdev.But I do note some of Gruen Gruen + Associates, a research
th nqe
critirizino
thc
Russian
Earlierthat week,I attendeda briefing govemment for these trials are the
by AlexanderZhukov, Russia'sdeputy sameexpertswho advisedthe country
and consulting firm with offices in
San Francisco and the Midwest.
www.ggassoc.com
THE INSTITUTIONAL
REAL ESTATE I.ETTER
Trends
Russia's Housing Boom
September,2004
Long lines of art lovers waited on a
rainy June day to view the first
exhibiton at the State Hermitage
Museumby IIyaKabakov.This major
culturaleventin St.Petersburgmarked
the first ume Ilya had returned to
Russiasincehe fled the Soqet Union
in 1988.Sincethen, he has setdedin
Long Island,N.Y., travelingthe world
with exhibitrons t-hat have been
,,ni-afc.
- h.it..J
It was clear that Ilya was emotionally
disorientedby today'sRussianmilieu,
which is nothing like the day-to-day
Iife of Soviet times portrayed in his
work. His wife, Emili4 chatactenzed
the gteat changethat has tahen place
in the country that was once all
empire. She understood Russrano
longer has a communist culture, but
neitheris it capitalist."Russia'sculture
is a nevzmixture similarto mxing tea
znd coffeein one cup," shesaid.
PASC3
for gznted.
calling on him to "stop rampant infill
construcdonin St. ?etersburg."These
Currendy, housing units are being reportersand many of their centralcity
createdin much largernumbersand of readers are outraged that the vacant
Fargreaterquality than what the Soviet land that many treat asfree open space,
planners erroneously claimed were parking space, or the like should be
being built under a seriesof "five year usedfor infill development.
plans." The Russians have worked
around their legal and financiai lacks To date, St. Petersbuds recendy
with a host of creative prilzte and electedGovemor ValentinaMatviyenko
public-private partnerships,some of has not moved to stop approvedinfill
which areunder the table.
projects,so the NIMBY advocatesare
hoping the federal govemment will
The tens of thousandsof households ovem:le municipalland-usedecisions.
crowded into decrepit apartrnents In their pleas to Putn, they cite the
translatedinto effective demand for slow growth arguments heard in the
housingwhenlawsvestedthe rights of United States- more growth would be
theseoccupantsto their units. Russia's environmentally damaging, the
young real estatedevelopersbuy out infrastructureis overloaded,the schools
the interestsof a.llthe householdsthat arecrowded,weneedmore openspace,
share the vested rights to the etc. The residents instead ryant
communal apartmentsat prices that suburban development, which tl'rey
permit the sellersto purchasea new arg-reis "where the grovth would be
unit in the greenfreld suburbs of most beneficia]."
Moscovr and St. Petersburg.Most of
the newly affluent middle and upper My wife, Nin4 and I were impressed
strata of Russiansociety, meanwhile, with what we saw and heard from
shzrea preferencefor living in the older Mawiyenko. We suspectthat she will
core of the city.
need all her considerablepolitical skills
to continue impror,rng the living
In St. Petersburgthe new superblocks standaids of her constituents while
ofhigh riseapartrnerits,
adjacentto new respondingto the burgeoningRussian
Finnish-owned hypermarkets and slow growth movement.*
coveredmalls,^re neat World War II
monuments. A young businessmznI
know recendy paid $1 million for a
partizJlyremodeledapartrnentin central
Moscow. Prices in St. Petersburgare
somewhatlower but still severaltimes
what they were few yearsago.
Young and middle-aged Russian
urbanites have masteredthe art of
gettingthingsdonein this new culture,
producing economic results never
approached by the old Soviet
commandeconomy.Sadly,manyolder
R u s si a n s f i n d
themselves
impoverishedand unableto copewith
a ne\v systemtlat requiresa trce of
entrepreneurialenerg;rnew to Russi4
with practices very diFferent from
those taught at the Haryard Busrness
School.
As housing conditions improve in
Russi4 people have reactedas in the
In 1990,after my first trip to Russi4I United States,with NIMBY-ism. But
did not know how the great demand becausethe middle and upper strataof
for housing retarland industrialspace Russiznsprefer to live in the central
would be satisfiedin a country that city, tJ-reir frght is against infill
had no banking system capable or construction.In St. Petersburg,where
interestedin financingreal estate,and permissionhasbeengiven to build on
no legalsystemwith anydringcloseto weed-strewnlots and to replacenonthe kind of la'rs and judiciaryrequrred historic buildingsthat cannot feasibly Dr. Claude Gruen is a Principal with
to guide and enforce contracts or be renovated,more than 50 editorsand Gruen Gruen + Associates, a research
and consulting firm with offices iu
provide the type of legal base that journalistsfrom 30 mediaoudetshave
San Francisco and the Midwest.
everyU.S.nde companyofficial takes written to PresidentMadimir Prrrin
THE INSTITUTIONAT
REAL ESTATE LETTER
Trends
October, 2004
Expensive "Free Land"
by the pnvate development ofhousing
and commerciaispacein dre pro ject, x
w e l l 2 s rn*r"r.h' "l i c f r r n d s . G r i s s o
emphasizedthat he and the Agenry Feel
the key to the project's feasibilityis 10.4
acres of "[ree land" donated by dre
State. I began to squirm in my seat as
he repeatedlyrefered to these 10.4 acres
as "free land," even as he explained that
the State legrslaturehad mandated a 35
nFr.Fn
^; n".-1-" .<-; -^ .. - . . *' ." Jzonlng
F-.--..' r
requirement as a condition for the
donation.
Terminal, as well as other former
rr.insport.rtion-reh
ted sitesowned by
the Stateof California.
Given the suggestion
that rheprojecr's
financial success hinges on the
acceptaflceoF the 10.4acresfrom the
PAOC1
Some rely on inclusionary zoning
because they beiieve builders will no
longer "overbuild" to the point w'here
new housing prices stabilizeand prices
Tnclusionaryzoning -- a concept firsr
of exisdng units decline. I have a great
'
med about 30 years ago to keep
dea.lmore tarth in the economic drive
suburban communities from "snob
of builders than that, and as professor
z o n m g ' m o d e r a t ei n c o m eh o u s i n go u r
Joseph Gyourko reported in the Spring
of rherr iurisdicrions -- hrs
2002 issue of the LYhaxonReal Estate
metamorphosed into a tool used to
Rtueu, the dera clearly shows 'except
mandate the production of
below
for Californi4 increasedmarket demard
market rate housing as a condition for
produces new housing construction."
approvinghousing pro jects.
Suppiy increases have not yet
dampened prices in places such as the
A" , .,^h;.1^ .F^.
_ . ..1^1i.,..i-.
- _ . . . . . . . . 9 m o r e Requiring 35 percent oF the allowed Sarr Francisco Bay Atea because oF
affordable housing to low- and 3,400 housing units to be affordable to entidemenrproblems and d isincentives
m o d e r l t e - r n c o m eh o u s e h o l d sr,r i s r s very-low., low- rnd moderate-income such as inclusionery zonrng.
etficient as shipping goods from New
householdsmeansthe averageprice or
\ ' . - r . - - D . . - . _ L - . _ _ _ _o
- F S e n renta.l value equiva.lent
of 1,156 unrts S o m e w x n r s u p p l y - d a m p e n i n g
-F r r n c i s c o .I n c l u s i o n r r y z o n i n g h u r r s will be about $350,000 iessthan half reguladonsbecruserhey rvant the price
middle-incomehouseholdsthrough its of what new units would sell for in this ofmarket housing to continue to go up;
market distortions, and over time ofien
well-located, potentia.lly prestrgious they see inclusionary zoning as an
rvorks asa disincentive to the long-term n e i g h b o r h o o d . T h e r e d u c t i o n i n oFfsetlng charity to help a few lucky
maintenance of the atlbrdable housrng obtainabie revenue lrom the sales of lower-income households. Bur as is
it does deliver. Nevertheless, requlnng the units will be about $404 miihon, or ahvaysthe casein economics,if ir seems
below market unrts be built along wrth more than $38 million per acre for the e fring cal't go on forever. it won t.
housing servesmarket-feasibledemand 10.4 acres. Because the City of San Regions can push up housing prices
is increasinglypopular.
F r a n c i s c ou s u a l l vi m p o s e sI l 5 p e r c e n r t h r o u g h s u p p l y r e s r i c l o n s f o r . r l o n g
inclusronary requiremenq one could u m e , b u r n o t F o r e v e r .E v e n t u a l i yt h e
An example oi how the concept oi
argr..reonly the State's add-on of 20 resultrng high cost of living will burden
inclusionary zoning has become an percent should be counted - a mere the cost of labor to the pointwhere the
artrcleof faith was provided at a recent $28 million per acre. Either wry, rle regtonal economy begrns to lose its
meetino in Sen Frrncicr-o. The effects are a dec[ne in iand values and abiiiry to compere. For large regrons
I'rncheon en
h " C R E W reduced incentive for the use of land or with a lot oF existing agglomeradonc,
"nnns,'red
and ULI, featured a pznel briefing on older, lower-density structures for this will take a long tlme to happen. But
the San Francisco Redevelopment L ^ , , ^ : . . ^ ^ - ^ 1 . . ^ ! : ^ evenrua.lly
it will. and $en rne)usronrry
\ o e n r v s T r " n s h i v n r n i e r. .- t T h e. P r o j e f i
zoning will no ionger be an rssue as
callsfor a "new neighborhoodin rhe The proposedgrossresidenuel
densiry decreases in jobs and income put
heartof SanFrancisco"on 39.2acres ofabout 87 unitsperacrefor the urban market demand into rerrerse at turbo
rh.rr include rhe Jgrng Trarsbry core oFa major city seemsasqultelow. speed.'&
The Transbayproject manager,lvlike
Grisso.explerned
dreproposedzoning
allows3,400housingunits rn hrgh-rise
towers and townhouses and the
construction
of a new $2.7to $4 billion
bus and rarl terminal.Thc costsof the
new rermind end other public
inirrstructure
would be borneb1 rhe
t:r-'r
incrementfinancingmadepossible
Strte
T
the nrnieet
.w. l a n a g e r ,
""L"'-1 - . - I - . r , , .
"Have you or your consultants ever
analyzed rJre possibility that your
redevelopmentand housingproductron
goals could feasibiy be achieved srmply
by rarsing the allowable density and
Dr. Claude Gruen is a Principal with
ehminating inclusionary zoning?" After
Gruen Gruen + Associates, a research
some hesitation,the answerwas a clear
and consulting firm with offices in
San Francisco and the Midwest.
www,ggassoc.coln
THE INSTITUTIONAI
PAqC2
REAI ESTATE LETTER
Trends
November, 2004
Road Blocks;
Obstacles to Construction Inhibit
Regional Economic Growth
While 24 percent of the Ca.lifornrans housing prices have increased by 7.1
surveyedby PPIC indicatedincreased percent in the United Statesand much
n should receive more in regions such x Srn Fr.ncisco
surfrce trr,nsportrtio
prionty tbr funding, there was no rnd Boston. where local regul:'ory
a g r e e m e n t o n t h e m o d e o f ruthorities impose tough brrriers to.
transportation that should be built. housing construcuon. Opening uP
Mark Twarn is believed to have sard,
"Everybody talks about the weather but
noboiy does anything about it." Of
course, with weather there is litde
anyone can do. In some regtons, the
sar"neseemstrue for economic growth.
While most residents want economic
growth, no mayority mandates the
actionsneededto achieveit.
Neady half supported roads in some
form, such as freeways,loca.lstreets or
carpool lanes, but 44 percent chose
trarsit-oriented solutions, such as hght
rail systems and buses Such drsparate
views make rt drfficult for elected
officia.lsand their statis to marshal the
support needed to select the best
transportatlonoptrons'
In a recent survey of California
residenrsby deePublic Policy Insnrute
oI Californra (PPIC). when asked.
"V4rat do you think is the most
important issue facing the people of
Californiz today?" 29 percent answered
" E c o n o m y . i ob s , u n e m p l o y m e n t . "
Nevertheless,when respondentswere
queried about their attitudes toward
e c o n o m y - s p u r r i n gr m p r o r - e m e n t si n
trmspurtxtion, "rribrdeble housing,
education and govemance, the survey
confusion.
found dissension and
Without a compass of understanding to
show the path to economic growth or
a sharedwrllingnessto pay for the costs
of the trip, even regions with good
economic potentia.lwill not achieve ttre
goal of heightenedeconomic growth.
The prob)em oi pickrng the righr
solution is made more diFficult because
a significant percentage of those who
express their opinion in surveys and at
the voung booth often are oPlng for
whet they w:nr odrers to use, rether
than the transportation they wll use
dremselves.
In :n err rvher rhe seLectionoi ,l
transportation project is often
.rccomplished by comPrnng the
environmental impact of ProPosed
projects and modes rather than
considering.r1ltransportadon opdons
co st/ b en efit
a uniform
within
framework, the lack of consensus
combines wrth the drff'erencebetween
actual modal choice and the modes
people say they suPPort to cre2te a
iormrdabie brrrrier to economic growth.
?ast generaiions provided the
improved transportation facilrties that
As the current controversy about
led to economic growth in the United
outsourcing demonstrates, wage and
staned
States.Many rural communides
the process with roads built by local salary levels that facilitate productir,rty
volunteers.Publicly financed cana.lsand are important to economic growth. The
only way to stabilize or lower effective
Iocks opened v/aterways that led to
manufacturing and agricultural growth, wage and salary levels without
and public investments in railways and sacrificrng livrng standards is to lower
livrng.
highway programs espanded markets r h e r e l . t t r v e c o s t o i
tbr loc.rl products. Whrle these past Untbrtunately, housing and medica.l
pubiic works lvere not carried Forvrard costs,two big components of the cost
w i t h o u t m o l o r p o l r t r c d s r u g g J e s .t h e oi living. hete been increastngeven in
argumentswere otierr limited to where t h e i ' r c e o F d e c h n i n g e c o n o m i c
conditions.
and how much, rather then what, to
build.
Since first quarter 2001, averageannual
entidement opportunrtles For housing
within a regron would use the hammer
of competition to decreasethe cost of
living.
The desirability of more affordable
housrng is shared by much of the
p u b l i c . B u r e n o d e m e n r d e c r s i o n sr r e
not made at the regiona.l ievel. Such
decisions are made locally by politrcians
who q'pica.liy conduci dreir heartngsin
chembers packed with constih-rents
from the neghborhoods that surround
the proposed burlding sites.While those
nerghbors may well ascribe to the
principle of more aftbrdable housrng
and may know more supplywill stabilize
or bring down prices, they rarely wrll
.rccepr more units nerr tireir own
backyards.
Just as binding many strips of wood
rogether makes a srong beam, the
blockage of many proiects by many
loca.lbodies creates:t,strong barrier to
economic growth. Regrons wrll be able
to realize their economic potenual only
if the pubhc who live and vote in those
zreas come together on the Public
pohcies and investments needed to
^^L.--,-
+L.r ^^r--
"l
Dr. Claude Gruen is a Principal rvith
Gruen Gruen * Associates, a research
and consulting firm with offices in
San Francisco and the Midwest'
www.ggassoc.com
THE INSTITUTIONAL REAL ESTAIE LETTER
wrll work to hold down additionsto the
employee base by rechargrng the
productrvity garns that reduce the
demendfor irbor. Unemploymentis
As we look to 2005,we note the U.S. unlikelyto climb much over 6 percent,
economy is sounder than the U.S. however,paruallybecausethe growth
dollar. The dollar will contrnue ro in informa.lworkerswrll hold down the
decline, but Asian countries, which
numberof reportedjob seekers.
Trends
December,2004
The Economy in 2005
have long been propping up the
^,--..r,,^.r |.c .,,",...- -zil] not
unload their hoard of dollars so as ro
czusea monetary crlses.
One reasonfor our economicstrength
is the high proportion of our
populatronthat works. At greaterthan
66 percent, the U.S. labor force
GDP wrll grow by .rbout 3.5 percent n
participatronrate is one ofthe hrghest
2005, a reasonably healthy rate of
in the developed
world. Not only does
growth. Late in 2004,the account trade the U.S.economycontainan unusually
ciet-icitwas at a historic high of 5.5 high proporuon of ihe country's
p e r c e n r o i G D P . t s h . r s l o n g b e e n populationand age-elgrblework Force,
t r u e .b i g e x p o r r e r sr o r h e U n i t e dS t e r e s . but a recentsurveyin the UnitedStates,
such as Chin4 Japan and Singapore, Cznzda,,
Jzptn,Itdn and Swedenfound
have financedsome of the purchaseof
U.S.workerstend to be more satisfied
rhcir
onnrlc
h'
I I q
.^n<' 'mar<
h'
r.viththeir lobs and working conditrons
purchasing U.S. Treasuries. The rhrn job holdersin the othercountries.
inventory of U.S. govemment debt
heldby Asiangovernmentsno$/ stands The recent tz-x law change that will
at $1.1tr1lllon.
enableU.S. companiesto bring back
dollarsearnedoverseasat rrerylow ta-x
If the Asian countriesstop trading in r.r'eswill grveonly the smallesttincrure
their excessdollarsfbr U.S.assetsor, oi relie[.rnd dlrt only remporrrily.ro
u n r q c v e ' ' r n l n ' d s - ' m c n F t h e U . S . the manut-acturing
sector.Within that
Treasurybonds they now' hold, the sector.prospecls:re good only For
value of the dollar would plummet, those who can innovxte or automate.
c"rusinginflrtion and higher interesr O n e o F t h e m r i o r c h r l l e n o e q n F
rateshere.Economists
wxtchingChinr, PresidentBush'ssecondterm wiil be to
however, believe this trade gorilla is implement incentivesfor such industnal
gorng to keep reinvestingin the U.S. ieadershrp. The only industnal rea.l
but at a siower rate than it has in the estate likeJy to see demand growth is
past.An interestingsign that tends to spacelhat can facilitate tenants' success
confirmthisis the recentChineseoffer in automation or innovation.
to buy the Canadranmining company,
Noranda,for more than $6 billion. To achieve the potential that exists tbr
Perhapsthe Chinese are broadening growth in trade, tourism and
their dollar-liftrng effons by buying intemational services,the govemment
assets,in addition to lending in the must reduce congestion in our seaports
,Amerlcas.
and airports. To accomplish this while
simultaneously increasing securitf will
In 2005, the employmentbase will require faster adxptatronof biometric
-^..
L,-r, --^
| -i
^-*---+
1nd 2
and other technologres that wiil enable
percent,an increaseoFat least2 million travelers and cargo to be identified and
i oh s . T n c r e r s i n qh u s i n e s qi n v e s r m e n t s checkedquickly and accurately. Hr€e
r.vrllspur economic growth, making up lnYestment and much more focused
fbr the slov'er but slll healthy rate of attentlon must also be grven to shoring
's
inr-re rcc
i.n. . n e-r-c,n n. . r,1. . r-n n.q-r, -rm p l t o n
up rhe coun11 overio.rdedm,rntime,
I
expenditures. This business investment
arr and rail linkages. The real estate
p"e.3
industry'sprovision of well-locatedand
producuuty-facilitatinglogisacfacihtres
wiil work in concertwith governmental
successes
in expendingthe country's
capacityto move cargoover its borders
and within the country.
Like the premature report of lvlark
Twain's death,predictionsof a housing
bubble will prove ro be highly
exaggerated.While housingseekersin
a few regions, where the addition of
supply has not been hobbled by
entitlement botdenecks, will benefit
From housing price stability and even
s[ght decLines,
most regionsmerelywill
scc il sluwduwn rn thc rale nF nr;cp
increases.
The economy of 2005 will be neither
boom nor bust, but will move aheadso
: s r o i n c r e t s ei n c o m e sr n d e m p l o y m e n t
ar-rdprovide strength that, ifused wiseiy,
can help us deal wi$ the very real
threats from terrorism and the need to
move to sustainableenergy sources.*
Dr. Claude Gruen is a Principal with
Gruen Gruen + Associates,a research
aud consulting firm with officesin
San Francisco and the Midwest.
www.ggassoc.com