Why Investors Are Building Wealth with “Walkable” Properties

Dave:

When you invest in real estate, oftentimes you’re trying to make informed bets or decisions on what properties or what areas are going to appreciate and boost your equity position in a property. And to do that, we’re used to looking at economic data, population growth numbers. These are things that we talk about a lot on this show, but there’s another subtle but powerful force that shapes property values that we don’t really talk about as much. And that is urban design. Hey everyone, and welcome to On the Market. I’m your host, Dave Meyer. Today we’re talking with author and urban planning expert Jeff Speck. Jeff is going to help us understand how elements of urban design, like transit availability, walkability, trees, building height, all these things influence property values and the economies around those properties. We’re going to get into how this plays into housing affordability, how you as an investor can try and get in on some of these trends and how you can use the information Jeff gives us for your own portfolio. Let’s get into it. Jeff, welcome to the show. Thanks for being here.

Jeff:

Hey, my pleasure. And I’m really excited to talk to your audience.

Dave:

Great. Well thanks Jeff. We’re excited to have you. And our audience has probably heard the term urban planner before, but if there are anything like me, don’t really understand the finer points of what it is you actually do. Can you just give us some background?

Jeff:

Most people, when I tell ’em I’m a city planner or an urban planner or an urban designer or whatever we call ourselves, they say for what city do you work for? And the majority of city planners are employed by municipalities. I happen to be a consultant on the private side who advises both cities and private developers. And I’d say about half my work is for private developers who want to make new places. And half my work is for cities and other communities that want to make their places better. And our focus is really on design, those aspects of how communities are put together physically that either engender a higher or lower quality of life.

Dave:

Got it. And so working with the public sector, I can imagine the governments are trying to create higher quality of life for its citizens. Is that what private developers you work with are looking for too? Or they looking for a better economic return?

Jeff:

I would say to a number. They’re looking for a better economic return. The great news is that they can get the best economic return by providing the highest quality of life.

Dave:

I love that sounds like a win-win, and we’ll definitely jump into that in a little bit here. But Jeff, you’re best known for your work on walkability in a lot of your work. You talk about these four components of walkability. Can you explain that to us?

Jeff:

Yes. So in my book and in my work and in of the projects I do in cities, I put forward what I call my general theory of walkability, which asks the question, particularly in America, most of my work is in America where driving is so easy and so cheap and most people own cars and the car is sitting there in the driveway between us and everything. So the natural tendency is just a fall into it. And of course driving is heavily subsidized. So under those circumstances, how do you create conditions in which people who have a choice will make the choice to walk? And the answer is the walk has to do four things simultaneously. It needs to be useful, it needs to be safe, it needs to be comfortable, and it needs to be interesting. And if you don’t provide all four of those things, people will generally not choose to make the walk. And the same thing applies to cycling as well. So each of those four categories then implies very specific instructions about how to achieve those ends

Dave:

And why would we want to achieve those ends for some of the benefits are probably obvious, but you have a lot of discussion in your book about why achieving a higher level of walkability and cycling ability to your point is desirable.

Jeff:

Well, what’s great is that since I first wrote the book about 11 years ago, and certainly since I first started doing this work about 25 years ago, I have less and less obligation to tell people why. And the first section of the book is called Why Walkability? And it lists three most important reasons for making our cities more walkable, and I’ll get into those in a nutshell, the economic argument, there’s kind of a dark side and a more positive side. The dark side is that we’ve literally between 1970 and the present day, we used to pay in 1970, we used to pay 10% of our income for transportation. And between 1970 and now, we basically doubled the number of miles of roadway in our country. And what we achieve by doing that is we now pay 20% of our income for transportation. So we’re paying about $11,000 a year per family to drive.

Jeff:

In Switzerland, it’s about $6,000 a year and there it’s dropping every year and here it’s going up every year we’ve tied ourselves to the most expensive way to get around, and that’s just out of our own pockets. Then there’s the additional money that we’re paying indirectly through taxes. One study I live in Massachusetts, one recent Massachusetts study found that we’re paying 11,000 to drive, but we’re paying an additional 14,000 in taxation and other ways to support that driving per family. So there’s a tremendous amount of externalities, right? Cost of roadways and cost of policing and ambulances and all the other things that grow out of that. So it’s amazing how efficient we are at business in the US that allows us to survive even though we’ve chosen this incredibly inefficient transportation system that provides mobility at the greatest possible cost. So the amount of cost to us individually and cost to us through taxation that we would be paying if we had a less driving society would be much, much lower.

Jeff:

Now I want to add the positives. The positive economic arguments we make are just how incredibly successful and positive walkable places are from an investing perspective and from an ownership and business perspective. Study after study shows that real estate in walkable places outsells real estate in less walkable places by 100, 200 in New York City, 300% I like to say a square foot in Greenwich Village, which is in Manhattan, is worth three times a square foot in Greenwich and Greenwich, Connecticut of course is a lovely place. And then also if you look particularly during the slumps that happened during the bursting bubble in oh eight during Covid, it was the walkable retail space and the walkable office space that maintained value or increased in value while the un walkable office parks and shopping malls just took a real dive. So it’s much more resilient economically when you build a complete place that has places to live, work recreate all of the aspects of daily life. It’s a much more resilient economic entity.

Dave:

We have more from Jeff on the benefits of urban planning and creating walkable cities right after this quick break. Welcome back to On the market. That makes a lot of sense. I guess as an investors you can sort of into it that people want this. When you see on Zillow or Redfin, they always have a walking score or a walkability score and how obviously that information and data is valuable to investors. Can you just tell us a little bit more, Jeff about why it is that you think people, it is more resilient? Is it just there’s higher demand from both renters and from homeowners to be in more walkable places?

Jeff:

Well, what there is is a tremendous mismatch between what the market provides and what people want. So depending on when the polls are taken by the National Association of Realtors and other groups, you’ll find that between 40 and 60% of Americans would prefer a big house in a big yard to a house in a walkable place or the other way around, depending on when you ask or whom you ask, but it’s about half the market actually would be delighted to trade yard size and house size for walkability, but then look at what’s available. I think nine-tenths of what’s out there is the house in the yard. Maybe the house isn’t that big or the yard isn’t that big, but the walkability is not there in probably nine-tenths of the American built environment. And so you could build nothing but walkable places for the next 20 years and you would still have a paucity of supply for the number of people who want to live in these environments.

Dave:

And just from a real estate development perspective, this makes a lot of sense. It’s cheaper, easier, less risk to build suburban subdivisions than it is to build in a highly dense urban environment. There’s often less regulation, there’s less cost, and so it makes sense to me people would be that we are building more in places that are less walkable and maybe that that’s creating this mismatch there. So Jeff, I want to talk a little bit about how investors can take and learn from your work and perhaps apply it to their own investing portfolio. When you work with developers, what are some of the things that developers are looking for or that you advise them to consider as part of their developments to increase the value of their projects?

Jeff:

What’s great is that when I started doing this work, there were almost no mixed use developers. I mean, the only mixed use developers were folks who were active in the centers of our most walkable cities like New York, dc, San Francisco, and almost none of them were working in the suburbs. The few mixed use developers that were beginning to work in the suburbs were my clients. But what’s changed in the quarter century that I’ve been doing this work is that particularly in cities but also in suburbs, we now have developers who are willing and capable of doing mixed use product. Of course, that’s in the face of half a century of the whole system of real estate reorienting itself around single use tranches. So you had not only developers who were monoculture focused in what they were building, but also a whole finance establishment that still exists that kind of wants to bundle single use properties and put them on a secondary market, which all mitigate against creating mixed use walkable places.

Jeff:

But the trend has definitely been towards making mixed use possible. Once developers saw the incredible success of our first mixed use developments, the poster child of which was a town called Seaside in the Florida panhandle, which in a dolled up version stars in the Truman Show, for better or for worse, but Seaside was the first attempt in 50 years to create a mixed use walkable traditional community organized like the old towns that we love. And of course we’ve now done hundreds of them, but that began a trend when people saw how profitable it was and it literally gained 25% in value every year for several decades. The lots at Seaside that more and more people start doing it. And so first of all, I only work with developers who are interested in doing mixed use developments. Secondly, we always look at the balance of uses and what uses in the general walkable area are missing or in short supply.

Jeff:

Now, I should say that when I’m working in downtown areas in America, distinct from other parts of the world, but in America particularly due to the people being enamored of the CBD Central business district concept due to white flight, which was particularly powerful in this country and other factors, our central cities and downtowns lost most of their housing. It’s actually by bringing the housing back to the city cores that you can create great value for everyone. Jane Jacobs, who is the most important urban writer of the 20th century, she said, you can’t invite people downtown, you have to put them there. And she observed how all these roads that were created to ease traffic in and out of cities basically allowed those cities to evacuate. And in fact, that’s the term in Rochester, New York when they built a ring road highway around the city, the city transportation, I believe it’s the one that they’re now filling in.

Dave:

I went to school in Rochester, so I’m familiar.

Jeff:

And so it has this ring road and they’ve now managed to unbury the eastern half of this road and turn it into narrow it and line it with housing and it’s now a wonderful street. When they built that, the transportation director for Rochester observed subsequently, he said, we built an evacuation route. It worked. Everybody evacuated. So my first advice for investors or developers working in cities is to find ways to bring back the housing that’s in short supply that will allow everything else to sing. And by the way, I give the advice to cities that they should subsidize developers to do that, like cities that offer tax increment financing and that offer tax abatements and other things to bring more housing downtown, they benefit in the long run because they’re mixed use downtowns and end up being much more valuable and that turns into tax revenue, but it can be a hard sell. Of course, right now with interest rates where they are, I am advising many clients to sit it out knowing that the real estate market won’t be coming back immediately, but when interest rates drop, that’d be a great time for this sort of subsidization to kick back

Dave:

In. That’s super interesting. Yeah, I grew up in and around New York City, and so my vision of what a city was growing up was relatively walkable. And then I moved to Colorado, which has made a lot of strides recently, but I was sort of surprised when I got to Denver and there’s just this downtown area that’s all commercial office space, but no one lives there and it’s just a bizarre place to go on the weekends or at night. And all the vitality, like you said, is sort of in the neighborhoods, the pockets of residential area, which is where I primarily invested, is where I started my investing career. And it did really well because I found places that were a little bit more walkable in places where I personally wanted to live. Now it does sound like a lot of cities are getting the memo here, but Jeff, a lot of our audience, very few of them are actually developers, at least on a large scale.

Jeff:

Why am I talking to you? No, just kidding.

Dave:

We need your help. Well, most of us are buying rental properties or short-term rentals or flipping houses. Is there an economic benefit for people like us to buy property near these types of mixed use developments or maybe adjacent to transit or some of these more walkable areas?

Jeff:

Well, obviously for an investor what matters is the change in value, not the current value. I do have some confidence that the trend will continue, absolutely will continue towards greater value in more walkable places. I think the challenge for an investor isn’t just buying in walkable places, but identifying those places that have yet to experience the bump that comes from that quality.

Dave:

Yeah, but do you have any idea how investors can do that? When I lived in Denver, I would go to all these city planning meetings and find out where they were building parks or where they were building transit stops because there’s a big light rail expansion in Denver, but is there any more centralized way to do it or do you kind of have to do it on a municipality by municipality basis?

Jeff:

When we were doing town planning, when I was working again with DPZ in Miami, which was kind of the lead firm doing these downtown master plans and new towns, there were investors who followed us around and just wherever we did a plan, they bought property. I don’t know if anyone’s done that for my firm yet. We’ve just seen a tremendous uptake in interest, particularly among downtowns that want to be more walkable. And particularly a lot of it is in a response to this what’s called the SS four A program, a safe streets and roads for all coming out of the Biden administration, which is causing a lot of cities to make their streets safer again. And many American cities have these SS four A projects underway where there’s a lot of federal money then going into making safe streets that have not been. And that would be a place I would look around those projects as soon as they’re announced for opportunities to invest.

Dave:

Got it. Okay. That makes sense. And so what can investors look for when you’re absent, following you around, which only so many of us would

Jeff:

Do, I welcome that

Dave:

Transit makes sense to me. That’s kind of the obvious one, right? But are there other things that investors specifically should, investors can look at and say, Hey, that might be a precursor to increases in value, improve walkability leading to more demand

Jeff:

For individuals? I would say that here’s a fun one. Often when we propose rails to trails or bikeways through communities, the residents fight them because they think that to quote people in public meetings who actually said this, that someone’s going to come from the city on the bike trail and steal their television, but in fact, what you find is that properties on bike trails, new bike trails in communities sell easily for 20 to 30% over properties at some distance away, and that data’s been taken over time, but if there’s a new bikeway going in, that’s a great place to buy real estate.

Dave:

Yeah, well, that’s a great tip and definitely have experienced that myself just in a different property. I bought one on a new bike path and it’s done extremely well. People want these types of amenities. We do have to take one more quick break, but while we’re away, don’t forget to hit that follow button so you never miss an episode of On the Market. Welcome back to the show. I want to talk about something that’s really prevalent right now or really important right now, it’s just housing affordability. Will adopting more Walkerville cities or some of the policies and things that you work on make housing more affordable or could this potentially help the problem?

Jeff:

The immediate impact of making places more walkable is to make them more valuable, which can make housing more expensive. And that’s why when I work in cities, I’m always careful to warn them about this and also to clue them in if they’re not aware already of the various tools that cities have at their disposal, which are available to maintain housing affordability in gentrifying neighborhoods. The number one thing we can do to improve housing affordability in our country is to build more housing and to remove barriers for building more housing. So whether or not you call it the walkable city, I would say that some of the things that we planners are advocating for these days include the elimination of the single family housing zoning category, or at least its modification to allow Granny flats everywhere. And by Granny flats, I mean the accessory dwelling that are being built by the thousands in those communities like LA where they’ve been made legal.

Jeff:

And you may or may not be aware that a number of different municipalities in California had their own A DU ordinances that were more or less restrictive, but they were more restrictive than what was good in many cases. And the state came in with a statewide mandate that overruled all the local laws and created a statewide law that made it less burdensome, easier, and less restrictions to build an A DU. And that’s what flipped the switch in California, and now thousands of those are being built. We certainly argue for up zonings around transit in Massachusetts. There’s a wonderful new law called the MBTA Communities Act. That’s our transit system in which municipalities are required if they want to receive full state funding. And some are saying no, but municipalities are required to up zone areas around their frequent transit stops so that developers have the opportunity.

Jeff:

It doesn’t guarantee anything, right, but it at least makes it possible for developers to put a ton of housing on your transit and people forget that affordable housing isn’t affordable if you have to own a car to get absolutely everywhere, one car per adult, which is what poor people in the suburbs are often burdened with purchasing affordable housing on transit, can actually lead to affordable living mixed use developments and new housing of all types. And by the way, many cities and states have an inclusionary zoning law that you may have heard of that requires a certain percentage of new projects to be more attainable. That’s the path to creating more affordability.

Dave:

So just so everyone knows, what if you’ve never heard the term, it’s basically this trend or policy that municipalities can take to change their existing zoning from where many US cities are primarily zoned for single family housing and then allow either duplexes, ADUs, multifamily housing, basically allowing developers to build more density in on existing plots of land.

Jeff:

You said the D

Dave:

Word density. Oh, is a hot button.

Jeff:

It sure is a good word, yeah. Okay. No, it’s not. I mean, your word I try not to use.

Dave:

Oh, really? People don’t like that.

Jeff:

People hate it, and I’m not sure where you were going. I don’t mean to interrupt you, but say that this sort of up zonings are typically fought by local residents who think it’s going to ruin the character of their single family neighborhood. In the history of upzoning, it has only increased the value of single family neighborhoods, and it’s common sense. If you have a piece of property where you can now have four units on it rather than one, that piece of property is worth a lot more, but the communities often fearing different people, but I would generously say fearing more cars fight against upzoning.

Dave:

This is the whole NIMBY thing, right?

Jeff:

Yeah. And the whole NIMBY thing I’ve found in my experience is that people aren’t so much afraid of people of different wealth or different color as they are just really concerned about the number of cars that are going to be invading their streets.

Dave:

People just want parking.

Jeff:

My experience has definitely been that the principal opposition and I think reasonable opposition to increase density D word in neighborhoods is more cars, which is why it’s really important to plan more development around transit and actually to certainly as a city, remove the onsite parking requirement that’s being placed on residents by city codes. I should add that the next thing, aside from Upzoning that many cities are doing progressive cities are doing like Minneapolis and Portland and Seattle, is that they are eliminating their onsite parking requirements, understanding that the developers and their financiers will come with their own requirements, but there’s no role of the city to mandate car use in that way.

Dave:

Right? And like you say in the book, it’s basically allowing the free market to dictate how much parking should be available rather than having the government decide.

Jeff:

I say that I’m quoting Donald Schoup, the Dean of American Parking, whose famous book, the High Cost of Free Parking has really changed the landscape intellectually around what’s appropriate in cities.

Dave:

Jeff, I want to ask you about some recent trends, and I know you wrote the book in 2013 and you did add an addendum that is the last part of the book that I have not finished yet, but I want to ask you about how you feel about some trends that happened since the pandemic where we saw a lot of migration out of cities and into suburbs. What do you make of

Jeff:

That? Well, let me say, yeah, I wrote, the initial book came out in 2012. The update came out last year, and I should tell people out here, I’m holding it up, people buying it, make sure you get the version with the green stripe on the cover, because Amazon even is still selling the old version, which doesn’t have the a hundred pages I wrote two years ago, which addresses Covid and Uber and Lyft and autonomous vehicles and Elon’s tunnels and all the other really interesting developments that have happened in the last decade. And there’s a lot to be said about that. The discussion about Covid is fascinating. First, there’s a number of things I want to bring up. One is that people thought that Covid was making people drive crazy because the automotive death rates crash rates and death rates skyrocketed during covid, and people thought it was like, ah, covid, throw off your seatbelt and pound the accelerator to the floorboards and just see what you can hit.

Jeff:

In fact, what we learned from that was that something we already knew, which was that fewer people were driving, so there was less congestion. Congestion saves lives, and it was simply the reduction in number of cars on the road that was causing the crash rates to go up. So that was fascinating. The second thing we learned was the contrary to what everyone was saying, you were safer in a dense city than you were in the suburbs or excerpts when it came to getting covid, and a number of epidemiologists did a study, and they found that if your city was twice as dense, you were 11% less likely to die from covid. You were just as likely to get it, but you were 11% less likely to die. That’s the question is why, and a number of us thought, oh, it must be because of wealth or access to healthcare or that sort of thing that comes with density. And no, the doctors stepped forward and said It’s because of walkability. If you move to a place that is less walkable, you’ll be in worse shape, and if you get covid, you’re more likely to die. So telling people to leave the cities where they have a walkable lifestyle in order to be safer from covid is a counterproductive measure, and in fact, you’re safer in an urban environment for that reason. The economic impact on cities is very interesting. We were talking a bit earlier about places like downtown Denver, which have only offices in them.

Jeff:

What we’ve seen as evidenced by the success of retail and the survival of retail and retail bouncing back is that those CBDs have suffered the worst because as the offices are now at best 80% occupied and more likely 60% occupied, the stores have really taken a hit. It’s the smaller city and suburban downtown retail where the impact of covid emptying out offices has not caused anywhere near as big a problem. There was an article on the Boston Globe about a year ago that commented on how the smaller downtowns that have housing near them had really bounced back much faster than the urban core. The one positive thing that I think came out of Covid is that a lot of smaller cities that were kind of struggling, a lot of people moved from the big cities to the smaller cities like from New York City to Hudson or from San Francisco to Truckee, and those smaller cities got a lot more vital as a result of displacement from the center city. I think the center cities have a struggle, which is they have a lot of office space, which is never going to be full again. This

Dave:

Is my next question for you. Is this going to drag everything down?

Jeff:

It’s definitely, it’s already starting to hurt cities, bottom lines tremendously. Their tax revenues are dropping, they’re going to keep dropping, and it’s going to be a real pinch in municipal budgets. That said, what’s interesting to observe is that the cities that have more Class B and C office space in these older kind of pre-war, what we call thinner floor plate buildings, where the buildings are typically about 60 feet thick from side to side, from window to window, as opposed to all the 1970s on office buildings that are typically 120 feet thick. It’s the older stuff to residential and is being retrofitted to residential where you can do that without having to write the whole property down. The cost of converting a modern 120 foot thick office building to residential is so great that you almost have to just take the hit, write it down, and then you can do it.

Jeff:

But maybe you have a storage facility, self storage surrounding the elevator core so that the apartments are close to the windows on the edges of the building. You can do hybrids like that sort of thing. But I was in Kansas City last week and they’re in great shape in downtown Kansas City. Why? Because starting 20 years ago, they had a ton of Class B and Class C office buildings that they converted to residential. They went from 6,000 residents downtown to 33,000 residents downtown over 20 years by converting old office buildings. And that’s a trend now that other cities have to pick up on. What I say in Walkable City is I look at places like Des Moines and Des Moines during Covid felt like a neutron bomb had hit. I mean, you’d walk around the downtown and it would look fine, but there were no people.

Jeff:

And Des Moines has two things downtown. It has massive office buildings, the center of the insurance industry. It has massive surface parking lots surrounding those buildings because people are coming back to those buildings in fewer number. I see those parking lots as a tremendous opportunity for residential. So you can literally cut those parking lots in half and put residential in them. And here’s an important tip for your larger developers is to understand that you should always put housing where there’s office already, and you should always put office where there’s housing already because the parking is empty overnight. If it’s an office building and it’s empty during the day, if it’s a residential. And I tell the story in the original walkable city of Lowell, Massachusetts, which had all these loft buildings, beautiful 19th century loft buildings that were empty, they were from the initial industrial revolution, developers wanted to turn them into housing, and they couldn’t because the banks were requiring that they provided parking. And the city with its great wisdom in the 1990s and even in the eighties, went to the developers and said, Hey, we’ve got five parking structures in our city. They’re empty overnight. We’re going to write you letters that connect these parking structures to your properties, and you can tell your banks that those are your parking spaces. And that’s what allowed Lowell, Massachusetts to become a really great downtown. Again, so fascinating opportunities with the complementarity of different times of parking around the day.

Dave:

It’s incredible to think about. There’s just all these little government policies and things that you don’t think of, but if you extrapolate it out, it’s incredible how it really changes the fabric of a city and honestly, our entire society. Yeah. Jeff, thank you so much for sharing with us before. The last question before we let you get out of here is if any of our investors, small, big developers, anyone wants to get involved, make their city more walkable or take advantage of the walkability bump in valuations, do you have any last thoughts on ways to get involved or to take advantage of some of your work? Well,

Jeff:

I think taking advantage of the potential investor upside of walkability is something we talked about a little bit already. I honestly hadn’t thought about that much, but I think that if one were to approach an investment portfolio with that goal, it would be quite a lucrative thing to do in terms of people making their own cities more walkable. I have a lot to say about that. I have to say that the landscape has changed. In public meetings, it used to be that only two types of folks would show up, the fos, the friends of the developer who would speak in support of a project, and the NIMBYs not in my backyard, who would speak against the project, and the city council would need to step back and say, Hey, this project is intended to benefit the whole city. In this case, the NIMBYs are perhaps correct in being concerned about their own circumstances, but we need to look at the greater good.

Jeff:

And maybe they would say that and go with the developer if it was a good project, or maybe they would just be overwhelmed by the shouting and the negativity. But what’s really interesting is in the last decade, people have started to show up at these meetings. You could call them yms, you can call them walkability advocates. You can call them housing advocates. There are folks who just want a better city. And literally now at the, for example, meetings I went to in Newton, Massachusetts, which is a pretty big city outside of Boston. It was a third, a third and a third, and the NIMBYs kind won the day. They don’t have an interest in the project except they want a better city. They want their grandparents and their children to be able to live in the same town as them with housing affordability. They want people to be able to get around on bikes and other ways without burdening the road infrastructure with their cars.

Jeff:

And so just showing up at these hearings can be really important, becoming a ybi whenever there’s a development project underway. The other thing is, and we haven’t talked about this at all, but I mentioned the four categories of the general theory of walkability. The most important one from my perspective is the safe walk. And so people who want to make their cities more walkable, the first thing they can do is advocate with their city leaders, with their city counselors, with their city staff to make streets safer. And that’s the work that I’ve been doing in many communities, but I’ve made it my life’s work to make American places more walkable, and I’ve made it more so my business to give people the tools to get that done.

Dave:

All right, Jeff. Well, thank you so much for being with us today. We really appreciate you sharing your knowledge and insight with us. If anyone wants to connect with Jeff or by the book, we’ll put the links in the show description below. Thank you all so much for listening. We’ll see you again soon For On The Market. On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.