From Boom to Bubble: How Finance Built the New Chicago

From Boom to Bubble: How Finance Built the New Chicago

by Rachel Weber

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Overview

During the Great Recession, the housing bubble took much of the blame for bringing the American economy to its knees, but commercial real estate also experienced its own boom-and-bust in the same time period. In Chicago, for example, law firms and corporate headquarters abandoned their historic downtown office buildings for the millions of brand-new square feet that were built elsewhere in the central business district. What causes construction booms like this, and why do they so often leave a glut of vacant space and economic distress in their wake?

In From Boom to Bubble, Rachel Weber debunks the idea that booms occur only when cities are growing and innovating. Instead, she argues, even in cities experiencing employment and population decline, developers rush to erect new office towers and apartment buildings when they have financial incentives to do so. Focusing on the main causes of overbuilding during the early 2000s, Weber documents the case of Chicago’s “Millennial Boom,” showing that the Loop’s expansion was a response to global and local pressures to produce new assets. An influx of cheap cash, made available through the use of complex financial instruments, helped transform what started as a boom grounded in modest occupant demand into a speculative bubble, where pricing and supply had only tenuous connections to the market. Innovative and compelling, From Boom to Bubble is an unprecedented historical, sociological, and geographic look at how property markets change and fail—and how that affects cities.

Product Details

ISBN-13: 9780226294513
Publisher: University of Chicago Press
Publication date: 11/20/2015
Sold by: Barnes & Noble
Format: NOOK Book
Pages: 304
File size: 3 MB

About the Author

Rachel Weber is professor in the Urban Planning and Policy Department and a faculty fellow in the Great Cities Institute at the University of Illinois at Chicago. She is the author of Swords into Dow Shares: Governing the Decline of the Military Industrial Complex and coeditor of the Oxford Handbook for Urban Planning. She was appointed to the Tax Increment Financing Reform Task Force by Chicago Mayor Rahm Emanuel.

Read an Excerpt

From Boom to Bubble

How Finance Built the New Chicago


By Rachel Weber

The University of Chicago Press

Copyright © 2015 The University of Chicago
All rights reserved.
ISBN: 978-0-226-29451-3



CHAPTER 1

The Rhythm of Urban Redevelopment


Here, colossal towers are merely placeholders, temporary arrangements of future debris. New York lives by a philosophy of creative destruction. The only thing permanent about real estate is a measured patch of earth and the column of air above it. The rest is disposable. JUSTIN DAVIDSON, "The Glass Stampede," 2008


If you had stationed a camera at the perimeter of Manhattan's Midtown, downtown Atlanta, or Chicago's Loop in 1998 and taken photographs of the same vista every few months over a period of about ten years, you would have witnessed the scenes in your viewfinder dramatically shifting shape. A modest one-story retail establishment gets replaced with a tendril of glass extending hundreds of feet into the air. A parking lot gives birth to a high-rise hotel. In New York City between 1993 and 2008, more than 76,000 new buildings were constructed and another 83,000 were radically renovated. Metro Atlanta permitted more residential building units than any region in the nation between 2004 and 2007, some 260,000 units overall. In downtown Chicago, twenty-seven buildings over forty stories tall were erected during the period from 1998 to 2010 (fig. 1.1). Some cities gained variety, identity, and texture, whereas others were sanitized by generic corporate architecture.

What this exercise in time-lapse photography reveals is not whether we should welcome or mourn these metamorphoses (whether the new construction is any "better" than the old), but rather the existence of forces at work that periodically transform the urban built environment.

Cities are vast socio-technical ensembles whose actors, relationships, and flows are housed within some of the largest, most expensive, and most durable products of human labor: buildings. Modifying buildings requires power, through the mobilization of resources, political strength, or technical networks. It requires power in the form of financial capital: the debt and equity necessary to acquire land, demolish existing structures, pay for labor and materials, and fund operations. It requires the political power to shepherd projects through a maze of permits, plans, and entitlements. Modifying buildings requires knowledge whose sources are perceived as expert and social commitments that are regarded as credible by members of these ensembles. So when cities resemble preserves of exotic animals — long-necked cranes and big-mouthed bulldozers kicking up dust — it shows that those possessing the requisite power-capital-legitimacy have been enrolled in the project of moving ideas toward material form and are able to overcome the limiting viscosities of place attachment, history, and the status quo.

How regularly do cities undergo such radical physical transformations? And why do these changes so often result in surpluses of unused space? This chapter explores the pace of spatial change and the tendency for property developers to overshoot demand. It then lays out the explanations for (over)building proffered in the past before presenting a novel one that will guide the remainder of the book.


Theories of Urban Change

To many, landscapes are always in a state of kinetic and irrepressible flux. Rem Koolhaas calls this state "delirious." Less enthusiastically, novelist Henry James referred to New York City as a "provisional" city that is "defined by a dreadful chill of change." Any experience of the urban is fleeting, Marshall Berman wrote in All That Is Solid Melts into Air, as "perpetual disintegration" is part of "the maelstrom of modern life."

Architects and planning theorists have been drawn to this idea of constant change — and not only for the cynical reason that their own professions stand to benefit from cities that are always growing or being recycled. This sentiment captures the modernist, city-as-machine desire for continuous progress that reveals itself variously in authoritarian planning regimes and small-scale efforts at home improvement. Some see the fast pace of spatial transformation as reflecting a distinctly American cultural value:

Change is integral to the American way of life. America is never finished, and deliberately so. It is a nation with landscapes in perpetual states of emerging and occluding. American places are basically ephemeral, for not even successful places escape constant tinkering.


Virtual ant colonies of industriousness, cities are witness to millions of mundane modifications to the vernacular architecture every day as residents manipulate and personalize their environments.

While rooted in modernism, the notion of constant change also appeals to the postmodern aesthetic, which embraces the flexibility and instability of structures that appear to be durable and fixed. Geographer David Harvey and others have connected the cultural forms associated with postmodernity (including architectural styles that emphasize bricolage and impermanence) to new regimes of flexible accumulation and just-in-time production. Technological innovations in production, globalization, and advanced differentiation in consumption accelerate the pace at which commodities, including buildings, are produced, junked, and reproduced. The inference is that cities are changing at a faster rate than they used to.

The concept of urban impermanence is titillating, profitable, and even fashionable, but is it accurate? Cities may seem as if they are always under construction, with buildings melting into air, but they also exhibit a relative stability of form. Indeed, a less fashion-forward approach to urban change stresses the continuity and obduracy of these anthropogenic environments. In this view, cities are brittle artifacts, like coral reefs, that reflect the cumulative buildup of investment and planning decisions inherited from previous eras. As sociologist Anique Hommels notes, it becomes increasingly "difficult to radically alter a city's design: once in place, urban structures become fixed, obdurate, securely anchored in their own histories and the histories of surrounding structures." Cities represent massive sunk costs not only in large-scale fixed capital, such as buildings and infrastructure, but also in the economic and political arrangements that have evolved to manage that capital. Hommels's study of three postwar redevelopment projects in the Netherlands reveals how difficult it was to radically reshape large, complex sites. Projects there became embedded in such vast networks of actors and social practices, and linked to so many interdependent systems, that mobilizing support for change was nearly impossible to achieve.

Previous development acts as an impediment to radical change as "fixed characteristics restrict the range of possible solutions." Buildings themselves are spatially entrenched commodities whose qualities (e.g., sunk costs, land use regulations, three-dimensionality) resist frequent mutation and hamper swift adjustment to changing demand. "Path dependencies," self-reinforcing dynamics that exert a powerful inertia, make earlier trajectories of development quite durable and difficult to reverse once structures are in place. New construction and demolition may capture the eye, but these events are exceptional when compared with the millions of properties that do not change at all or change in very subtle and slow ways.

Of course, these two accounts of physical change — one emphasizing how cities are set in continuous motion and the other underscoring their stasis — are selective and intentionally extreme representations. All cities experience growth and shrinkage, destruction and rebuilding, as time continually leaves its imprimatur on the built environment. Urban environments are always developing — "charged with predictions and intentions" — and conveying the passage of time (grass growing in a vacant lot, buildings modernized with new fixtures). During some periods that change is fast-paced, while in others it is as slow as syrup. But we often do not notice this change until some episodic event occurs, such as a new real estate venture or the mass clearance of buildings. Architect Aldo Rossi notes that "destruction and demolition, expropriation and rapid changes in use as the result of speculation and obsolescence are the most recognizable signs of urban dynamics."

Such episodic changes do not take place all the time; the continuum of urban time is punctuated by bursts of building activity followed by periods of relative dormancy. Change in the built environment proceeds through phases of discontinuous speedup and slowdown that are not random, but linked to other temporally delimited factors.


THE BUILDING CYCLE

Economists characterize such fluctuations in building as "cyclical" in that characteristics repeat and recur instead of being isolated or random. Like the general business cycle, these periods typically have four parts — an expansion, a slowdown, a downturn, and a recovery — and can be represented as short- or long-wave oscillations. In a short real estate cycle, individual developers may get ahead of themselves, but markets are assumed to "clear" as rents and vacancy rates adjust to new supply until demand equals the stock of space.

Starting with Wesley Mitchell and Homer Hoyt in the 1920s and 1930s, the detailed tracking of land values in cities like Chicago allowed land economists to empirically measure the length, frequency, peak, trough, amplitude, and speed of real estate cycles and to search for explanations for them. When looking at empirical real estate data retrospectively, as they did, one sees an obvious smoothness to them: no matter what indicator is being tracked (e.g., square footage of new construction, vacancy rates, construction employment, investment performance), it looks as if local markets go through long periods when they are either steadily increasing or decreasing. As an asset class, property looks more cyclical than, say, the stock market, in which share prices are often characterized as a "random walk."

One also notices how the cycles of regional real estate markets across the United States tend to converge, following roughly the same eight- to twelve-year durations (which includes both their upswings and downswings). While there is "no place for a model of 'the total construction cycle'" that would represent all the patterns equally well, certain property classes and kinds of submarkets often bunch together. For example, regional office space in the United States has experienced roughly four major trough-to-trough cycles in the postwar period: the 1960s (1954–1970), late 1970s (1975–1983), late 1980s (1985–1991), and 2000s (1998–2008). These periodizations are rough because cycle observers use different measures to detect turning points and because the start and end dates vary by location. Moreover, some prefer to see longer construction cycles as composed of multiple, smaller ones (typically lasting sixteen to twenty quarters).

The notion of a cycle assumes that upswings and downswings are destined to repeat themselves. This representation of time is reassuring because cycles are dependable and certain — like those we observe in the natural world (e.g., circadian rhythms, the earth's rotation). But the cycle metaphor may not adequately capture the causes and effects of construction activity. For example, periods of expansion and decline that occur over time within the same geography are not necessarily similar to one another. For one, they leave behind different levels of loss and irreparable change. As Kevin Lynch poetically notes:

Men have made magical attempts to ... pretend that change is also cyclical, to imagine that progressive time is a series of eternal, contrasting repetitions, each arising from the other. The magic warms the spirit with the sense that decline and dissolution are only appearances that resurrection will follow. But the things we love do not in fact come back to us. Whatever our hopes, we know things change.


Moreover, the notion of construction cycles, borrowing as it does from the physical and biological sciences, naturalizes change and gives the impression that the rhythms of city building are removed from social interests, economic incentives, or political pressures. This is a common lapse within economics, a field that has a long history of applying "laws" of the "hard" sciences and natural metaphors to the more mutable phenomena in the social realm. Indeed, the study of real estate cycles seems to derive from wave theory, a branch of physics concerned with the properties of undulating processes.

Neoclassical economists are not the only ones who have tried to fit the laws of nature to the artifacts of social life. Marx also saw the tendency of solid material to decompose as a basic fact of modern life. Even urban planner Kevin Lynch gravitates toward biological metaphors to describe the climactic moments and rhythmic repetition of urban environments: they are like a "heartbeat, breathing, sleeping and waking, hunger, the cycles of sun and moon, the seasons, waves, tides, clocks."

Cities and their buildings are not hardwired to behave like either radio waves (whose rhythms recur) or pieces of fruit (whose eventual decay is inevitable). If we look more to empirical social science than to metaphors borrowed from the physical sciences, the rhythms of change appear less regular and more dependent on specific social, economic, and political interventions. They leave cities transformed by their experiences in ways that complicate direct comparison with either previous transformations or with each other. Indeed, cyclical theory focuses our attention only on those superficial similarities between historical eras — in vacancy or return rates, for example — while avoiding the difficult question of what has actually changed and why.

For example, each of the abovementioned office construction cycles left distinctive marks on the cities that experienced them. The 1980s up cycle, for example, looked very different in Dallas than it did in New York City. Figure 1.2, depicting the square footage of new office construction in very different central cities, shows this variation in terms of the magnitude and timing of each city's growth spurts. Manhattan experienced less office construction in the postwar years than it did between the end of the nineteenth century and the Great Depression. In fact, more tall buildings (over 230 feet) were constructed in New York between 1922 and 1931 than in any other ten-year period before or since, and the bulk of them are still in use today. In contrast, Dallas went through a "petrodollar"-fueled office building frenzy in the 1980s. Atlanta feels like an even newer office market, as it experienced more growth in the 1990s and 2000s than Dallas did.

Each cycle does not entirely replace, but instead adds to, an inventory of buildings, creating a mishmash of old and new. A crude measure of a cycle's amplitude or degree of change is the amount of new square footage relative to that which existed at its start. For example, between 1978 and 1985, developers erected 36 percent of all the office space ever built in U.S. cities up until that point. In comparison, the cycle that occurred in the first decade of the twenty-first century was half this size: regional office markets in the United States added "only" 18 percent of what existed at the cycle's start in 1998. Buildings produced during each up cycle are bunched into "vintages," the structure and aesthetics of which are superseded by those of the next one. The commercial districts of southern cities such as Dallas and Atlanta feel more contemporary than Manhattan, as they have a larger share of office buildings constructed in the 2000s, even though Manhattan added more square feet of office space during the Millennial Boom.

The fixation on new buildings draws attention away from the losses that occur during construction cycles. New office construction in Manhattan entailed massive amounts of demolition, whereas the development of Dallas's sprawling commercial corridors did not. Younger cities with more developable land and fewer growth controls experience new buildings as a supplement to the total stock. In older, built-out settlements, however, existing buildings are frequently pushed aside for new construction. During the Millennial Boom New York City lost 44,000 buildings, and Los Angeles County lost 44,485 housing units (about 1 percent of Los Angeles's total regional housing stock).


(Continues...)

Excerpted from From Boom to Bubble by Rachel Weber. Copyright © 2015 The University of Chicago. Excerpted by permission of The University of Chicago Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents

Introduction: Why We Overbuild
Part 1 Real Estate Speculations
1 The Rhythm of Urban Redevelopment
2 Fast Money Builds the Speculative City
3 Out with the Old: How Professional Practices Construct the Desire for New Construction
Part 2 Chicago in the 2000s
4 Downtown Chicago’s Millennial Boom
5 Who Overbuilt Chicago?
6 Making the Market for Chicago’s New Skyscrapers
Part 3 Building the Future
7 The Slow Build
Epilogue: Why We Will Continue to Overbuild
Appendix
Acknowledgments
Notes
Index

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