By Richard McCann
A housing shortage? Develop infill projects. An economic development crisis? Infill development. Traffic congestion? Yep, more infill development. Infill development has become the go-to solution to our land-use ills. It seems so easy—just gather up those odd lots and abandoned properties and create a brand-new project with ready-made customers and retail businesses right next door. If only it was so easy.
Davis has not been able to develop larger tracts of land to attract firms working on innovation and partnering with UC Davis. Opponents of several proposed projects have claimed that developers can instead assemble the numerous infill parcels that already exist within city limits to create the needed innovation parks.
Now a new study in the leading journal, American Economics Review, finds that in Los Angeles, assembling a group of parcels for such projects faces sale prices 15% to 40% more than a single parcel project. And that doesn’t include the typical per parcel transaction costs that are compounded by making multiple purchases. The bottom line is that infill development for larger projects face a high cost premium that must be acknowledged.
As the authors write, “(e)conomic historians contend that the ability to assemble ownership interests is often a crucial prerequisite for economic growth… If land cannot be assembled in sufficient quantity, cities will fail to adjust to new economic realities. Most significantly, land assembly allows cities to become denser. Market frictions that inhibit assembly therefore cause land to be misallocated to suboptimally dense uses.”
The study points out that the significant market frictions of assembling parcels creates a wedge between the declining value of the existing uses and the potential added value from redevelopment. The new use may look obviously beneficial, but the costs of purchase transactions suck away the potential gains. So only those infill projects with large profits can succeed.
They found impediments from both public and private sources.
Public frictions arise from the regulation of land by local governments, including zoning restrictions, development fees, and building codes… Private market failures stem from bargaining problems between the developer of the assembled land and the land sellers, causing problems such as holdouts.
The study looked at 2.3 million parcel sales from 1999 to 2011. The results are statistically robust.
Some in Davis have proposed that new business parks can be developed in Davis through infill rather than by building on large tracts on urban fringe. The result from this study says that the infill projects must be much more profitable (either through other lower costs or higher returns) to make them competitive with the “greenfield” proposals of late. (And this ignores the higher costs often associated with developing “brownfield” parcels due to replacing and reconfiguring infrastructure.)
So, we don’t have the simple “one size fits all” solution to our problems of housing, economic development or traffic. Infill can’t be the alternative miracle. We are unlikely to see large-scale projects within current City boundaries due to this cost premium. It’s time to move on.