Strong Towns 101: Risk and Reward
On Monday, we compared the small little framing shop in downtown Grand Rapids with the Walmart out on the edge of town. We found that, financially, the little framing shop was three times more productive than the Walmart. Pound for pound, the small buildings in the downtowns of Range cities outperform the investments we find on the edge of town.
That's math. It's a pretty neutral observer of success. What is a little less intuitive is the amount of risk involved with these investments.
Start with the downtown shop. From the taxpayer's perspective, a little shop downtown does't cost much -- it takes up just a little bit of street, pipe, sidewalk, etc.. -- but, for that small cost, has a relatively high return. As we showed yesterday, it also has a lot of upside potential since, as the area becomes more successful, there is natural market pressure to intensify the building by adding additional stories.
“This pattern of construction provides for continued use of the building, and even improvement, when things don’t work out as we originally thought they might.”
Consider the downside risk: What happens when that downtown shop loses a tenant? Or the owner of the store decides to retire? When we look at these buildings -- essentially a little box -- we see how flexible and adaptable the design is. These building types accommodate a wide variety of uses, from coffee shops to legal offices to banks to residences. In short, this pattern of construction provides for continued use of the building, and even improvement, when things don't work out as we originally thought they might.
Now look at the big box store out on the edge of town. From a taxpayer's perspective, we get a big sum of money in tax revenue from it but we also take on a disproportionate amount of long term liability; now we have miles of road, curb and pipe we have to maintain. While that bill will not come due for some time, it hangs over our future. Unless these properties improve significantly in value within a decade or two, this is going to turn dramatically negative.
Unfortunately, the big box site is not designed to improve in value. Walmart, for example, builds its stores for a 12-15 year payoff. In other words, within a decade and a half of opening, the cash flow has paid back the capital for the site construction and Walmart is in a position, financially, to reevaluate their options. Since these stores are only designed to last roughly that same time period without major investments, the company has three options.
The first is to make improvements to the existing store and stay in the current location. Financially, this is the best outcome for the community, although note that it doesn't generally improve the overall value of the property and thus does nothing to address the long term bad investment the site represents. Still, losing a little is worse than losing a lot, which is what happens with the second -- close the store and leave the community -- and third options -- close the store and open in a new location. We see cities faced with either the second or the third option all the time, and when Walmart doesn't allow their sites to be redeveloped by anything that might compete with them, what the city ends up with is an expensive blight with little hope for improvement.
“From a taxpayer’s perspective, big box stores are a high risk, low reward scenario.”
From a taxpayer's perspective, big box stores are a high risk, low reward scenario. They provide a couple of decades of positive cash flow in exchange for the taxpayer assuming enormous long term liabilities. There is little that can be done to address this situation that makes any financial sense (sorry, sprawl repair advocates).
I've picked on Walmart a little here, but let's be clear: Walmart is not evil. They are simply responding to the incentives we have put in place. They are perfectly adapted to the environment -- the pattern of development -- we have created. If we don't like the outcome, if we agree that the short financial benefits of a big box store don't outweigh the long terms costs and risk of failure, then our calling is clear: change our pattern of development. Stop investing in approaches that make our city less affordable and more fragile.
Some questions to consider this week:
- What are some of long term implications of extending city sewer/water and roadways to properties -- especially residential homes -- beyond one of these fragile, non-adaptable sites like a Walmart?
- What would we sacrifice in terms of living standard, in an age of Amazon Prime and other online retailers, if we did not aggressively pursue and accommodate national retail chains?
- When we consider what the flexible, adaptable and financially productive development pattern left to us, are we comfortable with the long term implications of our attempts at growth? Would it be too difficult to acknowledge that we're the primary cause of the decline we're seeking to prevent?
All week we're discussing these questions and more here in the comments section below as well as on our discussion board. Please join the conversation.