Category: land and how we use it

Because a 1/10th acre parcel is only worth $14.4 million because of its location, not from anything located on it.

The lot where a McDonald’s long operated at a gateway to Amazon.com Inc.’s high-rise campus in downtown Seattle sold on Friday for $14.4 million — over three times more than what it did in 2016, months after Amazon opened the first tower.

Due to the site’s tiny size (less than a hundredth tenth of an acre) its quirky, triangular shape, and prominent location where Sixth and Westlake avenues cross Virginia Street, the property is a bit of [a] landmark.

It tripled in value since 2016 and for the same reason it commanded that price…location, proximity, nothing else.

Using the Mercer Metric, that land could be paying 1/10 of a million dollars in rent over 99 years…that would come out to $42,102,307.71 over that term with the same 2.5% annual increase. Annualized — dividing that by the 99 years to get a revenue number we can borrow against — it comes out to $425,275.84. Right now, it pays about $60,000 a year.

UPDATE: I let the reporter know about his 10-fold error on the size of the parcel but he reiterated that the value of the land is driven by the presence of a bank. As he writes:

The recent history of the property reflects what has occurred all around it since Amazon opened its first downtown tower in late 2015.

The next summer a local investor group, including Meriwether Advisors brokers Doug Barrett and David Rothrock, and Newmark broker Paul Sleeth, paid $4 million for the property when property values started to rise along with rents.
[…]
It would be tougher to make a big rent payment selling burgers and fries to passersby than it likely is for the largest bank by asset size in the U.S. catering to the financial services needs of the thousands of high-salaried Amazon workers across the street.

The two-story, 8,100-square-foot branch is the largest the bank has built in Washington in more than four decades, according to Chase. Last summer, it had eight full-time employees.

The new owner is a limited liability company affiliated with Boston-based Fidelity Investments.

No one pays $14 million for a parcel that small just to house a retail bank branch that employs 8 people. Does anyone really think the folks at Amazon do a lot of face to face banking? The land is an investment, owned by investors, not the bank itself. The scarcity of land in a dynamic economy is what drives these prices, not the work being done on that land. “When property values started to rise along with rents” would be more correctly stated as “when speculators raised rents to capture the value of scarcity.” This isn’t like the tides or phases of the moon. This is the landlord’s game.

All the investors need is enough to cover the property taxes…that’s about $5k/month for that location, albeit, a small portion of that location. A ground rent might pay as much as seven times the current property taxes. A swap for some other land, a plan to assemble a larger parcel, some way to block another investor from assembling one…who knows? What we do know is that putting a bank on it has bupkis to do with the value. The value is in the land.

If you could wave a magic wand and fix one modern ill, what would it be? Inequality? Pollution? Intergenerational unfairness? The decline of the high street? Suburban ennui? What if you didn’t have to pick, because there was one social problem that lay at the root of all of them?

Too much to excerpt but the author hits all the key points…that rents rise with wages and landlords take the spoils, that the cost to build has not risen nearly as fast as the cost of the building site, that density drives innovation and wealth creation/opportunity, that reducing travel/commuting distance will reduce carbon emissions and slow climate change.

The question I have to ask after reading such a well-formed argument is, who doesn’t want all of that? Who doesn’t want an end to inequality and pollution and intergenerational unfairness? Ask yourself who didn’t want democracy or the emancipation of slaves and why? Who opposes trade unions or minimum wage laws and why? The potential gains are clear yet people will still hold onto their status, their power. The same people who rail against homeless encampments or panhandlers at traffic lights will vote against housing density or anything that affects “neighborhood character.”

Why do the super-rich treat affordable housing in the Bronx as a lucrative asset class?

Because there is no such thing as affordable housing without affordable land and the Bronx is not where I would look for it…

Recapture the value of the land through a ground rent or land value tax and you break the cycle of gentrification and people made homeless through unaffordable housing. Or just continue to allow the few to exploit the needs of the many — to have a safe place to live — and wonder why nothing changes.

A developer’s $1.97m cash offer for the 2,158 sq ft (200 sq metre) property in the Noe Valley neighborhood was finalized last week. On the social media page Zillow Gone Wild, some commenters marveled at the price while others questioned the value of a house with boarded-up windows, peeling paint and an unstable foundation.

Oh, you sweet summer children…the house isn’t the play. The developer just bought a lot in Noe Valley, not a house. The house can be torn down and something can be built there that will now be the newest and perhaps most expensive house on the block, raising the value of the other houses (and the wealth of their owners) and it will meet its asking price, have no fear.

The comments on Twitter are on point.

Henry George would marvel at the dollar values involved but the underlying ideas — With the growth of population, land grows in value, and the men who work it must pay more for the privilege — hold up.

Because they are parasites, pure and simple…

Multifamily investors descended on the Puget Sound region at the end of last year, snapping up $477.5 million of large assets in King County alone in December.

“For many of (the sellers) it’s time to cash in the chips, and Seattle is always a very popular region to buy in,” said Brian O’Connor, principal at O’Connor Consulting Group in Seattle.

The flurry of year-end activity is typical and this time comes against a backdrop of rising rents due to a lack of supply.

“We’re doing our latest studies, and oh man, we are undersupplied everywhere. I mean, like really undersupplied. Rents are really going to go up,” he said.

Large institutional investors are among the buyers.

This is what you get when you put something as essential — and scarce — as land and, by extension, housing in the market as a tradable commodity.

[F]easibility studies showed that a lot of new construction jobs were only around break-even propositions. “I’m telling people that I don’t believe the rents have gone up enough yet to find that equilibrium between cost and rents,” he said.

Of course, those costs would be lower if the price to acquire land was lower, if instead of paying millions of dollars for land, you could acquire it under a lease for a fraction of that cost, lowering the need to charge high rents or develop properties only investors can afford. Ground rents aren’t new…Seattle has many examples, from disused school sites that are now commercial properties to other commercial real estate where the land is leased, not sold. If it’s a good play for business, it’s probably a good play for the city or county as well. Where are all my “let’s run government like a business” types now? They should be all about holding the land and recapturing the value through ground rents, but for their allergy to anything that improves life for people they don’t know.

This could work elsewhere too…

Helsinki owns 60,000 social housing units; one in seven residents live in city-owned housing. It also owns 70% of the land within the city limits, runs its own construction company, and has a current target of building 7,000 more new homes – of all categories – a year.

In each new district, the city maintains a strict housing mix to limit social segregation: 25% social housing, 30% subsidised purchase, and 45% private sector. Helsinki also insists on no visible external differences between private and public housing stock, and sets no maximum income ceiling on its social housing tenants.

It has invested heavily, too, in homelessness prevention, setting up special teams to advise and help tenants in danger of losing their homes and halving the number of evictions from city-owned and social housing from 2008 to 2016.

“We own much of the land, we have a zoning monopoly, we run our own construction company,” says Riikka Karjalainen, senior planning officer. “That helped a lot with Housing First because simply, there is no way you will eradicate homelessness without a serious, big-picture housing policy.”

But of course, you can see the problem. Unlike most cities elsewhere, Helsinki hasn’t sold off the land under it. It shouldn’t be necessary to own it: controlling the zoning/land-use process and assessing taxes on land as its more remunerative use rather than as vacant land, would get us most of the way there.

Housing First’s early goal was to create 2,500 new homes. It has created 3,500.

How many homes could have been built on the site of the old SPD headquarters, revitalizing that part of town? Since it’s demolition in the mid-oughts, it remains a hole in the ground across from city hall, paying the barest minimum of property tax assessed against a vacant parcel. Or the slowly evolving Northgate mall site, 55 acres that could have been a small town of its own, with access to the light rail network, the bus lines, and the freeway, if you ever needed anything you couldn’t get right there. But the idea of putting land — and housing — in the market, making an essential commodity like housing a speculative asset, means we can’t get there.

The biggest failure is a failure of imagination and we see it all the time.

Currently, the majority of Seattle’s residential areas are zoned for single-family homes and “accessory units” like backyard cottages, but do not allow for larger apartment buildings and condos.

Because what every city needs is more landlords extracting unearned wealth, be it through backyard cottages or parking lots downtown…

Many homeowners have fought proposals to allow denser development in their neighborhoods because they feel it will change the area’s character and cause parking headaches.

I wonder what they mean by “change the area’s character?” And of course parking comes into it…this is a city built for cars, so their servants are at the ready.

While the survey shows a majority of King County residents want to see single-family home areas opened up to apartments and condos, there’s an interesting twist: Most of them would rather not live in those types of housing units themselves.

I appreciate that King County’s largely exurban/rural residents are willing to see Those People in Seattle take one for the team…I would remind them that the King County property tax database that could allow all property to be taxed separately on land and improvements is county-wide, not just for Seattle. Maybe some of those big parcels Out There have more remunerative uses…

It’s clear from the survey that King County residents see more development as one way to help make homes more affordable.

Is it though? Do the good people of North Bend care about that? Or are they willing to see development Somewhere Else? No shade on those folks but this attributes some intention they may not actually feel.

A solid majority — around 63% — wants to see more housing allowed on underdeveloped land, which could mean anything from unused vacant lots to low-rise buildings in upzoned areas. Another change that appeals to the majority of county residents is to open up public golf courses to housing development, supported by 53%.

That makes sense but still…Seattle residents defended their golf courses so I’m still wondering if this glosses over some antipathy for Seattle from the rest of King County. After all, it’s Seattle’s growth that has made everything worse and more expensive.

The survey’s crosstabs show the elimination of single-family home zoning in the city of Seattle is favored by more men than women. There is particularly strong support among people who live in South Seattle (67% approve). Also, people who have recently moved within Seattle, and those who have been struggling with rent or mortgage payments, show a higher-than-average level of support for ending single-family home zoning.

That tracks…I continue to think that South Seattle has a more realistic set of expectations about the city than the north end, which seems more and more like any well-off bedroom community, on the outskirts of Atlanta or Plano. The topography of Seattle doesn’t help here, with the narrow waist and no good ways to get through to join north and south. But that was always here: Forward Thrust tried to get past that with a transit system for a future version of Seattle that the voters rejected. Maybe a bifurcation of N and S Seattle should have been the other choice: either connect these parts or let them go their own way. In the ensuing 50 years, maybe the inequities we see today could have been addressed by the people affected by them. The Metro King County idea was not to have Seattle vs the rest of the county but the voters didn’t really buy into that.

Seems like these resort towns need to get control of their land as a common resource.

Residents in Jackson Hole say that many of the houses in the 10,000 population town that had been rentals for service industry workers and ski bums have been bought to be torn down for new construction. The average price of a house in Jackson Hole is $2.5m, more than double what it was a decade ago, and rent for housing set aside for service industry workers over the summer started at $3,000 a month for a 400 sq ft apartment.

The result is an inflated housing market that’s priced out longtime residents. “Tourism drives interest in Jackson Hole, and that interest drives real estate investment, which then raises the cost of living and changes the labor market entirely,” says Chris Dickey, who has lived in Jackson Hole for 17 years and owns a digital marketing agency. “People visit the area a few times and then decide they want to move here. There are plenty of people out there willing to pay $3m to $5m for a home in Jackson Hole, but the problem is that’s not a price locals can afford.”

We used to see bumper stickers — “if we keep buying imports, where will our children work?” — touting domestic industry. No one sees land the same way, that if we sell it to investor/speculators, we will have no place for our children to live or the other folks we need to make sure the work gets done. We can’t keep expecting people to commute further and further for low wage jobs nor should any town take local wages and send them to be spent in some other city or county.

I wonder what the breakdown is of land vs house in a $3-5M home in Jackson Hole. The house won’t be a middle class tract home, of course, so it will all luxe finishes and big spaces, but that’s driven by the land: you’re not putting a 1000 sq foot rambler or bungalow on a piece of view property adjacent to national park. So what if the cost of the land came down, if the speculative value was recaptured through taxes, and houses could be sized more realistically?

Seems like there is a need for some social housing for the “service industry workers and ski bums” who make a place like that work. People visit or settle in those places for the local color but what’s the first thing to go, to be priced out? The Main St diner, the dive bar, the local gear shop (tack or skiing), and with that. All of that is what makes those places what they are. And all just so some hedge-fund plutocrat can flex on his business school friends…

“Everyone made the same bet on inexorably rising property prices, especially the developers, who levered to the hilt, overpaid for land at auctions, and scooped up as much real estate risk as they could take on,” [Michael Pettis, professor of finance at Peking University] said.

Because of course they did.

I know Mao didn’t actually kill the landlords but whatever happened to this? Why, in a country ruled by an actual communist party, is land ownership by anyone but the commons a thing?

Nothing I can add to this story…the writer has covered it all. But it’s always worth fossicking around in the property database to see how that parcel has progressed.

If there is a clearer illustration of how land increases in value with no effort on the part of the owner, I can’t imagine it — a 10 fold increase in value over 20 years for a parking lot.

It’s only 1/6 of an acre…if we apply the Mercer metric™ of $1M/acre per year, that’s about $160,000/year in ground rent/land value tax…as of 2021, that parcel only generates $38,190.82/year. If the parking racket doesn’t generate $160k/year, maybe it’s time to develop the land into something more remunerative — you know, the highest and best use. All I see now is someone making a 10x gain for nothing, while that land is wasted on car storage. That looks like a 12% annual return over 20 years: not bad for no effort or as the man said “Landlords grow rich in their sleep.”

What’s especially frustrating is that everyone in the real estate game, from developers to the local school district, understands the value of land, as an asset to hold onto or to develop under a ground lease — except the city of Seattle itself. It sells surplus land that investors add to their portfolios with no incentive to develop it. The city has even turned down lucrative lease offers, opting for a fee simple sale that represented a fraction (15%, in the case of the Mercer life sciences campus) of the offered revenue for that project. That left almost $1B on the table, a revenue stream that could have been used to borrow against (does no one in the city’s finance office know the future value function in Excel?): $1B over 99 years annualizes to $12 million per year. And that’s for one property, one development, one acre of the almost 500 Seattle has set aside as downtown/commercial real estate.