The Urban Bubble
Downtown Condo Market Goes the Way of the Exurbs
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many in public-policy organizations, academia and the media, the current
mortgage and credit crisis suggests the impending collapse of the American
suburban dream. The prevailing image is of a wave of foreclosures inundating
the winding culs-de-sac of split-level ranch houses and neo-colonials, built
and bought with cheap money and low interest rates.
One prominent New Urbanist, Chris B. Leinberger, writing in The Atlantic,
is advancing the theory the mortgage crisis reflects a growing trend toward
dense urban living that will leave much of the periphery — both the older,
established suburbs and the newer, edge cities — as what he calls “the next
slum.” He heralds a “structural change under way in the way Americans work
and live,” with people moving back to the central core of cities.
It turns out, however, that urban centers — particularly those promoting
dense condominium developments — are increasingly buckling under the same
credit problems now affecting many housing developments on the suburban
fringe. In some markets, condo sales, a strong indicator of urban fortunes,
are dropping in price more quickly than single-family homes.
Even where prices are dropping less quickly or rising, as in Manhattan,
higher prices often reflect the narrowing of the market. As middle class
home-buyers have been priced out of elite urban centers, the extreme upper
end of the market is increasingly dominating new sales. In New York, this
means more and more pieds ŕ terre owned by foreigners or wealthy Americans
with multiple residences. The New York Times recently ran a story about the
new multimillion-dollar apartments in The Plaza — many of which are
regularly empty, because buyers have their principle residences elsewhere.
But, even in New York, the volume of sales has been dropping, more than
34 percent in the last quarter compared to a year earlier — the steepest
drop in 18 years. As the other great bubble, the one on Wall Street,
deflates, many major projects, including the $4-billion Atlantic Yards
project in downtown Brooklyn, designed by Frank O. Gehry, have been
substantially scaled back or delayed. Altogether, more than $20 billion in
new projects have been put on hold and into mothballs.
In other urban centers — none of which offer the amenities and
attractions of New York — sales are falling off, sometimes dramatically.
Many condo projects are suffering weak sales, softening prices or have been
turned into rentals in once “hot” core cities, including San Francisco,
Seattle, Boston, Philadelphia, Portland, Atlanta, Chicago and Washington.
Nor is a turnaround likely in the near future. One corrosive factor may
be that, despite the downturn, many markets can expect to see thousands of
new condo and multi-family units come on line in the next few years. This is
the delayed impact of the easy financing available at the height of the
property bubble.
In 2007, the nation had a supply of completed condominiums that would
normally absorb 10 months’ demand, and this year more than 20,000 new units
are scheduled to be completed in Atlanta, south Florida and San Diego alone.
In these and many other once-promising downtown markets, like Los Angeles,
prices in the much-ballyhooed central core are falling twice as fast as the
surrounding region.
With the continued addition of new product amid falling prices, many, if
not most inner city markets, are facing a tough road over the next few
years.
If these realities conflict with what you have been reading in the
mainstream press, do not be surprised. City revivals, sometimes amounting to
a move of a few thousand people to a downtown area, have been promoted
relentlessly by civic leaders and echoed with breathless enthusiasm by local
developers and realtors.
Rarely reported, however, is the fact that more than 90 percent of all
metropolitan growth in this “back to the city” decade has taken place in the
periphery. One reason: 80 percent of Americans, according to numerous
surveys, want to live in suburbs, small towns or the country. In addition,
contrary to the notions of city planners and media cognitive elites, the
vast majority of Americans prefer a single-family home to an apartment or
condo. For most people, the American dream still means a house with a yard —
not a high-rise apartment
Yet such facts seem to mean little to many who write about the future of
cities and suburbs. One misleading account ran in the supposedly
authoritative Financial Times on Apr. 4. Titled “As Cities revive, America’s
poor are forced to the periphery,” the article cited studies which show that
older, inner-ring suburbs now are home to more of the working poor than
urban cores.
The FT’s basic premise was that while it’s still good times in the urban
core, it’s a disaster further out. “It used to be that the poor people lived
in cities and the rich lived in suburbs,” Carol Coletta, who runs CEO for
Cities, a pro-urban think-tank, was cited in the piece, “Now it’s the
reverse.”
Not quite true. Overall, according to the census, the poverty rate in the
suburbs is only half that of the core cities. Moreover, the suburbs have
grown at nine times the rate of central cities since 2000, and now have 2.7
times as much population. Given these facts, notes demographer Wendell Cox,
it is not surprising they have a larger number of people in poverty.
Yet, the greatest concentrations of poverty in America remain in the
country’s inner cities. All 10 of the nation’s poorest places of more than
250,000 people are traditional urban centers, most with nearly one in four
persons living in poverty — including Coletta’s hometown of Memphis. In
contrast, the 15 counties of more than 250,000 population that have the
highest median income are all, well, in the suburbs.
It is also hard to make a case that urban centers are now attracting
hordes of the upwardly mobile and well-off aging boomers, as is often
suggested. Studies by the Brookings Institution demographer, William H.
Frey, and real estate industry experts have found that relatively few
well-heeled empty-nesters are deserting their suburban nests for the core.
In fact, most are staying close to home, while about as many head further
out than move in.
Similarly, middle class residents continue to leave urban centers,
particularly as they enter their thirties and start having families. Most
major urban school districts face declining enrollments; in Chicago, public
school enrollment has declined by 41,000 in the last seven years alone.
Despite reports of many more families with strollers in Manhattan, the
numbers of urban children traditionally falls dramatically once kids reach
school age. If you look at 10-year olds, notes an analysis by Praxis
Strategy group, Manhattan’s youth population dwindles to almost half the
national average.
Therefore, despite the hype about families or empty-nesters, cities still
attract mostly young singles, students and new immigrants. Many of these,
once they are settled or reach middle age, often move out to the suburbs or
to less expensive regions. Even core urban groups, like gays, may now be
heading to the suburbs for more affordable housing and quieter
neighborhoods, notes a recent study by UCLA researcher Gary J. Gates.
Costs and comfort may be only part of the reason. Suburbs themselves have
become more diverse and welcoming to households that do not fit the
traditional "Leave it to Beaver" mold. Some have growing cultural
institutions, thriving town centers and excellent ethnic restaurants.
Perhaps more compelling, the bulk of economic growth and jobs — including
high-end professions— continues to shift away from the core urban areas. This
is true even in urban success stories like Portland and Philadelphia.
This may explain why the boosters’ over-hyping of the market for “luxury”
condo development in many cities has become so overwrought and economically
unsustainable. There is clearly a market for dense urban housing that should
expand over time. But given the demographic and economic trends, it does not
exist yet — at least not in the volume or at the prices offered by many
developers today.
Equally important, the celebratory rhetoric surrounding the condo “boom”
has deluded many urban policy makers into mistaking speculative development
for real progress. They would have been much better off focusing on
fundamentals like boosting middle class jobs, reining in inflated public
employee costs, improving educational systems and improving basic
infrastructure.
Yet, ironically, the current condo glut could still present a great
long-term opportunity for urban centers. Lower condominium and rental prices
might lure key urban demographic groups, like young educated workers, to the
central cities that were becoming too pricey for them. City boosters would
do well to use this current crisis to nurture a sustainable urban middle
class instead of wasting time bashing the majority who, stubbornly, still
prefer suburbs.
