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«Abstract This article considers new methods for determining the market demand for urban residential development. Traditional supply/demand analysis ...»

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Confronting the Question of Market Demand for Urban Residential

Development∗

Laurie Volk and Todd Zimmerman

Zimmerman/Volk Associates, Inc.

Abstract

This article considers new methods for determining the market demand for urban residential

development. Traditional supply/demand analysis often underestimates demand because it ignores the

potentially significant impact of newly introduced housing supply in urban areas on settlement patterns,

particularly when that supply is specifically targeted to match the housing preferences and economic capabilities of draw area households. By using methods such as target marketing, the demand for different types of residential development can be estimated for neighborhoods that currently feature no such housing.

Although demand for urban housing cannot be quantified, the characteristics of the various types of households that represent the potential market for urban housing can be determined. An understanding of these household characteristics can guide the public and private sectors toward adopting strategies for developing and sustaining urban neighborhoods. The most difficult challenge is to marshal economic forces through proper positioning, timing, and phasing to exert a positive influence on urban settlement patterns.

Keywords: Markets; Housing; Development/Revitalization Introduction “Demand” for housing is often an illusory concept, particularly when applied to urban neighborhoods. The depth and breadth of the potential market for urban housing, however, can be determined and is often substantial, even in cities that have seen little or no new housing produced in years.

Historically, urban areas have experienced population loss, often severe, and conventional supply/demand analyses typically project that trend to continue, with the result that forecasts of demand are often minimal, if not negative. Conventional supply/demand analyses ignore the potentially significant impact of newly introduced housing supply in urban areas on settlement patterns, particularly when that supply is specifically targeted to match the housing preferences and economic capabilities of draw area households.

∗ This paper is a work in progress and is not intended for attribution. It may not be quoted, cited, or duplicated without the permission of the Fannie Mae Foundation. The opinions expressed are those of the authors and do not necessarily reflect the positions of the Fannie Mae Foundation or its officers.

© Fannie Mae Foundation 2000.

All Rights Reserved.

The Market Power of Emerging Communities 2 Laurie Volk and Todd Zimmerman Research Methodologies All too often, research methodology limits the scope of possible results. For example, if housing market analysis is focused only on the supply side—i.e., values and occupancies of existing dwelling units (typically, adjacent neighborhoods) and values and absorption rates of new residential construction (typically, in greenfields locations)—then the “demand forecast” will be limited to those housing types that are currently available. Even the most rigorously applied supply/demand methodology rarely reveals the actual scope of new housing potential. This is because most “market analysis for real estate uses general marketing theory; however, out of necessity, it must consider the geographical concerns of spatial concentrations of supply and diffused demand” (Grissom and Liu 1994, 79). Rarely is this mismatch adequately resolved.

Because of this mismatch, demand for new housing in a specific location cannot be definitively determined through research, however rigorous. The multiple factors that enter into the housing decision cannot be statistically isolated even through the most complex empirical analysis.

Thoughtful observers of residential settlement patterns know that, when it comes to housing analysis, rigorous empirical inquiry only leads to additional questions.

Although demand for urban housing cannot be quantified, the characteristics of the various types of households that represent the potential market for urban housing can be determined. An understanding of these household characteristics can guide the public and private sectors toward adopting strategies for developing and sustaining urban neighborhoods. The most difficult challenge is to marshal economic forces through proper positioning, timing, and phasing to exert a positive influence on urban settlement patterns.

The challenge is an important one. The creation, re-establishment, restoration, or enhancement of neighborhoods is the foundation of any rational initiative for sustainable regional development.

Without the connections between residents and shopping, employment, and recreation, infrastructure and resource efficiencies will continue at the current low levels.

Supporters of the status quo maintain that if there were a genuine market for urban housing, there would already be plenty of it. Apologists for the current leap-frogging pattern of low-density, narrowly targeted, single-use development still argue that the current pattern is simply continuing “the relentless outward expansion of cities into suburbs and beyond” (Gordon and Richardson 1997, 75–76). This thinking suggests that we are ultimately headed toward some sort of housing entropy, in which every household is equidistant from every other household, and all community and commerce is experienced in cyberspace out of necessity.





Those same supporters also cite as “empirical evidence” decades of American household movement to environments characterized by steadily decreasing densities. However, this “evidence” is largely meaningless. In most metropolitan areas, American households buy into the current settlement patterns because they lack genuine choice.

Housing production generally follows the path of least resistance: easy-to-finance and easy-tobuild units on land that is environmentally “clean,” in a “good” location in a metropolitan area that is experiencing reasonable job growth, for which it is deemed appropriate zoning and approvals can be readily obtained. The builders and developers follow the well-defined and Fannie Mae Foundation 2000 Annual Housing Conference Confronting the Question of Demand for Urban Residential Development 3 efficient delivery system of housing as “product” that is the end result of a long conspiracy of good intentions, from the Euclid zoning decision to the Americans with Disabilities Act. This usually translates into the efficient “unibox” detached houses on former agricultural land.

There is more residential development in fringe locations, then, simply because it is significantly easier to accomplish than development on urban sites: Exurban tracts are larger; entitlements are less complicated; and a majority of acquisition, development, and construction lenders have a high comfort level with single-use greenfields development. It is the higher degree of difficulty that has made urban residential development a “niche product.” This does not mean that urban housing can find only a “niche market.” Compact urban development is beginning to be embraced by too many builders, developers, financial institutions, and government agencies— from local to federal—to remain marginalized as a “niche.”

Supply-Side Research in Urban Locations

Conventional housing market analysis generally does not attempt to address the specific needs or desires of the increasingly diverse pool of housing consumers. Supply/demand analysis is generally the analytical tool of choice. But the type of supply/demand analysis that often passes for new housing research is nothing more than an analysis of the market performance of currently marketed subdivisions and master-planned communities, combined with simple, often marginally related demographic data. If forecasts of household change are included, they are usually straight baseline projections, which assume that the recent pattern of change in the numbers of households will continue into the future. Analysis of supply-side data can range from rudimentary to quite sophisticated. Nevertheless, most new housing research is predicated on two very questionable premises: 1) that the change in the number of households will continue the trend of the recent past, and 2) that the only housing types that will meet with market acceptance are those that have demonstrated sales success in comparable locations.

Reliance on supply-side analysis often leads to local myopia. Builders, real estate brokers, and other real estate observers are often subject to an antiurban bias, justifying their opinions with supply-side data.

The distortion of supply-side analysis is often aggravated in urban areas by the mismatch of existing urban housing units and the households that have the potential to move to urban neighborhoods. In some cities—for example, St. Louis—the market feasibility of new housing construction has been dismissed because large houses already existing in the city do not sell despite prices that are quite low. In these instances, the issue is not the prices, but rather the sizes of the existing houses. A significant number of the grand older urban houses have hundreds, even thousands of square feet more than the market really requires; this is particularly true when the market consists of young singles and childless couples who are seeking convenience and location rather than space. An understanding of the characteristics of the potential market for urban housing, then, can reveal these mismatches.

The heavy reliance on competitive sales data has led the housing industry into a peculiar selfreferential inward spiral, in which the houses of many builders are converging into amazingly similar units. Continued ad absurdum, this convergence means that in the future there will be just

–  –  –

one house type built in America. A benefit of this scenario of monotony, one would assume, is that production would be very efficient.

Academicians generally dismiss these limited housing research studies: “...in recent years the quality of market studies in real estate has been widely criticized” (Myers and Beck 1994, 259).

However, despite many decades of scholarly analysis of empirical real estate–related data, few of the scholarly research techniques have been adopted by housing developers. Only real estate portfolio analysts and acquisition managers have empirical tools on which they can rely. Just as supply/demand analysis often works quite well in describing the market for packaged goods, if carefully applied, it can also provide useful insights into performance projections of investmentgrade income-producing real estate assets.

In contrast, those seeking practical tools with which to gauge the potential for new residential initiatives—public and private sectors alike—have, as often as not, been led astray by supply/demand analysis. The emphasis often placed on unquantifiable “demand” can be misguided.

Forecasting the demand for new housing is so challenging because housing dynamics are fundamentally different than those of other consumer durable items. Unlike other purchase transactions of consumer goods (from impulse items to big-ticket items), housing is a product that is fixed in place requiring that the purchaser must move to acquire it. As Dowell Myers has pointed out (Myers 1990), this creates the unique causal relationship between population and housing in which the arrow of causation changes direction depending upon geographic scale.

The relationship between the demand for housing and the number of new households may vary significantly depending on scale. At the broadest geographic scale (metropolitan statistical area and above), housing demand—and its corollary, the number of new housing units that is required to respond to that demand—is derived primarily from projected increases in the number of households; barring wholesale demolition, fire loss, and abandonment of existing housing stock, new housing is not likely to be absorbed without a corresponding increase in households. At the local level, however, and assuming a neighborhood’s housing units are at “stabilized full occupancy,” there can be no increase in households if there are no new housing units built in which they can be housed.



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