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Multifamily Trends - March/April 2008 - Point of View

Regulators have begun to consider the relationship between a development’s location and its overall contribution to greenhouse gas emissions. The most significant measure is the number of vehicle miles traveled by residents. Regulations designed to lower this mileage will likely have a strong effect on site values.

Location, Location, Location: Building Green Is about More Than Building

By John McIlwain

Selecting a site to purchase for development is tricky business. Even the best market analysis is only an educated guess about what conditions will be like years later, when a project beginning development today will be ready to rent or sell. Today, with housing markets in unprecedented turmoil, the uncertainty is even greater.

But markets are not all that are in turmoil: the regulatory environment is roiled over global warming and carbon emissions. State and local governments are adopting or considering hundreds of new laws and regulations concerning building standards in order to reduce energy use and greenhouse gas (GHG) emissions (“It’s the Climate, Stupid,” Multifamily Trends Point of View July/August, 2007). Knowing that a development starting today may face market and regulatory obsolescence shortly after it is finished, developers, investors, architects, and engineers are struggling to figure out what and how to build.

Adding to the uncertainty is the fact that, in their efforts to reduce GHG emissions, regulators are broadening their focus from the building to the building’s site. In particular, they have begun to consider the relationship between a development’s location and its overall contribution to GHG emissions. The first two examples of such related action occurred last year in California and Massachusetts. These actions need to be watched closely as they could well be harbingers of many such actions in the years ahead.

The most significant measure of a development’s GHG contribution is the number of vehicle miles traveled (VMTs) by residents as they drive to and from activities in their lives. Studies confirm that sites in more compact, urbanized locales generate fewer VMTs than those in low-density suburbia and exurbia. Although it is not yet clear how governments will attempt to use VMT data to reduce GHG emissions, it is likely that regulations designed to lower overall VMTs—and, hence, overall GHG emissions—will affect the value of sites considerably.

Needless to say, VMT-related regulatory efforts run counter to decades of centrifugal suburban development. For more than 100 years, U.S. cities have added rings of suburbs, each one farther from the center, each one less dense than the one before. The defining characteristic of today’s low-density suburban development patterns is the distance separating jobs from homes. Connecting the home and the job (and generating the VMTs) is the commute, which affects either directly or indirectly virtually all Americans today.

Reduction in the quality of life due to current commuting patterns, coupled with the imperative to reduce GHG emissions, suggests that the decades-old, ever-outward-moving model of land development is under pressure—creating greater uncertainty regarding the value of a site bought today.

A Brief History of Commuting and Sprawl

Commuting actually goes back thousands of years to farmers who lived in villages for protection from marauding neighbors. Each day, the farmers walked out to their fields to work. According to historic records, the average time they spent walking, or “commuting,” was around 30 minutes, or about one to two miles each way. (Even today, the median commutation time in the United States continues to hover around 30 minutes.)

Urban commuting is a more recent phenomenon, dating to the early part of the 19th century. As crafts shops evolved into factories during the Industrial Revolution, living patterns changed as well. No longer was it practical for craftsmen, their families, journeymen, and apprentices to live together above the shop. Neighborhoods that had been mixed use began to be limited to commercial activities as people moved their homes to the “suburbs” a short walk away.

In the United States, this new housing pattern first evolved in Manhattan, according to Thomas Bender, author of The Unfinished City: New York and the Metropolitan Idea (New York: NYU Press, 2002). As crafts shops south of Wall Street closed, families moved north to purely residential neighborhoods created on what previously had been farmland. These early urban commuters were primarily male office workers who walked the short distance from their new “suburban” residences to their places of employment around Wall Street.

The term “commuter” did not enter the language until the late 1800s, when trains and trolleys began to carry men to work. The operating companies began to offer lower rates for regular riders (as they do today with monthly tickets) in exchange for the reliability of their patronage. The fares of the regulars, in other words, were commuted. In time, those who bought these commuted or commutation tickets became known as commuters.

As technology developed, so did commuting. But even as automobiles replaced trains during the first half of the 20th century, it was only a wealthy few who could afford a car and a house in the suburbs.

This, however, changed dramatically following World War II. With the Federal-Aid Highway Act of 1956, highways began to crisscross the country. Along with the advent of home financing through the Federal Housing Administration (FHA) and the Veterans Administration (VA), affordable cars, and cheap and plentiful gasoline, suburbs began to blossom around every U.S. city. Commuting from the suburbs became a way of life for the average American.

In the 1960s and 1970s, the suburbs grew larger and commutes grew longer, causing businesses to follow their employees and customers out of the city. Commuting patterns shifted from the classic urban hub-and-spoke model to today’s complex spider-web pattern, with homes and jobs sprinkled throughout the metropolitan region and people driving every direction.

The result is today’s worsening suburban road congestion. Low-density development generates more VMTs than only those from commuting. Studies show that for each commuter VMT in a region, four additional VMTs are generated by the driving required to live in the suburbs—including the miles driven to get the dry cleaning, pick up the kids, go to the movies, and so on. In other words, work commutes produce only 20 percent of a region’s total VMTs.

Meanwhile the new “sport” of extreme commuting has emerged. According to the U.S. Census Bureau, extreme commuting is defined as regular travel between home and work that takes 90 minutes or more each way. The Census Bureau estimates that there are some 3.5 million extreme commuters today—double the number in 1990—thereby making this the fastest-growing category of commuter. Two years ago, Midas Muffler awarded the extreme-commuting championship to a Cisco Systems engineer who traveled 372 miles and for seven hours, each workday, to get from his home in the Sierra foothills to his job in San Jose and back home again.

Commuting in the United States has indeed evolved from the days when 19th-century gentlemen walked a few blocks down Broadway to Wall Street. This raises the question, where do we go from here?

A New Commuting Paradigm?

There are those who will argue, with good reason, that U.S. metropolitan regions will continue their outward growth in order to add some 1.5 million homes a year on average to keep up with the fast-growing population.

Circumstances, however, appear to be changing. For example, commuting distances and traffic congestion have multiplied since the 1950s; few new roads are being built; and the price of gasoline is rising. In addition—and most important—climate change has focused attention on the increase in GHG emissions caused by the dramatic growth of VMTs in the United States. According to the U.S. Department of Energy’s Energy Information Agency, 28 percent of all U.S. GHG emissions come from transportation, of which some two-thirds are from cars and light trucks driving in low-density suburbs.

The fact is that the continuation of the current pattern of outward, low-density, suburban growth will cause VMTs and GHG emissions to increase, undermining efforts to reduce total U.S. GHG emissions. This is an untenable situation if the United States is to reduce GHGs to the levels called for by current climate science (as represented by the United Nations Intergovernmental Panel on Climate Change). New developments in technology alone will be insufficient to bring down the absolute amount of GHG emissions from VMTs; a major shift in metropolitan development patterns is needed as well.

But it takes time for markets to shift. While the market for compact, urbanized development is growing and concern about climate change is intensifying, the demand for low-density suburban and edge development nonetheless remains strong. What will it take for compact development patterns to take the lead?

The answer probably will be government intervention. Political leaders at all levels are facing increasing pressure from citizens to do what is necessary to reduce total emissions; inevitably, this will require development patterns to be rethought. Already, the initial outlines of this rethinking are emerging.

Early Signs of Regulatory Change

Until recently, governments have not directly considered the extent to which a development’s location will affect the level of its greenhouse gas emissions (although encouraging smart growth and transit-oriented development have considered it indirectly). The modus operandi appears to have changed last year. Consider the case, settled in August 2007, in which California’s attorney general sued San Bernardino County on grounds that the local government failed to consider emissions of GHGs in its new growth plans. As part of the settlement, the county agreed to create a GHG reduction plan as part of its comprehensive plan and to consider the impact of location on the GHG emissions of all new development. This will force the county to rezone in ways that will require more compact development. Other high-growth counties in California are now weighing how to manage their own planning processes in light of this lawsuit.

A few months later, in December 2007, the Massachusetts Environmental Policy Act Office published its “Greenhouse Gas Emissions Policy and Protocol,” which calls for developers of most projects that are already required to prepare an environmental impact report (EIR) also to quantify the potential annual GHG emissions that would result from these developments, report this data in the EIR, and commit to a series of measures to reduce emissions.

The policy is a small step, as it only applies to a relatively few projects (an estimated 80 to 100 per year) and appears to be aimed at commercial and industrial, rather than residential, development. Nonetheless, it is significant, especially because it requires all emissions to be measured, including both direct emissions (e.g., stack emissions) and indirect emissions (e.g., emissions from vehicles expected to be driven by employees, vendors, customers, and others, and emissions from plants that will be generating electricity for the proposed operation).

It is the inclusion of indirect emissions that involves the critical issues of location and VMTs. And it is not a big step to substitute “residents” for “employees” if (or, more likely, when) this policy is extended to residential development.

Conclusion

States are just beginning to understand how the location of development can affect GHG emissions, and to find ways to implement development patterns that help their overall plans to reduce GHG emissions. The initial steps taken by California and Massachusetts should be seen as the first sign of what is likely to be a tidal wave of land planning reform that will sweep the country, state by state, in the years ahead. And, if at some point in the future, the U.S. Congress enacts a national cap and trade system for GHG emissions, it would likely cover buildings and their locations as well.

The pressures to reduce overall GHG emissions is growing fast, and the levels to which scientific consensus says they must be reduced are so low that emissions from all sources will have to be reduced. Because VMTs constitute a significant part of overall emissions, they will need to be reduced as part of a large-scale national effort. Thus, compact development will be encouraged by incentives or penalties, or simply, it will be mandated. Such actions will have a significant effect on the value of a site acquired today. Unfortunately, when these changes occur and how much they will affect a site’s value remain a guessing game.

John McIlwain is a ULI senior resident fellow and holds the ULI/J. Ronald Terwilliger Chair for Housing.