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Friday, April 15th, 2011

Replay: The Power of Greenfield Economics

I’ve touched on this before in other posts, but it is worth highlighting again. The great move from the city to the suburbs has been attributed to various factors: changing lifestyle preferences, the automobile, subsidies to sprawl, urban industrial pollution, etc. While there is probably truth in all of these, possibly the most powerful of them all is greenfield economics.

What is greenfield economics? This is simply the set of conditions that flow from building on new territory or exploiting new markets vs. redevelopment of old places, organizations, etc. Being able to start with the proverbial blank slate enables a huge number of benefits. Consider:

1. Everything is new and state of the art. A brand new home in the suburbs is new, comes with a warranty, and probably needs limited maintenance for the first few years. Also, it is built to the current fashion, with the layout, square footage, and room sizes people prefer today. The kitchen has stainless steel, not harvest gold. Everything about it is what the market is demanding today. As fashions and tastes constantly change and evolve, it seems unlikely older homes are hitting the market sweet spot, often requiring renovations, plus they require significant maintenance just to keep them up




2. No legacy costs. More broadly, the area has no legacy costs. There are no brownfields to clean up, no dead malls, etc. There are no unfunded pensions because nobody has accrued a pension yet. There are no bond repayments from yesterday’s boondoggles. And so on.




3. No legacy institutions and culture. A greenfield isn’t saddled with bunch of deals, and accommodations made years ago. It’s isn’t saddled with a mayor who is the grandson of the city council president from 40 years ago. There are a limited number of powerful special interest groups. As anyone who has tried to change an organizational culture that no longer meets institutional needs can tell you, this is a daunting task.




4. Ability to defer infrastructure costs. In particular, arterial street capacity and freeway capacity are built with a lag. This lets new towns avoid costs in the short term.




5. Scale economics are in your favor. Costs consist of fixed components and variable components. In a growth scenario, the fixed portion gets amortized across more units, meaning your cost per unit drops. Also, this allows substitution of additional fixed costs for variable costs to gain further unit cost efficiency. As long as growth holds, that alone can drive down cost per resident and business. This helps keep taxes low.




6. Efficiency of large lot development. New suburbs are usually developing relatively large parcels, which is efficient in that environment. For example, the land was probably acquired from a small number of original owners. The planning and zoning process is pretty much the same whether you are building five houses or five hundred. Again, there are unit costs efficiencies from building many units, etc.




7. Few low income residents. Because new towns tends to feature owner-occupied housing and new apartments, a job and credit history is generally needed to get in. Thus the nature of new places is avoid low-income people, and the associated social service costs. Part of the reason that the outer suburbs experienced particular stress in the housing collapse was because the weakened lending standards allowed people with marginal finances to buy in. A return to the status quo ante means those types of buyers will likely be excluded in the future. That doesn’t do anything to help lower income and working class people – they still have to live somewhere – but it will keep them from newer suburbs, as will restrictions like large lot size zoning and building codes that mandate upscale materials.

It isn’t hard to see why building new and moving to new places, particularly when staying within the same economic and amenity region, is very attractive.

You might say that this is a transitory state and the problems of the city will eventually hit the suburbs as well. Very true. And indeed, that’s what we see. Inner ring suburbs across America are struggling. Some of them are failed towns worse than any inner city. Many of today’s boomburgs will no doubt share the same fate 30 years from now. As a general rule, it seems that only the most affluent suburbs have staying power. But that doesn’t help you if you are a central city or inner ring suburb today.

Eventually all of the items above go into reverse. The town becomes “full”, it gets old, and its own deferred costs catch up with it. Then all of the logic that made the greenfield so powerful works to equally devastating effect in reverse. As the population and tax base shrinks, fixed costs loom large, for example.

The kicker in all this is that the liabilities and costs almost all attach to the territory, not the people. Thus they can be escaped simply by moving to a new greenfield. It’s like prospectors skipping from one clapped out mining town to the next. Or being able to run up a huge credit card in someone else’s name and skip town.

This is a huge structural challenge for old places. There is certainly a lot of work to be done on understanding how to deal with it. But the first step is recognize that simple greenfield economics can account for Hazel Morrow-Jones finding that “people like new and big homes far from the central city.” That’s where the greenfields are and people implicitly get that.

This post originally ran on February 4, 2010.