Robert Freedman is the director of multimedia communications at NAR. He can be contacted at email@example.com.
Walkable Living Makes Strides
What's the impact of high gas prices on residential real estate? Real estate practitioners and industry analysts debate the fate of suburbia and the prospect of a future where people leave their cars in the garage.
November 1, 2008
Pain at the pump is accelerating demand for higher density homes close to jobs, but predictions of suburbia’s demise may be premature.
With gas prices hovering around $4 a gallon for the foreseeable future, will suburbs see subdued demand even after other housing areas regain strength?
REALTOR® magazine brought together industry analysts and practitioners to debate that question. Their conclusion: The high cost of gasoline is simply accelerating a changing demographic picture. After reigning supreme for decades, they say, the suburban lifestyle model will share the limelight with what panelist Christopher Leinberger calls a "walkable urban" alternative. Suburbs that thrive in this new age will go through their own renaissance to become less car-dependent.
REALTOR® magazine: In the last two years, the dynamics of the housing market have changed considerably, with higher gas prices coming on top of the market slowdown. Where do you expect to see home sales growth in the next five years?
David Wluka: The inner suburbs—the ones that are close to jobs. Those that are further out are having serious problems in terms of pricing and sales. There’s a definite push toward being closer to work.
Nick Bastian: I agree. We’re definitely seeing a focus on properties that are closer to town and closer to public transportation. Arizona’s notorious for being spread out. In years past, if you saw a bus on a street, it was empty. But now we’re seeing buses and park-and-ride lots full. It’s been a huge mind shift.
Jeffrey Otteau: We’ve been seeing a shift from the outer- to the inner-ring suburbs and urban areas at least since 2005, so higher gas prices are just a layering on top of a shift that was already developing because of demographics. When you look at the entire cohort of potential home buyers, what you’ll see is that over the next 15 years, 75 percent of them want nothing to do with a house in the suburbs with a good school system. The housing demand is heavily concentrated among aging empty-nest baby boomers and emerging Generation Y households, all of which are childless. These households are looking for lifestyle, transportation efficiencies, and access to major metropolitan areas. We have 11 months of inventory in New Jersey. When we look at the top 10 markets in the state, all of them have a rail station that connects to Manhattan. These markets are running inventories of two to four months, and their declines in home prices have been on a magnitude of about 5 percent, while the market at large has lost about 20 percent. So from every angle, housing demand is reversing the pattern of the last 30 years and is coming back to where it all began: the cities and the inner-ring suburbs.
Christopher Leinberger: This move back to the cities and inner-ring suburbs is a structural, not a cyclical, shift, and it’s as important as the shift in the 1950s to the suburbs. But this shift leaves us with overbuilt product on the fringe of the suburbs that may not find a market, certainly not at replacement cost. So there will be downward pressure on prices for this product, some of which is pretty new.
Wluka: I’m seeing things a little differently. Generation Y people do go into the cities, but once they have kids, they come back out to the suburbs. I’m seeing significant demand for the old-fashioned, single-family house on a half-acre or larger lot. In fact, some of them want an acre or more.
Leinberger: This isn’t to say the "drivable suburban" model isn’t a realistic model. There’s obviously market demand for it. The question is, over the next 20 years, with 88 percent of net new households formed in this country singles and couples, is the drivable suburban product overbuilt? In the meantime, we don’t have enough walkable urban product, which is why the walkable urban price premiums are 40 percent to 200 percent on a price-per-square-foot basis, according to my research.
Pat Kaplan: With Portland’s urban growth boundary, we have always driven people to the center of the city, but it was about four years ago that I saw the properties that were close to public transportation and in walkable communities begin to appreciate much more rapidly than other properties. To this day that’s still the pricing structure.
Leinberger: It’s interesting that 20 years ago, the cheap place to live in this country was in the walkable urban locations; now those areas have this price premium. That’s the structural shift.
Otteau: When the housing market begins to recover, the outer suburb housing market will actually worsen because it will accelerate this structural shift. Over the long term, suburban housing will underperform against the entire marketplace, and in some markets, we’ll see significant declines when the broader market is actually getting better.
RM: Assuming the accuracy of your forecast, are there things real estate practitioners in those markets can do to make the outer suburban areas more attractive to consumers? We can’t let a whole segment of the housing market devalue like that, can we?
Otteau: One action is fighting "down-zoning" by suburban municipalities attempting to control growth. Down-zoning lowers density and has the effect of pushing new-home prices in the suburbs beyond what home buyers can afford to pay. That affordability problem also drives demand back to cities where there’s higher density.
Wluka: I agree. If you could convince communities to adopt a transfer-of-development-rights concept, where you took the land you wanted for a ring road and created enough density to support a transit system and new urban-type communities, you could attract buyers. Once people see new urban-type communities, they like them because they’re quite lovely. The trouble is that we in real estate aren’t making the density decisions. It’s the people at the zoning and planning boards. I’m on a governor’s task force in Massachusetts to rewrite our zoning enabling laws. The goal is to encourage walkable suburbs with higher density by rewarding localities that adopt this model with state money. The resistance from local communities is tremendous.
Leinberger: This isn’t about where the suburbs are but how they’re designed. Much of the demand for walkable urban product is in fact in the suburbs. In the Washington, D.C., metro area, which has more walkable urban places per capita than any other metro region in the country, 70 percent of the walkable urban places are in the suburbs. Only 30 percent are in the center city. And both are doing well. What the market’s telling us is that people want lifestyle centers that are mixed-use with retail on the ground floor and office, housing, or hotel space above.
RM: Why are municipalities fighting zoning changes? Does it have to do with the increasing cost of infrastructure for higher density?
Wluka: That’s one of the excuses. But the underlying reason, at least in a home-rule state, is loss of power. In Massachusetts, we have 51 towns that have their own zoning bylaws and density regulations, and it’s very difficult to get any of them to give up that power.
Otteau: From our market perspective, the arguments against higher density and more transportation-efficient zoning are twofold: Less development means fewer cars on the road (although in reality the opposite is true), and higher density equates to higher taxes to fund services for the greater number of families in an area.
Leinberger: It’s interesting that drivable suburban areas promise open space, ease of getting around by car, and clear air, but as you build more of these communities, the quality of life goes down and those promises are dashed. What people don’t know yet is that as you build walkable urban places, preferably around rail transit, more density is better from a quality-of-life standpoint. And the other thing is, the density provides a great fiscal foundation under the jurisdiction. Arlington County, in the D.C. area, for example, which has fostered high density around transit, is one of the most financially healthy counties in the region.
RM: But if I’m a real estate professional in one of these outlying areas, I have to earn a living today. What can I do?
Wluka: Well, the increase in gas prices, while obviously very significant, isn’t necessarily enough to change many households’ homebuying decision once they really look at the costs. And you can help people see that. When you calculate fuel costs over a year for commuting—say it’s 60 miles, round trip, a day—you’re looking at 300 miles a week. If you get 20 miles per gallon, you’re using 15 gallons a week. That’s about $60 a week. If someone is buying a $600,000 house, is $60 that big of a deal, especially for a family with children for whom schools are so important? When young couples have kids, they tend to move out of the city. That hasn’t changed.
Leinberger: I think we’re going to be seeing households shift their spending from transportation to housing, and you can encourage that by talking about the need for people to shift their spending from a depreciable asset to an appreciable one. If you drop one car out of your household, the American Automobile Association tells us you’re saving $7,800 a year in after-tax dollars. If you translate that savings into a mortgage, you can increase your mortgage capacity by $150,000. We in real estate want people to make the decision to shift their spending from cars to what we’re building.
Bastian: One of the beautiful things about real estate is it’s so individual. With new social media tools, such as blogs, you can expound on what you know about the benefits of your neighborhood and reach a wide audience. There’s always going to be those who like the rural lifestyle of the outlying areas, so if you have a great community center or equestrian park or motorcycle facility, you need to make sure people are aware of that. In the Phoenix area, a lot of the developers have gone to advertising "live, work, and play"—you know, to do everything in your own community. And they’ve had pretty good success with it.
Kaplan: I agree. We’re going to see a trend back to real estate professionals specializing in specific areas, staying closer to their base and developing specialties. You’ll also see associates becoming smarter in qualifying their buyers. They don’t have extra time or gas dollars to drive around looking at houses, so when they get an e-mail saying, ‘I saw your listing on the Internet. I’d love to take a look at it,’ they’re not running out to show it if it’s a 20-minute drive away. Instead, you’re seeing them e-mailing or calling to make sure a buyer is qualified before they spend their time and dollars showing it.
RM: We’ve been talking about a shift to center cities to be closer to jobs and reduce commutes, but isn’t much of today’s job growth in the suburbs? What can localities do to make suburbs more walkable and transit-oriented?
Robert Dunphy: The topic of suburban growth and suburban jobs is a tough one because, from a smart growth perspective, a lot of people would rather not have the jobs in the suburbs. They’d rather have all the jobs back in the city. Well, you know that’s not going to happen, so you need to plan suburban jobs in such a way that you do offer transit options that require relatively short drives.
Otteau: One of the things that New Jersey has done right is to enact legislation in which it pays for the construction of an employment facility if the employer locates in a city within a half mile of a train station. The law’s been in effect for about a year, and no announcements of projects getting funded have been made yet. But we’re expecting that to occur.
Bastian: In Tempe, they’re talking about giving developers incentives to get density and affordability because you need density to make transit viable. That’s just really never been done in Arizona before, and they’re really being conscious of making communities friendly for walkers and bike riders. They want to make sure it’s pedestrian-friendly and the shops are going to be situated facing the streets, making it easily accessible to people and having the parking in the back.
Dunphy: This challenge is, you need to convince people to make it easy to develop in the locations that we all agree are the good ones and harder to develop in the bad ones. But public policy tends to go in the opposite direction. Infill development in established areas is complicated. You have more people living by the development so you have more potential opposition, and the development is more expensive. And if you’re really aggressive and try to make the development affordable, the project becomes even more difficult to do. By contrast, if you just go out and do kind of a conventional project in the suburbs—the kind of project that everybody agrees we should be doing less of—localities will usually just give you straightforward approval.
Kaplan: In Portland, we have our high-tech area outside the city center because the cost for businesses trying to locate within the city boundaries is too high. Buyers would love to be closer to the city center, but they’d rather be closer to their jobs, so they live in the middle areas.
Dunphy: What you have in Portland is really the best of both worlds. People who can’t live all the way downtown can settle on a place in between a suburban and a downtown location, and some of their travel can be served by public transit.
Kaplan: Yes, but one problem we’re experiencing is parking capacity. Portland has a fabulous light rail system, but all the parking structures are full by 7 o’clock in the morning.
RM: If gas prices should go back down to, say, something under $3 a gallon, does everything we’re talking about become moot?
Otteau: At most, a fall in gasoline prices will only slow the speed of the shift to more dense housing in urban areas. The kind of houses we have today and where they’re located have, for the most part, been defined by baby boomers. When baby boomers start retiring and slide down the job ladder instead of climbing up it, we’re going to see a significant movement of empty-nest baby boomers looking for lifestyle with smaller space. That shift is coming regardless of what happens with gas prices.
Wluka: Well, at the end of the day, there remains a market for suburban single-family housing. While there’s migration to the center city, it’s not families with children making that move. Housing demand is still linked to the school system. My son is 35 years old and has three kids. Like others in Generation X, he’s a young professional moving from the urban area to the suburbs.
Meet the Panelists:
- Nick Bastian is a sales associate with Realty Executives in Tempe, Ariz., where a light rail system is under development.
- Robert Dunphy is a senior resident fellow with the Urban Land Institute in Washington, D.C., specializing in transportation and infrastructure issues.
- Pat Kaplan, CRS®, GRI, is broker-owner of Kaplan Real Estate Group in Portland, Ore., where growth circles have long dictated development patterns. Kaplan, a former treasurer of the NATIONAL ASSOCIATION OF REALTORS®, has been a leader in NAR’s smart growth initiatives.
- Christopher Leinberger is a visiting fellow with The Brookings Institution in Washington, D.C., and author of the book The Option of Urbanism (Island Press, 2007). He’s a founding partner of Arcadia Land Development, which develops walkable communities.
- Jeffrey Otteau is president of Otteau Valuation Group in East Brunswick, N.J., a real estate con-sulting group that conducts real estate market analyses and property valuations, and general manager of www.otteau.com, a site that tracks real estate trends.
- David Wluka, president of Wluka Real Estate Corp. in Sharon, Mass., specializes in both residential and commercial real estate and chairs NAR’s Transportation Working Group.
Updated: June 19, 2018