Urban development entered a new era in the mid 1990s as consumers and developers began to embrace higher density development in urban locations. This is an important trend that promises better ecological outcomes and better economic outcomes for both municipalities and consumers.
However, the current economic recession poses a problem relative to the much-heralded urban renaissance. The problem is in what I'll call the New Proforma, which is facing a 'new balance' between costs and revenues.
During most of the approximately ten-year urban renaissance, construction costs were relatively low, even for the newly embraced mid-rise buildings and their accompanying parking structures. And while construction costs were relatively low, compared with today, the price points for selling or leasing real estate were rising dramatically, allowing a good profit margin for urban development. Demand was strong, fueled by underlying demographic trends but accentuated by abundant capital for investment by developers, businesses, and consumers. The net economic affect was that building higher density was profitable and there was a strong market for the product.
The New Proforma faces difficulties on both the cost and the revenue side of the equation. As the over-inflated real estate markets collapse in terms of demand and price, construction costs have remained high, particularly in regard to steel and concrete, which are key materials used in higher-density construction. In the United States, construction costs have normally dropped along with reductions in demand because our market has been, until recently, something of a closed system. Today, we interact with what is a global market for construction materials, and so far global demand has remained high and costs have not declined along with construction volume.
After any real estate downturn, a difficult period emerges for accomplishing financial feasibility because of lower pricing. What makes this downturn different, and extreme, is the degree of price reduction combined with high debt on behalf of consumers, municipalities, state government, and the federal government. We have fewer than normal tools to recover from a downturn. And so far, construction costs are still high. A global downturn may ease pressure on construction costs, but that in itself will bring additional complications for a recovery.
If this current New Proforma relationship between lower revenue and still-high costs remains when the recession ends, our ability to continue urban development as we have come to celebrate it will be much diminished. This may occur at a time when higher density development is sought more than ever by governments and consumers to respond to needs to reduce GHG emissions, reduce transportation costs incurred in an era of higher petroleum prices, and the need to get more return on investment and return on assets for our municipal, state, and federal investments in infrastructure.
One solution is to 'draw a bigger circle' and expand the number of stakeholders that contribute to higher costs and realize benefits for better development patterns. More on this later.