"How ‘Developer’ Became Such a Dirty Word" (with Forest City cameo)--and some pushback

The New York Times on 7/29/19 published Emily Badger's How ‘Developer’ Became Such a Dirty Word, subtitled "It’s a demonized group, yet there are few solutions for the housing shortage that don’t at least partly involve more development."

That's true, and it's also true that time tends to buff the development examples of the past in our memory--consider the adulation toward Rockefeller Center, which during its time, as author Daniel Okrent described, was the product of political clout and public relations wizardry.

But the latter tactics are part of why developers today provoke significant skepticism, a theme largely absent from the article--though not the comments.

but seriously, the question is not "are all developers bad?" It is "who benefits?" and "who controls the process?

— Oksana (@OksanaMironov) July 29, 2019

Most important, developers don't get paid until project is finished & sold/leased. In some metros, that routinely means 5+ yrs of negative cash flow before any rents come in! Longer time fighting NIMBYs/navigating complex rules --> higher costs --> higher rents.

— Jenny Schuetz (@jenny_schuetz) July 29, 2019

The summary

From the article:

The notion that development is inherently bad, or that developers are inherently bad actors, seems to ignore that the communities residents want to protect from developers were once developed, too, and often by people who made money at it. (That is, unless you believe in “immaculate construction.”)
“When somebody’s attacking this, I do sort of wonder, ‘Well, where did you grow up?’” said Julia Vitullo-Martin, a policy analyst who has followed development in New York since the 1970s, from City Hall and academia. “And who built your house?”
In any city with a housing shortage, there are also few practical solutions that don’t at least partly involve more development. The villain blamed for the problem, in other words, must be part of solving it.

Part of that housing shortage in the New York metro area can be blamed on the lack of development, and the failure to:

• plan for development (by changing not just zoning policies but local tax policies)
• get federal funding, and/or reform the mortgage interest deduction to steer housing policy
• to open up zoning (to allow larger buildings)
• to require affordability when doing so (see: Downtown Brooklyn rezoning)
• to spread the burden equitably throughout the city (parts of New York near transit were downzoned),
• to spread the burden equitably throughout the region (many suburbs remain unscathed)
• to invest in infrastructure (more subways, better buses, faster suburban trains would spur housing)
• to allow, or even mandate, duplexes or triplexes in neighborhoods zoned for single-family homes, as in some other cities recently

The lack of such comprehensive planning, without a commitment to equity (for example, to ensure that renters in rent-stabilized units are not at risk--new safeguards were enacted this past legislative session), has generated skepticism toward "development." 

Drawing particular skepticism are projects that proceed thanks in part to political influence: one-off rezonings, or even state overrides of city zoning, such as with the Atlantic Yards/Pacific Park project. 

Combine that with the fact that the real-estate industry typically--though less so this past year--has disproportionate sway in city and state elections and subsequent policy, given real estate players' history of campaign contributions.

A Forest City cameo

From the article:

The story of why that happened is less about developers themselves than the forces around them: the economics of the industry, the politics of growth, the available land that’s dwindled and the inequality that’s grown.
But it is simpler to jeer the huckster standing before the planning commission.
“I always felt that I was behind one of those Coney Island cutouts,” said Ron Ratner, whose family’s lumber business in Cleveland grew into a publicly traded real estate behemoth, Forest City, which was sold in December (Forest City developed The New York Times’s Manhattan office, too).
“I’m wearing a leisure suit and I have a bolo tie,” Mr. Ratner said. “Or I’m wearing a sharkskin suit and I have alligator shoes with big gold buckles on them. And I’m probably wearing five or six gold chains hanging around my neck.”

Wow, a backhanded reference to the fact that Forest City Realty Trust, formerly Forest City Enterprises (and the parent of Forest City New York, formerly Forest City Ratner), was sold to Brookfield Asset Management after very contentious board debates, a story the Times (and other major publications purportedly covering real estate) ignored.

And wait a sec. The lumber business was years ago, and the real estate behemoth was very good--until it wasn't--at working tricky public-private partnerships, not Coney Island cutouts but closed-door lobbying.

Historical forces

Badger notes that sprawling single-family homes took precedence over new urban apartments, creating homeownership, "though at first only for white families." That hints at the significant public policy boost.

She quotes an economist who describes New York and other older cities as "closed," with no more room to grow, which means things must be torn down, making development "feel much more zero-sum."

It doesn't have to be, though, if there's an equitable policy to add bulk, affordability, and local amenities--a formula that the administration of current Mayor Bill de Blasio says it is pursuing (though some disagree).

"Where profits are barely even possible"?

The above subheading (sans question mark), from the article, notes that development is expensive, given costs of land, labor, and materials, the constraints of zoning, and the costs of environmental review. From the article:

“There is just a total lack of understanding of the economics of building new housing today, of the math behind it, and what developers actually make or don’t make,” [former nonprofit developer] Ms. [Carol] Galante said. “This is not your father’s subdivision process of the 1950s.”
A developer underwriting a multifamily project today typically must project returns of about 6 percent on the invested equity (much of which goes to the investors, not the developer). That’s no guarantee of riches.

As comments posted on the article and on Twitter suggest, that's not the full story. That 6% is not the profits, and developers also typically take a percentage fee on the amount invested, perhaps 5% (as with Atlantic Yards), which should pay for some of their upfront costs.

That said, if a project (as with Atlantic Yards) takes too long or is misconceived during a time of irrational optimism, the carrying costs can add up.

A comment from Gib Veconi of Prospect Heights, active in Atlantic Yards issues:

It's important to distinguish knee-jerk NIMBYism from justifiable frustration over the capture of New York City government by the real estate industry. Another reason people resent developers is because they are beneficiaries of an inequitable process from which the public has been disenfranchised. City land use policy is to continually increase the productive value of land, ostensibly to increase tax revenue, but in fact to increase developer profit. That is why the largest City MIH rezonings focus on neighborhoods with the greatest potential for appreciation through redevelopment, and why the "affordable" apartments that result are targeted for incomes higher than the neighborhood median, and hence raise housing cost, causing displacement. I have also personally been told by employees of the NYC Department of City Planning that when modeling a redevelopment scenario for feasibility, the Department assumes a developer profit not of the 6% cited in the article, but of 15%--a handsome return indeed. Finally, City and State land use review processes are structured to achieve the outcome desired by private applicants, and cut the public out of decision-making.

I agree that it's a little misleading. Nevertheless, the yield is the profit that's being produced that everybody's sharing

— Market Urbanism (@MarketUrbanism) July 29, 2019

From the comments

There's a lot of hive-mind wisdom in the Times's comments. A selection:

Justin Chipman, Denver, CO:

In a sense, this article is a strawman argument. I am a builder. I am a small-volume builder, but I usually build on spec (risking my product on the open market.) However, the term developer typically refers to someone that is building on a larger scale. At the core of our economy is housing and it is understood by most in the lower eighty percent of the housing spectrum that they are largely at the mercy of forces much larger than them and hardly with a care for them. Sure, the devoloper builds things that some people need, but they also fail to take responsibility for what they cause. The developer is the party responsible for planning our cities. When citizens sit down and do it we call it socialism and regulatory control, but when a private business buys two farms and builds 10,000 homes as a planned community and names it after the animals and environment that they killed, it smack of dishonesty and people respond accordingly. 

RB, Los Angeles:

I am the daughter of a developer and I have worked many years ago as a lender for two different insurance companies real estate departments. I personally believe that the majority of developers care about obtaining wealth for themselves not on creating something better for our communities. My father was a developer in Los Angeles in the 1950's and 1960's. He build "junk" apartments with walls so thin you could hear everything in the next unit, or so he said... My personal experience as a lender was that the majority of the developers were in it only to create great wealth for themselves and not about bettering our communities and the lives of the people in them. 

Mopar, Brooklyn:

Real estate is big business, and one that is flourishing right now along with tech and health care. Developers have politicians in their pocket, and they control and determine the world we all live in to an outsize degree. Postwar planning and development was mostly a disaster and destroyed much of our built environment, the natural environment, our health, monuments such as Penn Station, older neighborhoods, and much more. Today, we cannot develop our way out of a housing crisis. The problem goes far beyond real estate. But without federal and local subsidies to create 100 percent affordable housing, like we had in the early 20th century, developers build luxury housing that not only does nothing to alleviate prices for the working and middle class but actually raises them. The current approach in New York and beyond to give tax breaks to developers who include 20 percent “affordable” housing in every development is a sham that is destroying the character of New York’s neighborhoods and creating unaffordable housing that is at best market rate or even higher, such as $2,200 a month studios in the outer boroughs.

Derek, California:

Its worth noting that any 'shortages' in housing in cities are generally artificial. LA County has hundreds of thousands of vacant units, and there is a similar story in New York. However, developers are primarily interested in speculation: Building luxury housing in neighborhoods which are cheap, and turning them expensive in the process, and leaving huge swaths of the city vacant in the process. Perhaps we need to be asking about why we only allow private development: Public housing has been essentially a political non-starter in the United States for decades, but it is an obvious way to undermine the ever more predatory instincts of a private market. 

S Simon, New York:

@Marie Wait...Do developers follow rules and laws?? Does Trump?? I don't think so. They bend and break the rules wherever there's a nickel to be made. Take New York City for example. Zoning laws are routinely broken or ignored seemingly with the help of the agencies mandated to protect the community and enforce the law...The way to change this is Campaign Finance Reform. 

Marie, Boston:

Drumming up sympathy for wealthy developers who seldom live in their developments won't go far with this reader who was witnessed enough developers first hand to say that you could have stopped at the first paragraph. I've never seen a developer who didn't live up to "they will tell you what you want to hear in order to get what they want." I've never seen a developer make promises about "amenities" or accommodations who didn't later renege on them...

Le, Nyc:

Lots of confusion in this article. One is neglecting to explain that "free market developers" do not build housing for low and even lower middle incomes here in NYC. There is obvious market failure here. Second, the role of the massive flood of world real estate capital coming here looking for speculative investment opportunities here has created massive price inflation as is a primary cause of the "affordable housing crisis". and Third, the "get rid of regulations" solution to building in NYC (with the false narrative that "NIMBYs" create and enforce those regulations) is bad, inaccurate and just plain wrong theorizing by a few Chicago-school economists, and obviously false empirically from the data they attempt to muster to argue the point. And in NYC, there is a lot of price gauging and oligarchic power in the housing market. City data show that NYC developers were claiming to be getting upwards of 96% yield on capital in hot luxury markets of Manhattan. Time to investigate the problem as one of market power in an olgarchic industry and not a problem of the spreadsheets of a few big real estate companies.

jdp, Atlanta:

As a real estate banker for 30 years I can attest to how complicated urban development has become. It's a game for developers who can afford the overhead of a design team to create genuine value and deal with regulations. Small time well connected contractors who happen to acquire odd pieces of cheap land where there are no development controls can ruin a corridor. But, big or small, time is money and all tend to shade the truth to expedite their projects. Trump is not all together different than most developers. It's just a matter of degree.

Ted, NY:

In a city like NYC, the “establishment” doesn’t allow fair competition. The developer community is insular and driven by very high profits. Systematically, since the the late Ed Koch ascent as Mayor, affordable housing laws and regulations have been weakened or eliminated. This abuse is nothing less than ethnic and social cleansing of Manhattan, where more and more working families have been forced out to make room for luxury and super, super luxury housing creating what passes as MYC establishment, powerful families of which Jared Kushner is said to the “scion”? Not profitable? Please don’t insult the public’s intelligence Consider how former Mayor Bloomberg allowed the closing of St Vincent’s Hospital, AKA, the poor people’s hospital, which supported the uninsured and was losing money; though in time, the ACA would have saved it. Nonetheless, it was sold to Scott Rudin and the Rudin family which quickly rebuilt it into luxury condos that sold upwards of $15M and the penthouse went for $50M. The story seems to be the same in other major cities. Developers are not thinking “affordable housing.” That the homeless population has been exploding in NYC is not coincidental. California, likewise, has seen an unprecedented exponential growth of homelessness.

Oliver, My Local Starbucks:

No project would ever get built for a 6% return, ever. 6% yield on cost, sure, but that’s completely different and the writer is surely mistaken about that figure. Even stabilized cash-generating properties need to yield closer to 10%, renovations between that and 15%, and ground-up developments are generally skipped over unless the returns are more like 15% to equity, minimum. Developers often contribute just 10-20% of the required equity as well, and take an outsized share of profits over certain return benchmarks so the developer makes a return closer to 20% and up on a successful deal. At the end of the day someone has to get things built, so developers are important players in any city. And while a lot of comments refer to greedy developers, the fact is people in development are just making a living like anyone else. That’s the point of work, and no one should be surprised at developers building the most profitable projects they are able to.

Matt Polsky, White, New Jersey:

It's unusual and can sometimes be welcome when a defense is offered of a demonized group, in this case developers, showing the limitation of simplistic villainizing. Badger does a fair job, but leaves out some things. She does concede there have been bad developments. So, to some degree, they have made there own bed. When I've talked to some of them about environmental responsibility, with a few exceptions it's not a priority. Or they say it can't work without making the effort to find creative ways to make it work. Even during their heydays, developments were causing externalities, but these weren't counted. This article doesn't mention climate change, water, endangered species. Future developments that continues that mindset should be obsolete. Yes, there are other sources of the problem. The article mentions the phenomenon of "I've got mine; I don't care about you getting yours." But, similarly, simply labeling opponents as NIMBYs is just as bad. While denser development is a big part of the solution to affordable housing, it's also simplistic to label opponents as racists as possibly there are other reasons that would need to be addressed. With so many problems, we need a new approach, including a lot of rethinking of conventional practices of how housing could work. 

Rasmus Lillios, United States:

Badger is right to distinguish different developers, lest we all become NIIMBYs shouting down subsidised housing as we do luxury apartments. And changes to zoning codes to allow more units indeed offers a creative path to more units and potentially more affordable units. But the background assumptions and ideologies at play need to be examined much more critically. Developers building at market-rate or even 80% AMI are actively invested in the private market of housing. 'The math behind it' is not some natural law given by the gods of land and house–it is a belief in how land should be managed and who should be able to find a home. We can find another way. 

Jm, Brooklyn:

Tsk, tsk. I get tired of the lazy reporting done when it is about real estate. No mention of speculation? Money laundering? Foreign loans? Property flipping? Deed theft? EB 5 visa incentives? All these things are driving the NYC real estate market. Oh I forgot about obscene tax incentives that end up getting paid by the regular homeowner and taxpayer to keep this system in place for the developers. Granted there will always be a need for development, but the author wasted her words trying to get us to feel sorry for the plight of the poor developers who have to spend more money on land instead of looking into how developers in tandem with government (these days they are one and the same) are to blame for all of it. Why give Ratner pity quotes without listing how Ratner properties have been bought and sold and how they have displaced communities? How does Atlantic Yards flip to become Pacific Park? Ms. Badger this was disappointing journalism. Or was it a real estate ad? Maybe I'm confused.

William R, Crown Heights:

The issues of over-development, zoning, and the public's reaction to these things is a textured and nuanced conversation that varies wildly in its underlying facts and realities from city to city. In NYC, ultra-luxury mega towers don't just represent the worst of what the afore mentioned so-called evil developers and their politician pawns have in store for us, but the upward pressure these pied-à-terre place on the market is a direct obstacle to building actual affordable housing that comports with the realities of need, rather that comporting with the objective to turbo-charge gentrification. The real goal of NYC's current affordable housing scheme as it relates to the up-zoning of neighborhoods like Inwood and East Harlem.