How Real Estate Developers Think

Design, Profits, and Community

Peter Hendee Brown

• Publisher: University of Pennsylvania Press
• Year: 2015
• ISBN:
  9780812291261
• Topic: Business
• Subtopic: Real Estate
• Index: Business

Cities are always changing: streets, infrastructure, public spaces, and buildings are constantly being built, improved, demolished, and replaced. But even when a new project is designed to improve a community, neighborhood residents often find themselves at odds with the real estate developer who proposes it. Savvy developers are willing to work with residents to allay their concerns and gain public support, but at the same time, a real estate development is a business venture financed by private investors who take significant risks. In How Real Estate Developers Think, Peter Hendee Brown explains the interests, motives, and actions of real estate developers, using case studies to show how the basic principles of development remain the same everywhere even as practices vary based on climate, local culture, and geography. An understanding of what developers do and why they do it will help community members, elected officials, and others participate more productively in the development process in their own communities.Based on interviews with over a hundred people involved in the real estate development business in Chicago, Miami, Portland (Oregon), and the Twin Cities of Minneapolis and St. Paul, How Real Estate Developers Think considers developers from three different perspectives. Brown profiles the careers of individual developers to illustrate the character of the entrepreneur, considers the roles played by innovation, design, marketing, and sales in the production of real estate, and examines the risks and rewards that motivate developers as people. Ultimately, How Real Estate Developers Think portrays developers as creative visionaries who are able to imagine future possibilities for our cities and communities and shows that understanding them will lead to better outcomes for neighbors, communities, and cities.

Chapter 1

Developer as Visionary

Buy real estate in areas where the path exists and buy more real estate where there is no path, but you can create your own.

—David Waronker, American real estate investor¹

Three Hills

In 1625 the Reverend William Blackstone, one of New England’s first European settlers, bought a large piece of land in Boston with three hills and pure springs, where he built a small cottage. The area soon began to attract other settlers and Blackstone, a recluse, decamped for Rhode Island in 1630. For the next century and a half, the area, called “Tri-mount” because of its three hills, remained a pastoral grazing common with only a few estates, pastures, and orchards.²

In 1795, a group of wealthy businessmen created a private company called Mount Vernon Proprietors for the purpose of developing housing in the area for the growing merchant class. In the same year they bought a south-facing, sloping pasture of eighteen and a half acres from the painter John Singleton Copley, in part because one of their partners, Harrison Gray Otis, had served on the town committee that had settled on the area for the site of a new state house. Copley later protested the sale on the grounds that Otis had inside information about the future value of his land, but Copley lost after a decade-long legal battle. At around the same time the Commonwealth of Massachusetts acquired a six-and-a-half-acre parcel from its first governor, John Hancock, and the new Massachusetts State House, designed by the architect Charles Bulfinch, was built on the site and completed in 1798.³

The Mount Vernon Proprietors got to work soon after, laying out streets in 1799. Next, they began cutting down the three hills and then regrading to create flatter and more developable land. The westernmost hill, Mount Vernon, was cut down first and the spoils were used as fill along the edge of the Charles River, creating more land and increasing the holdings of the Mount Vernon Proprietors. At the top of the steepest of the three hills stood a disused beacon that had been built during the Revolutionary War for the purposes of warning nearby towns in the case of enemy attack. That hill, which then stood sixty feet taller than it does today, was cut down and regraded as well but its name endured and over the coming decades the Mount Vernon Proprietors transformed Reverend Blackstone’s pastoral retreat into the area now known as Beacon Hill.⁴

Beacon Hill comprises three districts: the North Slope, the Flat of the Hill, and the South Slope. The North Slope was originally a seedy waterfront area called “Mt. Whoredom,” and the Mount Vernon Proprietors purposefully laid out the major streets in an east-west orientation to minimize connections to the area. Over time the North Slope became home to African Americans and abolitionists and then to Irish, Italian, and Eastern European Jewish immigrants. The Flat of the Hill, the filled area along the edge of the Charles River, originally housed both residences and businesses, including the blacksmiths and stables that served the residents of the South Slope. Over time the area grew and a vibrant business and retail district developed along Charles Street.⁵

But the heart of the Mount Vernon Proprietors’ plan was to build a new community for Boston’s wealthy on the South Slope, so they started with large mansions but soon realized that they could earn a greater return on their investment in the land by developing more densely, building a greater number of smaller homes, and selling in volume. The rest of the streets were laid out to accommodate brick row houses in the Federal style that Bulfinch helped popularize and in the Greek revival style that was also popular at the time.⁶

Few people in the twenty-first century would describe Beacon Hill as a highly speculative “real estate development” but in 1795, that is exactly what it was. A group of wealthy investors with a vision bought land; drafted a plan; completed earth works; platted, subdivided, laid out, and built streets; and built and sold houses designed in broadly popular styles. What is called Beacon Hill began as a simple land deal and a production housing development, although it took the better part of a century to fill in the entire area. More important, however, is that the vision of the Mount Vernon Proprietors long outlived its creators. Beacon Hill went from being a hilly pasture to becoming the residential heart of Boston, and the South Slope, with its red brick houses that exude class, taste, heritage, permanence, and inevitability, became one of the most desirable and expensive places to live in the United States.

Figure 3. The excavation of Beacon Hill in 1811. Lithograph taken from a watercolor by J. R. Smith. Courtesy Trustees of the Boston Public Library, Print Department.

Figure 4. Beacon Hill in 2006. Photo by Della Huff.

A Brief History of Urban Real Estate Development in America

Real estate development has always meant the investment of capital into improving existing land and property by moving earth, providing infrastructure, subdividing the improved land into smaller parcels or lots, and constructing buildings, typically in order to increase use and density. Urban development in the United States from the seventeenth through the early twentieth centuries more often meant the development of new housing on large tracts of former agricultural land owned by a few individuals close in to the city—land with few neighbors and few problems. Some cities grew organically but in others visionaries with control over large land areas were able to produce grand plans that took centuries to realize. William Penn’s seventeenth-century “Greene Country Towne” vision for Philadelphia was based on a gridiron plan and five public squares. A century later Pierre L’Enfant followed with a plan for the new capital city of Washington, DC (at the time, swampland), which was based on a gridiron overlaid with diagonal avenues and circles at their intersections. Much like the Mount Vernon Proprietors, these visionaries first created a plan; they then cut down the trees where the streets would go, built the streets, and subdivided the land. Over time, investment and development followed the path of least resistance: those new streets that provided access to the parcels of land that were for sale.

The industrial era led to urbanization, as people from the countryside made their way into town looking for manufacturing work in the factories that sprang up around the road, rail, and maritime infrastructure that was concentrated within urban areas. Cities filled up with workers who lived in dense housing within walking distance of their factory jobs. At the turn of the twentieth century, public health problems in cities stemming from deplorable housing conditions, overcrowding, inadequate water and sewer systems, and the lack of light, clean air, and public space caused city leaders to begin planning again. The City Beautiful movement that followed resulted in grand plans for urban space and infrastructure. Plans were created for St. Louis by Harland Bartholomew, for San Diego by John Nolen, and for Chicago by Daniel Burnham, who was known for having said: “Make no little plans. They have no magic to stir men’s blood and probably will not themselves be realized.”⁷

Since the nineteenth century, suburban commuter towns had grown up around train stations but these stations became less important as the invention and improvement of the internal combustion engine led to rapid growth in automobile and truck use, initiating the “rails to rubber” movement. Henry Ford’s mass production of cheap automobiles accelerated this movement, opening up the entire countryside to a new form of suburban development while the influence of the railroads on development patterns continued to decline. Automobile use grew throughout the post–World War II era, and the Federal Aid Highway Act of 1956, a $10 billion-investment in more than forty thousand miles of interstate highways, further fueled this growth. These roads opened up access to the countryside and accelerated the exodus of people and industry to the suburbs, leading to the hollowing out of cities, which were often carved up by the new highways that cut through and isolated urban communities. The flight of the middle class left only low-income immigrants and African Americans in the urban cores of most cities.

In the 1950s and 1960s, the federal government attempted to stimulate private investment in America’s struggling inner cities by implementing big plans. While the majority of urban land in the United States is privately owned and developed, the Urban Renewal program of slum clearance and large-scale urban redevelopment projects put the government in the role of a visionary developer by combining federal funding with public planning and private development partners at the local level. Urban Renewal, however, was costly, had mixed results, and dislocated many of the low-income people left behind in the urban core whose homes and communities were bulldozed to make way for new, modern housing projects that generated new social problems of their own. In the 1980s Urban Renewal became a memory, city governments largely ceded responsibility for planning back to the private sector, and few cities possessed enough land, money, or political will to make any plans at all.

At about the same time, many formerly working-class industrial cities, which had suffered from population losses and the depleted tax base that resulted, started to implement a new economic development strategy. Recognizing the permanent loss of industry and blue-collar factory jobs, these cities sought to transform their downtowns and increase private investment and the tax base by attracting the “FIRE” businesses of finance, insurance, real estate, and other businesses that created white-collar professional jobs. These new workplaces, along with improvements to existing arts and culture institutions and tourist infrastructure, initiated the revitalization of the city as a cultural attraction and place to visit, if not a place to live. In addition to these cultural institutions, many higher education and medical institutions with historic roots and large campuses and specialized buildings in the city that could not be easily relocated began to reinvest in their facilities and surrounding communities. Together, arts and culture institutions and the “eds and meds” began to fill some of the gaps in the urban core and began to attract the middle and upper classes back to the city.

But cities still faced a big challenge, because the only property available for large-scale urban development after the 1970s was land abandoned by former industrial uses like factories, railyards, and waterfronts. Many of these sites were in great locations, close to the downtown core, but they often lacked traditional infrastructure and presented significant environmental challenges that together increased costs, risks, and liabilities to cities and private developers alike. Visionary developers and public officials began transforming these kinds of sites into communities in many cities, including Chicago and Portland, Oregon, as we will see. These sites were so large, however, that they took decades of building production and absorption to completely redevelop and in many places they were still being built out in the 2010s. Urban universities, colleges, and major healthcare systems were among the few remaining institutions that could still develop and build according to “master plans” but many of these had become increasingly landlocked too and had to resort to piecemeal infill planning and the replacement of existing facilities with higher-density development.

At a smaller scale, private property owners and developers were no longer converting agricultural land to whole new neighborhoods and commercial and retail districts, as the Mount Vernon Proprietors in Boston had done. Instead, they were replacing aged building stock and infilling smaller vacant parcels, often with new uses and at increasingly higher densities. But many of the parcels that were available came with the same challenges as the larger industrial sites. For example, cities were full of quarter-block parcels that once housed gas stations or laundromats that sat vacant atop contaminated soil that would be costly to clean up and that imposed risks and liabilities on new owners. Efficient development requires an area of minimum size, shape, and dimensions, so parcels that were oddly shaped or too small to accommodate marketable building types presented yet another set of challenges. In these cases a developer would have to buy up and “assemble” one or more adjacent parcels to create a single, large, contiguous parcel of the right size and shape to accommodate an economically viable development. But land assembly requires patience and entails significant transactional risks, because several if not many parties may be involved and a good development idea can be frustrated by a single landowner who does not want to sell, who wants to hold out for a very high price, or who wants to work with a competitor. And for those who control urban property at any scale, private development is no longer as private as it once was since the public has started to directly engage developers and the governments that regulate them after having lost trust in both.

Challenges of Developing in the Twenty-first Century

Developers like the Mount Vernon Proprietors operated with extraordinary freedom because there were few neighbors at the time who would have objected to the development of agricultural land, but cities have changed through urbanization, population growth, and other trends and forces. Four key movements that started in the 1960s increased the public’s skepticism of both private- and public-sector development and construction activities and led to the rise of “public participation.” First, in 1961, an observant Greenwich Village housewife named Jane Jacobs wrote the classic Death and Life of Great American Cities. Jacobs’s book was the first significant critique of the Urban Renewal program and the failure of its modernist planning efforts. Death and Life marked the turning point in how Americans thought about building their cities, and it has remained a classic and a largely relevant urban planning and design text today. Second, other classics soon followed, including Rachel Carson’s Silent Spring (serialized in The New Yorker and published as a book in 1962), which was widely credited as causing the ban of the pesticide DDT and launching the environmental movement. Third, the mass demolition of blocks of older buildings in city centers by Urban Renewal’s “federal bulldozer” culminated in the destruction of New York City’s magnificent McKim, Mead, and White–designed Pennsylvania Station. Its replacement with what many considered to be a soulless, modernist monstrosity sparked the birth of the historic preservation movement.⁸

The fourth movement began in 1978 with the passage of the popular ballot initiative Proposition 13 in California. “Prop 13” limited the California state government’s ability to increase property taxes in California, initiating a “taxpayer revolt” and ushering in the era of “no new taxes” throughout the United States. One effect of the antitax movement was that cities began to seek alternatives to using general-fund tax revenues for needed public infrastructure projects. The public-private partnership, or PPP project model, an alternative financing method introduced in the early 1980s, quickly proliferated around the United States and the world and has continued to dominate in the twenty-first century. These projects are legal and financial partnerships between private developers and governments—usually city governments—who offer to support a private project financially with public resources such as low-cost land, environmental cleanup grants, low-cost money in the form of tax-exempt debt, and future tax revenues (tax abatement and tax increment financing, or TIF). Policy makers hoped that the use of public resources to reduce the costs and risks for developers working in unproven urban areas would stimulate the market and “prime the pump” for future private development and reinvestment in the city that would not require subsidies. In exchange for these resources, the public would obtain benefits or amenities as a part of the project, ranging from streetscape and sidewalk improvements to public plazas, parks, green roofs, and parking facilities. Often, however, the public benefits seemed sparse or not very public and the subsidies were viewed as payments that lined the pockets of private developers while moving a large share of the risk onto the public partner. At the same time subsidies became a normal expectation from developers in many cities where elected officials wondered when the pump would finally run by...