Sharing the Future City
By Gunnar Branson, NAREIM CEO ‚ÄúWe enter a new era.¬† Are we ready for the changes that are coming?¬† ‚Ä¶ In the perspective of fifty years hence, the historian will detect in (this decade) a period of criticism, unrest, and dissatisfaction to the point of disillusion ‚Äì when new aims were being sought and new beginnings were astir.¬† Doubtless he will ponder that, in the midst of a world-wide melancholy owing to an economic depression, a new age dawned with invigorating conceptions and the horizons lifted.‚Äù
-¬†¬†¬†¬†¬†¬†¬† Norman Bell Geddes, 1932
‚ÄúWe are called to be architects of the future, not its victims.‚Äù
-¬†¬†¬†¬†¬†¬†¬† Richard Buckminster Fuller, 1978As our society changes, so do our cities ‚Äì the places where civilization happens.¬† Just as our cities changed after the Great Depression and in the post-war period, they are changing now to accommodate the needs, desires and resources of society.¬† In the second decade of the 21st century, we are still recovering from a frightening global financial crisis, facing changing demographics, and profound innovations in technology and global communication. How will our cities change, and how can we steer them to make not just habitable but better than they were before? That isn‚Äôt a simple question to answer ‚Äì in great part because no one person or entity owns or controls a successful city.¬† There may be a strong political leadership, powerful corporate interests, organizations, tribes and thought leaders that can exert some influence, but at the heart of any successful city is fundamentally the sharing of ownership.¬† The streets, the infrastructure, the buildings, and even the identity are owned by everyone who lives in the city.¬† In the emotional or spiritual sense, it is intuitive that the city is shared.¬† In a successful city, it is not uncommon to see someone pick up a piece of garbage or give a tourist directions to a museum, or shovel the snow off the sidewalk in front of their home or business ‚Äì it is, after all, their city.¬† Every citizen owns and is responsible it.¬† When people don‚Äôt share ownership, however, only the most oppressive regimes can keep up even the appearance of a functioning metropolis.¬† City workers perform only the minimum tasks asked of them.¬† Security is corrupt and often non-functioning.¬† Garbage is left in the streets.¬† New investments in private and public space from anyone other than the leaders become scarce and those free to leave, do. Equally important as the emotional ownership is the shared economic and legal ownership.¬† Over the centuries, we have created a series of structures, customs and laws that support sharing the city and its resources.¬† Financial and governmental arrangements such as leases, mortgages, regulations, taxes, and shared services all support a rich shared ecosystem that allows a city and a society to flourish. As those structures change, so does the nature of the cities themselves. Cities are shared, and how we share ownership will determine the shape of their future. As an example, North American cities underwent a tremendous transformation in the second half of the twentieth century. As predicted and to some extent encouraged by Mr. Bell Geddes‚Äô prescient Futurama exhibit for General Motors at the 1939 World Fair, cities transformed through an expansion of the suburbs and the steady ‚Äúemptying out‚Äù of the central downtowns.¬† Superficially, this was enabled by factors such as new industries, massive engineering of roads and bridges, wide-spread automobile ownership, the expansion of the economy after a brutal depression, and an explosive post-war population surge.¬† But the most powerful driver of transformation was the often overlooked innovation in shared ownership created by the Federal Housing Administration in 1934:¬† the 30-year self-amortizing home mortgage. No one thinks of a mortgage as particularly innovative, and yet it changed the decisions, behaviors, and opportunities for millions of people, perhaps even more than all the brilliant design, engineering and technology of the 20th century.¬† Before the 1930‚Äôs less than half of the U.S. population could own their home.¬† A few short-term, balloon payment mortgages, where the entire principal had to be repaid in 5-7 years, were available, but only a small number of people had the means to take advantage of such loans to buy their own home.¬† In 1910, the census showed that only 46 percent of families owned a home.¬† Everyone else rented. What happened over the next 80 years is well known and impressive to consider. Home ownership soared to over 65.9 percent of families in 2013.¬† An astonishing majority of people in the US live in their own homes. By any measure, the thirty-year mortgage has been very popular‚Ä¶and with good reason.¬† As long as home values rise, the considerable cost of interest is mitigated or even superseded by the increased value of the home when it is sold.¬† But there was an important catch to this innovation in shared ownership that transformed the landscape far more than a simple change in ownership structure: up until the 1970‚Äôs a mortgage only worked for a single-family home.¬† Anyone who wanted to own their home would have to leave the city center for neighborhoods and suburbs with room enough for individual houses.¬† Mortgages weren‚Äôt available for apartments until federally insured condominium mortgages were developed in the 1970‚Äôs.¬† Until that time, if you lived near the center of the city, you were a renter.¬† If you wanted a mortgage, you moved out. In the 1970‚Äôs some people used condominium mortgages to stay in the city.¬† In the next few decades, more people chose urban living and some city neighborhoods came back to life.¬† In a few cities, suburban growth slowed while urban growth increased.¬† For example, the U.S. census reported in 2011 that Chicago‚Äôs overall population decreased by 7 percent over the previous decade ‚Äì and yet the population in a five-mile radius from the center of downtown grew by 36 percent. City center populations continue to grow ‚Äì driven by changes in technology and the growing preferences of well-off baby boomers and millenials to live, work, and play within walking distance.¬† But there is a downside to this recent success. Thanks to the law of supply and demand, living in today‚Äôs revitalized downtowns is becoming too expensive for many people who want to live there ‚Äì and that could limit future growth. Is it possible for shared ownership to change again?¬† Just as the 30-year mortgage developed the shape of the 20th century city, is there another structure that could facilitate the needs of the 21st century city? Before considering what a new shared ownership structure might become, it‚Äôs important to clearly understand what a lease and a mortgage share in common.¬† If one rents a home from a landlord, one agrees to a lease of a defined term, usually one year.¬† Every month during the term of that lease, rent must be paid to the landlord.¬† If one buys a home with a mortgage, one agrees to a defined mortgage with a lender, usually ranging from 15 to 30 years, where interest (rental fee for the money) must be paid monthly.¬† If a renter stops paying rent or if a borrower stops paying their mortgage, both are eventually evicted, and the possession of the home reverts to the landlord or the lender. Of course, there are very important differences between a mortgage and a lease, including the capability for a borrower to retain appreciated equity on any increase in value in their home ‚Äì but in fundamental ways when one leases a home, one pays rent for the property, when one mortgages a home, one pays rent for the money. Having a mortgage is simply another form of renting.¬† This is certainly supported by historical data on home ownership.¬† Despite the current 65.9 percent home ownership rate, the percent of families that own their own home without a mortgage today is about 20 percent.¬† Compare that to the rates of free-and-clear ownership in 1910 of about 30 percent.¬† Viewed this way, a smaller percentage of Americans today own their homes than in 1910.¬† Most Americans are still fundamentally renting their home, but use a different kind of rental agreement called a mortgage. A similar financial construct allowed for most people to ‚Äúown‚Äù cars as well.¬† Car loans allow for ‚Äúowners‚Äù to make a regular payment on their cars until they are paid off.¬† Built into that payment is interest, or ‚Äúrent‚Äù for the money needed to ‚Äúown‚Äù the car.¬† If a car owner stops paying the loan, the car is repossessed by the lender. Renting money for a house and a car were crucial enablers for suburban expansion.¬† Only by ‚Äúrenting‚Äù money could people afford to live in a home far away from the city and drive to work, shopping and to recreation. Without the mortgage and the car ‚Äúloan‚Äù, the suburbs might never have happened. But how good a ‚Äúdeal‚Äù is renting of money to own a home and a car? Consider the cost of ‚Äúowning‚Äù a car:¬† even with a car loan or lease it is expensive.¬† According to AAA‚Äôs 2013 ‚ÄòYour Driving Costs‚Äô study, the average sedan costs $760 per month to own and operate. A larger car, such as a truck or SUV, is even more expensive. At the same time, it appears that most car owners do not use their car all the time.¬† For example, the 1995 Nationwide Personal Transportation Survey conducted by the US Department of Transportation calculates that the average time spent by drivers in their cars every day is 1.2 hours ‚Äì or five percent of the total time.¬† That means that for 95 percent of the time, the car is not in use and is not providing value to the owner. For most people it costs $9,000 every year to ‚Äúown‚Äù a car that they only use five percent of the time.¬† But what if you could monetize some of the 95 percent?¬† What would happen if one had only to pay for 50 percent or 30 percent of that car?¬† ¬†¬†What if you had a membership in a club that gave you access to a car when you needed it, but shared it with other members when you didn‚Äôt? That‚Äôs precisely what car sharing services like ZipCar, Car2Go and DriveNow do.¬† Members only use cars when they need them, and the services are free to monetize the untapped 95 percent idle time by sharing the cars with other members.¬† Drivers are able to pay less on a monthly basis to have access to cars at their convenience ‚Äì and a single car is used by many people in any given day. The value proposition to users is very compelling, and these kinds of services are growing fast. At the end of 2013, Zipcar claimed that their revenues had almost tripled in four years from $106 million in 2008 to $279 million in 2012 and has grown to 850,000 members. Instead of renting property, or renting money to own property, these services offer membership based access to assets. The appeal of these car-sharing services is often somewhat misunderstood.¬† The thousands of users who become members every year aren‚Äôt joining just to save money ‚Äì they are gaining access to more than they could possible get if they were owners.¬† Just as belonging to a health club allows you to use facilities such as swimming pools or tennis courts that far exceed in quality that which could be built ‚Äì sharing a car allows someone to live a far more elevated lifestyle than they could buy themselves through a money rental agreement like a car payment.¬† For $700 a month, someone can ‚Äúown‚Äù a modest sedan but through a car sharing membership, one can drive much nicer cars ‚Äì even perhaps afford to hire shared limo drivers through services such as Uber at the same cost. By changing from renting to membership, individuals are able to gain access to more and better quality services than they could before.¬† Membership is not about saving money, it‚Äôs about upgrading lifestyle.¬† The question then becomes:¬† can membership be as viable a model for real estate shared ownership as it is proving to be for cars?¬† Can membership help more citizens gain access to the denser city centers of the future? A membership is not as different from a loan or rental agreement as it might initially appear.¬† In both a rental and a mortgage arrangement, ownership of an asset ‚Äì whether it‚Äôs a car, a house, an apartment or an office, ownership is shared ‚Äì between a landlord and a tenant or between a lender and a borrower.¬† Membership is also shared ownership, but it is shared with a larger group of people. This form of membership has already begun to be applied to office space.¬† Usually, the only way for a business to access office space is to buy an office building or to rent blocks of offices space in an extended lease of five to 20 years.¬† This buy or lease model has served large stable companies quite well, but smaller and faster growing companies are effectively shut out of the higher quality office space in downtown locations. At the same time, there is a surprising amount of office space available.¬† Even in healthy downtowns where there are limited vacancies, most offices stand empty at least two-thirds of the time.¬† Someone walking down the streets of downtown New York, Washington, DC, San Francisco, Boston or Chicago, all currently healthy office markets with high official occupancies, might be surprised to see how many empty windows there are.¬† What if all that capacity was put to work? Co-Working spaces such as Galvanize in Denver, Next Space in California, General Assembly and Neuehouse in New York all offer different versions of memberships for individuals and companies to locate their office ‚Äì without renting.¬† By doing so, just like car sharing, it is possible for more people to use the same amount of space.¬† It also allows for a higher level of office space than those companies could afford to create themselves, located in coveted downtown locations, with a high level of services, infrastructure and flexibility for companies that are growing and changing every month instead of every 10 years.¬† If a company needs to add workers, they simply have to add memberships, not go looking for new office space to lease.¬† With membership in co-working offices available, a whole new demographic of companies, entrepreneurs and free-lancers can leave their attics and garages to work downtown. These co-working spaces are surprisingly efficient.¬† Some operations report as much as three times the number of members than desk chairs in their office.¬† Instead of measuring the optimum amount of office space as 100 or 200 square feet per person, a membership model allows far greater density.¬† This is important if everyone wants to be downtown, and may be a key to understanding what our cities might look like in the decades to come: ¬†a lot denser than they are now ‚Äì but there is a good chance that it won‚Äôt feel very crowded.¬† Instead of offices and homes standing empty most of the time as they do today ‚Äì if the buildings are used more efficiently, with different companies and individuals using space at different times of day and the week, it‚Äôs possible for more people to use the same amount of space without being on top of each other. Interestingly, the density of people downtown is far less today than it has been historically.¬†¬† According to a study done by Jerome Pickard in 1967, Dimensions of Metropolitanism, for the Urban Land Institute, the population density in 1920 for five of the largest cities, New York, Chicago, Philadelphia, Boston and Pittsburgh was about 8,400 people per square mile.¬† In 2010, those same five cities have a population density of 3,100 people per square mile.¬† Certainly, these cities‚Äô populations grew in size over 90 years ‚Äì by a considerable amount ‚Äì but they mostly grew out thanks to the dramatic expansion of suburban communities.¬† Meanwhile, city centers built millions of square feet of new office product and lost over 60 percent of their residential population density. Today the greatest demand in our cities is for living space. More people want to live close to where they work.¬† There are many reasons that may explain why this is happening, ranging from higher costs and congestion for commuting to a shift in aspirations towards a more urban lifestyle.¬† Perhaps the simplest and strongest reason for the increase in demand for city centers is that people want to be closer to their friends. When looking for a place to live, the assumption for many years is that most people value the quantity of space they can acquire above all other considerations; as in, ‚Äúhow much space can I get for the money?‚Äù¬† And although many people still ask that question, it is not the primary driver of living decisions; instead it is a bit more complex. An apartment developer recently asked prospective tenants what amenities or features they valued most in a potential apartment, and what would most influence their decision to move into or stay in any given building.¬† The list of features that prospects were asked to rank included things like swimming pools, concierge services, workout rooms, parking, party rooms, cleaning services and many others.¬† With all these high-value, and often expensive amenities on offer, it was striking that the most influential feature, well above anything else, was ‚Äúa friend that lives in the building.‚Äù The social aspect of home purchase or rental decisions is quite often the primary driver.¬† Even single family home buyers select the neighborhood they want to live in, often one close to friends and family members, well before they try to find the largest or most attractive house they can afford. Membership structures can help make a more social lifestyle affordable for more people.¬† If one lives close to where they work, and has easy access to car share service, mass transit, and taxis, one can forgo owning a car entirely ‚Äì and save the $700 + per month cost of ownership. That frees up more money to pay for a more expensive apartment.¬† But it is important to remember that even though urban living is more expensive on a per square foot basis, the difference in price for a living space isn‚Äôt always that much.¬† Urban living is very different from suburban living, in that much more time is spent in shared spaces, such as coffee shops, parks, lobbies of apartments, etc.¬† In the suburbs, there is far less common space, and much more time is spent in a private home.¬† Therefore, a suburban home needs to be larger than an urban one ‚Äì as more time and more activities take place there.¬† Urban homes can be much smaller because people spend less time there ‚Äì and therefore more affordable as a whole despite a higher per square foot price. An apartment membership scheme could make urban living even more accessible. ¬†Membership based office space has fewer empty windows than traditionally leased office, but thanks to more efficient space design and scheduling, there is plenty of room for everyone to work. ¬†¬†Managed correctly, apartments could also use shared space more efficiently through membership. One of the drivers of vacancies or non-use of apartments in existing buildings is that peoples‚Äô lives often change faster than the term of a lease.¬† One might take a new job too distant from the apartment, fall in love and decide to live together ‚Äì or even welcome a child or pet into the home. In a pre-membership environment, space stands empty until the lease expires and finds a new tenant. ¬†Imagine what would happen if instead of signing a one-year lease for an apartment, one could join an apartment building for a one-year membership. ¬†If during the membership term one changed jobs or decided to move in with someone else, one could up-grade their membership to allow them to shift to a larger apartment or to another building owned by the apartment company.¬† Instead of losing a tenant at the end of a lease term because their life changed, a building owner would be able to deepen their relationship and hold on to members by accommodating to their life changes. High-end apartment buildings built today already feature quite a bit of shared membership attributes.¬† Shared amenities such as outdoor patios, dog walks, yoga studios, swimming pools, gyms, lounges and party rooms replace the need for large private spaces that used only a fraction of the time by their owners.¬† If one joins an apartment building, much the same way one joins a health club, it may be possible for members to enjoy a better lifestyle than they could create on their own. Imagine what would happen to our cities if membership became the dominant form of ownership rather than the lease or mortgage. More people of a broader economic spectrum could enjoy the amenities and pleasures of a city at a lower cost - and encourage more uses in close proximity.¬† Consider, for example, what might happen if more people shared a single amenity such as a swimming pool.¬† According to a 2013 study by Benedikt Gross and Joseph Lee called ‚ÄúThe Big Atlas of L.A. Pools‚Äù there are over 43,000 swimming pools across the greater Los Angeles area ‚Äì most of them privately owned ‚Äì costing over $946,000,000 in construction costs, 22 million square feet of land and 760 million gallons of water. ¬†More sharing of those pools ‚Äì could provide swimming to more people for a fraction of the money, land, and water used today.¬† Not everyone can or should pay $22,000 to swim in their own pool.¬† Many more people can pay a membership fee to share that pool with 10 to 100 other people.¬† Sharing of amenities means that fewer assets have to be made, less land is needed, less transportation required, less energy consumed and less carbon created ‚Äì but more people can have access. Since the beginning of cities, there has been some form of shared ownership.¬† The evolution of the forms of shared ownership, whether they are leases, mortgages or memberships have and will continue to define the shape of our cities.¬† If membership becomes a more dominant form of shared ownership, it is quite possible that in the next twenty years, the density of cities could double, and their citizens will share more of what a city can offer.