Hyper-Gentrification Revisited

In Hyper-Gentrification, I wrote about a blogger called Jeremiah Moss. Specifically, about something he wrote called On Spike Lee & Hyper-Gentrification.

Since that time, he was invited to rewrite that piece for the New York Times, as part of their overview of gentrification. So his position, distilled, is:

    The old-school gentrification of the 20th century, while harmful, wasn’t all bad. It made streets safer, created jobs and brought fresh vegetables to the corner store. … Unlike gentrification, in which the agents of change were middle-class settlers moving into working-class and poor neighborhoods…

    …hyper-gentrification in New York was implemented via strategically planned mass rezonings, eminent domain and billions in tax breaks to corporations…

    So before gentrification became “hyper”, it wasn’t all bad, according to Moss. When the process of removing the working class from their neighborhood was happening, using all of the tools at the disposal of both real estate developers and the city, from illegal evictions, to arson, to filling vacant apartments with drug dealers to drive out tenants, to turning over in rem buildings to “developers” for pennies on the dollar, to programs like AHOP, this wasn’t all bad. The same private/public interests (themselves, bourgeois legalisms) were at play as today, at the then-existing level of development.

Moss sees gentrification starting when people and small businesses start to move into an area where they weren’t before. He fails to understand the processes that led to that, despite his many references to Neil Smith. He doesn’t see the “flipping” of buildings (buildings bought and then sold at a profit, sometimes without any renovations being made) as part of the process, or even the transition from a healthy building stock to a decrepit one. For him, as for so many like him, it starts when the outward signs become noticeable.

So what is his solution?

    Let’s drastically reduce tax breaks to corporations and redirect that money to mom-and-pops. Protect the city’s oldest small businesses by providing selective retail rent control, and implement the Small Business Survival Act to create fair rent negotiations. Pass a citywide ordinance to control the spread of chain stores. … Shop local and protest the corporate invasion of neighborhoods.

Increase taxes on corporations? OK. Direct the money to small businesses? To what end? If the Small Business Survival Act creates fair rent negotiations (Moss’s contention), small business rents will be lower. So what will they do with the money? Raise their employees’ wages? Ha! Pocket the money? Probably. Use the money to expand? Probably. So the small businesses will become big businesses, in time. Maybe even chains. Regarding shopping locally, I’ve already addresses that.

Moss’s changes will only benefit small business owners. That is his starting and ending point.

    This … is the transformation of society in a democratic way, but a transformation within the bounds of the petty bourgeoisie. … [I]t believes that the special conditions of its emancipation are the general conditions within whose frame alone modern society can be saved and the class struggle avoided.*

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* The Eighteenth Brumaire of Louis Bonaparte, accessed April 27, 2014.

The Origin of 80/20 Housing in New York City

If the real estate cowboys invading the Lower East Side in the 1980s used art to paint their economic quest in romantic hues, they also enlisted the cavalry of city government for more prosaic tasks: reclaiming the land and quelling the natives. In its housing policy, drug crackdowns, and especially in its parks strategy, the City devoted its efforts not toward providing basic services and living opportunities for existing residents but toward routing many of the locals and subsidizing opportunities for real estate development. A 1982 consultants’ report entitled An Analysis of Investment Opportunities in the East Village captured the City’s strategy precisely: “The city has now given clear signals that it is prepared to aid the return of the middle class by auctioning city-owned properties and sponsoring projects in gentrifying areas to bolster its tax base and aid the revitalization process” (Oreo Construction Services 1982).

The City’s major resource was its stock of “in rem” properties, mostly foreclosed from private landlords for nonpayment of property taxes. By the early 1980s the Department of Housing, Preservation and Development held over 200 such in rem buildings in the Lower East Side and a similar number of vacant lots. With sixteen of these properties, the Koch administration made its first significant foray into the real estate frenzy of gentrification; artists were to be the vehicle. In August 1981 HPD solicited proposals for an Artist Homeownership Program (AHOP) and the next year announced a renovation project that was to yield 120 housing units in sixteen buildings, each costing an estimated $50,000, aimed at artists earning at least $24,000. Their purpose, the Mayor proclaimed, was “to renew the strength and vitality of the community,” and five artists’ groups and two developers were selected to execute the $7 million program (Bennetts 1982).

But many in the community disagreed vigorously enough to oppose the AHOP plan. The Joint Planning Council, a coalition of more than thirty Loisaida housing and community organizations, demanded that so valuable a resource as abandoned buildings should be renovated for local consumption; city councilwoman Miriam Friedlander saw the plan as “just a front for gentrification”; “the real people who will profit from this housing are the developers who renovate it.” And indeed, the HPD Commissioner expressed the fervent hope that the project would be “a stimulus for overall neighborhood revitalization.” While supporting artists portrayed themselves as normal folks, just part of the working class, a population already largely displaced from Manhattan who deserved housing as much as anyone else, an artists’ opposition emerged — “Artists for Social Responsibility” — who opposed the use of artists to gentrify the neighborhood. HPD, the mayor and AHOP were ultimately defeated by the City Board of Estimate, which refused to provide the initial $2.4 million of public funds (Carroll 1983).

But AHOP was a warm-up for a larger auction program, as HPD prepared to leverage gentrification citywide using in rem properties. The Joint Planning Council decided to grab the initiative by proposing its own community-based plan, and in 1984 it proposed that all City-owned vacant lots and properties be used for low- and moderate-income housing and that the speculation responsible for eliminating existing low-income units be controlled. The City ignored the community plan and came back with a “cross-subsidy” program. HPD would sell City-owned properties to developers, either by auction or at appraised value, in return for an agreement by developers that a vaguely specified 20 percent of rehabilitated or newly built units would be reserved for tenants unable to afford market rates. Developers would receive a tax subsidy in return. Initially some community groups gave the program tentative support; others sought to adjust the ratio of market-rate to subsidized housing to 50:50, while others rejected the entire idea as a backdoor route to building minimal public housing.

But opposition mounted as the actual intent of the program became clear. In 1988 the City announced that the Lefrak Organization — a major national developer — would build on the Seward Park site where, in 1967, 1,800 poor people, mostly African-American and Latino, were displaced when their homes were urban renewed. They were promised the new apartments scheduled for the site, but twenty years later the renewal was yet to happen. The fee for the site was $1, and Lefrak would pay a further $1 per year for the ninety-nine-year lease. Under the plan, Lefrak would build 1,200 apartments, 400 of which would be market-rate condominiums, 640 would be rented at $800–$1,200 to “middle-income” households earning $25,000–$48,000, and the remaining 160 units would go as “moderate-income” units to those earning $15,000–$25,000. No apartments were actually earmarked for low-income people. Further, all rental units would revert to Lefrak as luxury co-ops on the open market after twenty years; Lefrak would get a thirtytwo-year tax abatement, and an overall City subsidy of $20 million. Lawyers representing several of the 1967 tenants filed a class action suit against the Lefrak condo. “Yupperincome housing in low income neighborhoods” is how one housing advocate described the plan, “and the purpose is creating hot new real-estate markets” (Glazer 1988; Reiss 1988). The project got as far as a “Memorandum of Understanding” with the City, but as the depression closed in, the folly of attaching any subsidized housing to market development became clear. Lefrak abandoned the project — but not before it became clear that the City had no intention of mandating Lefrak to build the 20 percent of subsidized units in the same neighborhood. The geographical mobility of the subsidized housing of course opened up the specter of gentrification again for those who had not already seen through the “double-cross subsidy” program, as it came to be known by community activists.

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Neil Smith, The New Urban Frontier (London/New York: Routledge, 1996) 22-23.

Luxury Listings NYC

Somehow, my wife got her name onto the distribution list of a magazine (of sorts) called Luxury Listings NYC. It’s delivered right to our doorstep! We received the first copy a couple of months ago, but neither one of us looked at it. We’re not really in the market for a multi-million dollar penthouse apartment. This time, though, with the recent institution of this here blog, I browsed through it when it arrived. It was Sunday morning, and no one else was awake yet. It seemed like a good time.

I was going to scan some of the pages, but then, in my ever-resourceful resourcefulness, I had the idea to search on Google for ‘“Luxury Listings NYC” PDF’ instead, and found it! You can view non-downloadable PDFs of the first issue, Jan/Feb, and of the current issue, Mar/Apr.

The magazine covers every neighborhood-product in Manhattan below 110th Street: Upper East Side; Upper West Side; Midtown; Gramercy; Chelsea; Greenwich Village; Soho; Tribeca; Lower East Side; and Financial District. Every section has a “Celeb real estate in the neighborhood” listing too, telling which celebrities also live in that neighborhood — a strong selling point for Wall Street types!

I took some screen shots of a few of the fascinating tidbits of information you can find there, but none of the ads for apartments themselves.

If you live in Manhattan, you can subscribe for free. Outside of Manhattan, a subscription is $95/year.

General
This is the one that surprised me the most. I’m not shocked to see selling prices in the tens of millions of dollars, but I don’t think I’ve ever considered a rental above ~$5,000/month. (I’ve also never considered rents outside the neighborhoods I’ve lived in).

llnyc-v1i2-manhat-priciest
By way of comparison, the median annual income in Manhattan is $67,204;
NYC: $51,270; NYS: $56,951; US: $52,762.

Speaking of medians, which neighborhood in New York is the most expensive?
The results may surprise you.
llnyc-v1i2-nyc-highest-median-price

If it’s any consolation, it’s always worse somewhere else (there’s a quote by Arthur Schopenhauer: “The most effective consolation in every misfortune and every afflication is to observe others who are more unfortunate than we: and everyone can do this. But what does that say for the condition of the whole?”):
llnyc-v1i2-top-10-cities

What keeps the 1% up at night?
llnyc-v1i2-au-pair

Biggest Community News Affecting Local Real Estate
Upper East Side
llnyc-v1i2-ues-news

Upper West Side
Money can’t always buy peace of mind! Not when bedbugs are concerned.
llnyc-v1i2-uws-bedbugs

Midtown
It seems in real estate cartography, Midtown stretches from river to river. No more Hells Kitchen, no more Clinton, not even Midtown West. Just Midtown.
llnyc-v1i2-midtown-news

Gramercy
llnyc-v1i2-gramercy-news

Chelsea
llnyc-v1i2-chelsea-news

Soho
llnyc-v1i2-soho-news

Lower East Side
llnyc-v1i2-les-condos

Finally, like all good magazines, Luxury Listings NYC has a humor page. Celebrities say the darndest things!
llnyc-v1i2-celeb-headline
llnyc-v1i2-celeb1
llnyc-v1i2-celeb2
llnyc-v1i2-celeb3
Ha ha ha! Those are some real knee-slappers!

Well, I hope you’ve enjoyed this little romp through the joys and woes of the 1%’s search for luxury digs. Come back again!

Capital Devalorization in the Inner City

This follows up on Investment in the Built Environment — Prologue, but I changed the title to “Capital Devalorization in the Inner City”.

The physical deterioration and economic devalorization of inner-city neighborhoods is a strictly logical, “rational” outcome of the operation of the land and housing markets. What follows is a rather schematic attempt to explain the historic decline of inner-city neighborhoods in terms of their institutions, actors, and economic forces involved. We might think of this explanation as a production-side corrective to traditional “filtering” theory. … It is assumed from the start that the neighborhoods concerned are relatively homogeneous as regards the age and quality of housing, and, indeed, this tends to be the case with areas experiencing redevelopment.

When a neighborhood is newly built the price of housing reflects the value of the structure and improvements put in place plus the enhanced ground rent captured by the landowner. But eventually sustained devalorization of neighborhood housing can take hold. This has three sources: advances in the productiveness of labor (allowing a similar structure to be produced at a lower value than was previously possible); style obsolescence; and physical wear and tear.

Clearly, property owners in many neighborhoods succeed in making major repairs and maintaining or even enhancing the value of an area’s housing. These areas remain stable. Equally clearly, there are areas of owner-occupied housing which experience the first stage of devalorization. Homeowners, aware of imminent decline unless repairs are made, may sell out and seek newer homes where their investment will be safer. At this point, after a first or subsequent cycle of use, there is a tendency for the neighborhood to convert toward a higher level of rental tenancy unless repairs are made. And since landlords use buildings for different purposes than owner-occupiers, a different pattern of maintenance will ensue. Owner-occupiers in the housing market are simultaneously both consumers and investors; as investors, their primary return comes as the increment of sale price over purchase price. The landlord, on the other hand, receives his or her return mainly in the form of house rent, and under certain conditions may have a lesser incentive for carrying out repairs so long as he or she can still command rent. Since the transition from owner-occupancy to tenancy is generally associated with a declining market, some degree of under-maintenance could be expected. With sustained under-maintenance in a neighborhood however, it may become difficult for landlords to sell their properties, particularly since the larger financial institutions will now be less forthcoming with mortgage funds; sales become fewer and more expensive to the landlord. Thus, there is even less incentive to invest in the area beyond what is necessary to retain the present revenue flow. This pattern of decline is likely to be reversed only if a shortage of higher-quality accommodations occurs, allowing rents to be raised and making improved maintenance worthwhile. Otherwise, the area is likely to experience a net outflow of capital, which will be small at first since landlords still have substantial investments to protect. Under these conditions it becomes very difficult for the individual landlord or owner to struggle against the economic declining which they have helped to induce. House values are falling and the levels of capitalized ground rent for the area are dropping below the potential ground rent (see Figure 3.2). The individual who did not under-maintain his property would be forced to charge higher than average rent for the area with little hope of attracting tenants earning higher than average income which would capitalize the full ground rent.

newurbanfrontier-3.2
Figure 3.2 The devalorization cycle and the evolution of the rent gap.

Real estate agents exploit racist sentiments in white neighborhoods that are experiencing declining sale prices; they buy houses relatively cheaply, and then resell at a considerable markup to African-American, Latino or other “minority” families, many of whom may be struggling to own their first home. [P]roperty values are usually declining before blockbusting takes place and do not begin declining simply as a result of racial changes in ownership. Once blockbusting has taken place, however, further decline in house values is likely, not just because of the racism of the housing market but also because of the inflated prices at which houses were sold and the consequent lack of resources for maintenance and mortgage payment suffered by incoming families.

Under-maintenance gives way to more active disinvestment as capital depreciates further and the landlord’s stake diminishes: house value and capitalized ground rent fall, producing further decreases in sale price. Disinvestment by landlords is accompanied by an equally “rational” disinvestment by financial institutions, which cease supplying mortgage money to the area. … In addition to mortgage redlining, there is also redlining on the part of homeowner insurance companies, which further induces economic disinvestment. What loans do occur at this stage allow properties to change hands but do little to encourage reinvestment in maintenance so the process of decline can simply be lubricated. Vandalism, sub-dividing of apartments, and refusal to make any repairs soon follow.

When landlords can no longer collect enough house rent to cover the necessary costs (utilities and taxes), building are abandoned. This is a neighborhood-scale phenomenon: the abandonments of isolated properties in otherwise stable areas is rare. Much abandoned housing is structurally sound, which seems paradoxical. But then buildings are abandoned not because they are unusable, but because they cannot be used profitably At this stage of declining, there is a certain incentive for landlords to destroy their own property through arson and collect the substantial insurance payment.

Gentrification is generally preceded by such a cycle, although the process need not occur fully for gentrification to ensue. … The objective mechanism underlying filtering is the depreciation and devalorization of capital invested in residential inner-city neighborhoods. This devalorization produces the objective economic conditions that make capital revaluation (gentrification) a rational market response. Of fundamental importance here is what I call the rent gap.

The rent gap is the disparity between the potential ground rent level and the actual ground rent capitalized under the present land use. As filtering and neighborhood decline proceed, the rent gap widens. Gentrification occurs when the gap is sufficiently wide that developers can purchase structures cheaply, can pay the builder’s costs and profit for rehabilitation, can pay interest on mortgage and construction loans, and can then sell the end product for a sale price that leaves a satisfactory return for the developer.

The process is initiated not by the exercise of individual consumer preferences, but by some form of collective social action at the neighborhood level. The state, for example, initiated much of the early gentrification in the US as a continuation of urban renewal projects, and though it plays a lesser role today, state subsidies and sponsorship of gentrification remain important. More commonly today, with private-market gentrification, one or more financial institutions will reverse a long-standing redlining policy and actively target a neighborhood as a potential market for construction loans and mortgages. All the consumer preference in the world will amount to naught unless this long-absent source of funding reappears; mortgage capital, in some form or another, is a prerequisite.

Three kinds of developers typically operate in recycling neighborhoods: (a) professional developers who purchase property, redevelop it, and resell for profit: (b) occupier developers who buy and redevelop property and inhabit it after completion; and (c) landlord developers who rent to tenants after rehabilitation. … Professional and landlord developers are important … but occupier developers are more active in rehabilitation than they are in any other sector of housing construction. Since the land has already been developed and an intricate pattern of property rights laid down, it is not always easy for the professional developer to assemble sufficient land and properties to make involvement worthwhile. The fragmented structure of property ownership has made the occupier developer, who is generally an inefficient operator in the construction industry, into a plausible vehicle for remaking devalorized neighborhoods.

Gentrification is a structural product of the land and housing markets. Capital flows where the rate of return is highest, and the movement of capital to the suburbs, along with the continual devalorization of inner-city capital, eventually produces the rent gap. When this gap grows sufficiently large, rehabilitation (or, for that matter, redevelopment) can begin to challenge the rates of return available elsewhere, and capital flows back in. Gentrification is a back-to-the-city movement all right, but a back-to-the-city movement by capital rather than people.

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Definitions

House Value
It will be necessary to separate the value of a house from its price. Only in the marketplace is value translated into price. And although the price of a house reflects its value, the two cannot be mechanically be equated since price (unlike value) is also directly affected by supply and demand conditions. Thus value considerations set the level about which the price fluctuates. Now with housing the situation is further complicated insofar as individual houses return periodically to the market for resale. The house’s value will also depend, therefore, on its rate of devalorization through use, versus its rate of revalorization through the addition of more value. The latter occurs when further labor is performed for maintenance, replacement, extensions, etc.

Sale Price
A further complication with housing is that the sale price represents not only the value of the house, but an additional component for rent since the land is generally sold along with the structures it accommodates. Here it is preferable to talk of ground rent rather than land value, since the price of land does not reflect a quantity of labor power applied to it, as with the value of commodities proper.

Capitalized Ground Rent
Ground rent is a claim made by landowners on users of their land; it represents a reduction from the surplus value created over and above cost price by producers on the site. Capitalized ground rent is the actual quantity of ground rent that is appropriated by the landowner, given the present land use. Thus, assuming for the moment an equation between price and value, sale price = house value + capitalized ground rent.

Potential Ground Rent
Under its present use, a site or neighborhood is able to capitalize a certain quantity of ground rent. For reasons of location, usually, such an area may be able to capitalize higher quantities of ground rent under a different land use. Potential ground rent is the amount that could be capitalized under the land’s “highest and best use” (in planners’ parlance) — or at least under a higher and better use. This concept is particularly important in explaining gentrification.

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Neil Smith, The New Urban Frontier (London/New York: Routledge, 1996) 61-71.

Investment in the Built Environment — Prologue

I posted a version of this in the afternoon of February 22, but a few hours later I reverted it to Draft status. It was just a series of mostly-disconnected, extended quotations, and I don’t want my posts to be just a series of mostly-disconnected, extended quotations. They need to be able to stand on their own.

This is where my whole blogging problem starts to manifest itself. On the one hand, I want the blog to be focussed and informative. At the same time, I’d like to be able to just post longer-than-Tweet pieces on things I’m interested in — books I’m reading, or the fact that I’m listening to James Irsay sitting in for Chris Whent on Here of a Sunday Morning, analyzing Chopin etudes — without them being particularly informative.

Also, because I now have five followers (!), I feel that I owe them something. The problem is, I don’t know what exactly.

I had the same problem years ago, before the innernet. A friend of mine and I wanted to put together a literary magazine. Not like Paris Review, but fiction and poetry that we and our friends wrote, but I didn’t know how to approach it. On the one hand, I wanted it to be serious, so I wanted it to look nice. Of course, a serious literary magazine that looks nice is like the Paris Review, and is expensive to produce and distribute. These things are usually the pet projects of the idle rich. The other idea was to put together something more along the lines of Ray Gun, or any number of local mimeographed booklets circulating in the neighborhood. I really didn’t like this idea though. I hated Ray Gun’s typography. However, the benefit of this method was that it didn’t have to look “nice,” and it would be easy to reproduce and distribute because I could run them off on the copier at work and we could put them on the consignment shelf at St. Mark’s Books, and distribute them by hand.

The result was that we collected enough to put out our first edition, but it never happened because I couldn’t decide what it should look like. In retrospect, we should have gone with the low-fi version. Work with what you’ve got.

End of Prologue.