As house prices skyrocket, zoning changes could solve housing crisis

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About the Author: Salim furth is Principal Investigator and Director of the Urbanity Project with the Mercatus Center at George Mason University. He is the author of a new guidance note on “Housing reform in the United States: a menu of options. “

Many American cities are facing a double real estate crisis: housing prices soar while office buildings remain empty. Neither of these problems can be solved overnight, but cities and states can help solve both by making it easier to redevelop commercial sites for residential use.

This housing cost crisis has been going on for decades. Zoning codes have become more stringent, limiting where housing can be built and matching costly requirements such as large minimum lot sizes. As a result, the United States has built fewer and fewer new homes per capita. When a limited supply market is hit by increased demand, prices soar. And housing demand has risen sharply in 2021, as people working from home want more space, and low interest rates have stretched the purchasing power of those with good credit.

In the office sector, the popularity of flexible working arrangements, especially among younger workers, is pushing companies to rethink their leases. When the time comes to renew, even some profitable and growing office tenants will downsize or take advantage of lower prices to move to a better location. Real estate services firm JLL estimates that at least a fifth of office space is vacant in 17 of the 54 major U.S. markets, including New Jersey, Dallas, Denver and Miami.

Retail markets are in much better shape than offices. Vacancies are stable around 5%. But the industry faces headwinds with the constant rise of e-commerce and the decline of shopping malls, and there are still outlets that have lost their viability. While retail space is not the center of a current crisis, expanding zoning flexibility now will help protect the sector from future economic changes.

Of course, zoning is not the only obstacle to reallocation of commercial real estate. Some places are unattractive for housing. Most commercial structures cannot be reused; they must be replaced. And financial investors can be skeptical of creative, i.e. unproven, concepts.

But for the many sites where residential construction might work, zoning is often the deciding factor. A combination of local tax concerns and the strong voices of a Nimby minority (“not in my garden”) have made many local governments picky about growth. In some jurisdictions, most new developments go through an opaque ‘planned unit development’ process that allows local officials to exercise a veto over everything from density to aesthetics, which opens the door to Corruption. Other jurisdictions would prefer to keep abandoned sites vacant in the hope of someday landing a lucrative commercial taxpayer.

In the long run, cities have a lot to gain from allowing and encouraging residential growth on underperforming commercial sites. Unlike completely new construction, redeveloping an existing site does not add anything to the city’s long-term maintenance obligations for roads, utilities, and stormwater management. And Nimby’s resistance to new housing may be eased on commercial sites.

What types of housing are suitable for old commercial spaces? In neighborhoods and city centers, solutions might involve adaptive reuse rather than new construction. But most of the underperforming retail space is found, unsurprisingly, in second-tier locations, like half-empty suburban office parks. These lend themselves to suburban-style residential development: garden apartments, Texas donuts, and manufactured home parks. Larger sites can become subdivisions or planned communities, with any mix of housing styles that make sense in the local market.

In North Chesterfield, Virginia, local authorities recently authorized new apartments on land that had been zoned and that waited decades for office development that never came. And in Wellesley, Mass., An office park owner proposed a partial redevelopment that would include multi-family space as well as a wider mix of commercial uses. Such developments are not uncommon, but they take longer, cost more, and are much rarer when based on case-by-case rezoning.

The simplest and most necessary step to enable residential redevelopment is to allow residential uses in commercial areas on the basis of a right. Many cities are already doing this.

But cities need to go further, allowing subdivision of plots (ideally up to 1,000 square feet, accommodating a small townhouse) and reducing or eliminating parking minimums so that parking lots can be redeveloped without necessarily demolish a partially occupied commercial building.

States can also intervene. While no city can solve a regional housing crisis on its own, state action has a chance to fight. Legislatures can open all commercial zones to multi-family and single-family residential construction with small lot sizes, although they should write exceptions for the few places that are physically unsafe or give cities the right to appeal.

States looking for a lighter touch may limit the applicability of legislation based on vacancy status, location, or plot size. An alternative is to pre-empt local zoning only for underutilized parking lots and plots with a high vacancy rate on the date of changeover. Another is to only apply it when a commercial plot can be connected to a neighborhood street network. A third would be to limit changes to plots of two or more acres.

Cities and states might be tempted to add a list of costly conditions to residential conversion rezoning, such as the requirement of a ground floor retail, luxury design standards, or a inclusion zoning. But they should resist the urge to tinker, because the build won’t happen at all unless it is completed. In second level locations, this more likely means simple starter houses than the perfect “lifestyle center” drawn in a planner’s pastels.

The weather is changing. Cities change. Zoning must change with them.

Guest comments like this are written by authors outside of the Barron’s and MarketWatch newsroom. They reflect the views and opinions of the authors. Submit comments and other comments to [email protected]

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