How Aggregate Investment Affects
Location Rents in a Regional Market

Harry Pollard and Edward J. Dodson

[An exchange of views that occurred 24 and 25 October, 2011.]

Harry

As you may know, I don't agree that improvements increase Rent (or its sale price - land-value). Rather, I think that improvements take advantage of existing Rent. When rent is high enough, something may be built to take advantage of it.

Ed

Individual improvements will not increase the rental value of locations in a given area, but aggregate investment in improvements -- both public and private -- certainly will, except at the point where a regional economic downturn pulls down property prices.

Harry

In the case of 'gentrification', rent is high enough to make an existing improvement a poor user of its potential. So they clear everyone out and 'improve' the improvement to make it attractive for a more well-to-do clientele to take advantage of the rent.

Ed

Yes. That is exactly what happens. Apartment rents are raised to the point that lower income renters cannot absorb the increases. Often properties that had at some point in the past been converted from single-family to apartments are purchased by developers or individuals, modernized and returned to single family use. Thus, there is a net loss of housing units in the neighborhood.

Harry

I suppose it's on all fours with the pressure of rising rents on house construction. If one has a $1 million dollar lot, one is forced to build a large mansion to make the sale attractive. People won't pay $1.200,000 for a small house. I suspect the Georgian Quarter is an example of improving enough to make the high rent (price) palatable.

Ed

Unless zoning permits the construction of more than one dwelling unit for the land parcel. Or, a builder is able to obtain a variance to existing permitted densities.

Harry

Deferring property tax payments for older people is something that is often done here. In the case of LVT, it's a one-off routine that would happen only during the changeover to common sense.

Ed

Deferral as a circuit breaker might still be required IF community leaders and members desire to minimize wholesale displacement. One frequent issue is whether the definition of community requires significant diversity.

Harry

You suggested that "aggregate investment in improvements" would increase rents. My thought is that such investment will redirect rent. About 50 years ago, the Farmer brothers in Toronto suggested that total rent in the city remain the same for a given community. Changes in the community would change rent.) I remember discussing this with Mase a long time ago and we both agreed that this was unlikely. I've come back to that idea and think that activities within the city may "relocate" rent rather than increase it. Thus, infrastructure that allows easy access to the central city may send rent there at the expense of the outskirts.

I explain this in class by using the following story.

A great new entertainment center is built in the downtown. It has cinemas, restaurants, fitness centers -- the lot!

Hundreds of thousands of people use this wonderful complex, coming from all over the city. This influx raises rents around the complex and small businesses start up around it. It certainly looks as if this improvement has increased rents.

However, as most people are now heading downtown, rents in the outskirts go down. Movie houses have trouble filling their seats, restaurants have empty tables and have survival problems. Essentially, rent has been moved downtown.

Then a dangerous virus strikes and its location is determined to be the great entertainment complex. Some people die, many are sick, and nobody will go near the place. The rent, which depends on the presence and access of people, has fallen. The local small businesses are in serious trouble. Rent has fallen, but their payments to the landlord are not reduced. (Landlords will do anything rather than cut their rentals.)

It should be noted that rents within the complex have also fallen even though the payments demanded have not. This suggests that the term 'rent' should be used to describe a value that attaches to a location rather than to any payments that may be made to the community or to a private individual.

Meantime, movie houses, restaurants, and other services in the outskirts are doing well for people have returned! Their rents (the value that attaches to their locations) have increased. That is, the services that own their locations. It is likely that those who rent are already gone. As we know, even though rents diminish, any drop in payments to landlords is very sticky to say the least. This is why a city has an abundance of vacant premises.

At last, the problem is solved. The downtown complex gets a good bill of health, people return and along with them rent.

Such a scenario would indicate that improvements -- even in aggregate don't create rent but rather take advantage of it.

An often cited case is the good school which "raises" rent. I would suggest that when a good school becomes evident, it would attract people to an area. With the influx comes an increase in rent.

I suppose that once again I've thrown the cat among the pigeons, but perhaps we should do a little more throwing with that cat.

POSTSCRIPT

Ed

In the scenario you describe, the regional economy amounts to a "zero sum game" - for every winning neighborhood or district there is a corresponding loser. In the real world, regions tend to gain or lose total population because of more complex and changing social, economic and political circumstances.

The aggregate investment I refer to includes the full network of public goods and services that enable people to take advantage of other public and private goods and services. The experience of most of the large cities in the United States proves the point, I think. Cities began to lose population to outlying areas because the construction of limited access highways between cities created links with rural roadways. The definition of distance was changed from miles to minutes. Developers grasped the pent-up demand for housing units with modern amenities, subdivisions went up with factory-like efficiency, and the residential communities created demand for all manner of new public and private goods and services. As one would predict, the location rental values in the new suburbs climbed and kept climbing. And, in the cities, the location rental values fell but not universally. Even where the cities experienced a net loss in population, only in those cities where the entire region lost population did the location rental values in the central business districts decline.

The set of circumstances you describe, Harry, are, while hypothetically possible, require conditions not very likely to occur in the real world. One final comment, Harry, in response to your statement "that the term 'rent' should be used to describe a value that attaches to a location rather than to any payments that may be made to the community or to a private individual" certain additional issues require clarification. That rent is a good term to describe the value attached to a location over a specific period of time is pretty good. We know as well that rent exists whether actually exchanged or merely potential, and regardless of whether the location is held by a community, a private entity or an individual. The way I explain the concept of rent to students is: "rent is that portion of the material goods we produce that is claimed because some locations have advantages - natural or created by human activity -- over others in any specific area, as small as a city block or as large as the ocean."