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Astute Planners Will Use 'The Next Big Thing' To Cities' Advantage

What's the next big thing?

The last big thing was housing, and it's over. So what's next?

We may be in a real estate slump, but as California communities and planners begin mapping out their futures, it is not too early to start thinking about what the next big thing will be in the world of real estate development.

The question is more important to the future of California's communities than you might think. There is a lot of talk these days about how the state is becoming a more urban place not only more people and more traffic but also higher densities, more transit, more walking, and a general departure from California's suburban past. But greater urbanity as opposed to simply more congestion does not happen on its own. It requires long-term planning, and it requires leveraging short-term trends in the real estate development business, so that new projects can serve as catalysts for the new urbanity.

And one thing is for sure in the development business: The next "up" cycle will be different from the last one.

We tend to think of real estate recessions as cyclical and they are. The market goes up and down, and development activity spirals up and then down. But what often gets lost in the shuffle is the fact that real estate development is faddish. The "hot" development product the one investors want to invest in and developers want to build is always changing. So the catalyst for the next round of urban development the next lever that planners will use to create more urbane cities is always changing.

Back in the 1980s, when California Planning & Development Report was first published, the hot development project was the office tower. From the 72-story Library Tower (now US Bank Tower) in downtown Los Angeles to the multistory office buildings constructed in outlying business centers such as Orange and Contra Costa counties, office buildings were the favored investment in the real estate business. So cities and planners took advantage of dense office clusters in their placemaking. Think, for example, of downtown Walnut Creek, especially around the BART station. Office space was decentralizing during the '80s, and the BART station provided an organizing principle for office density to occur, transforming the downtown area in the process.

Of course, the office market got overbuilt and eventually the entire real estate industry crashed, partly because office developers took advantage of relaxed banking rules to gain control of savings and loans. After a deep real estate recession, the new hot product was the entertainment retail center and, in particular, the multiplex movie theater. As with office buildings during the '80s, real estate investors poured billions of dollars into entertainment retail, and cities leveraged that investment into signature revitalization efforts. The multiplex theaters and other entertainment venues stimulated a whole new generation of walking-oriented places in California some of them in downtowns, some near existing retail areas, and some adjacent to the office high-rises built during the '80s. But it is worth noting that very little new office development has occurred in the last 20 years.

Entertainment retail didn't get stuck in the typical overbuild-crash-burn cycle that office buildings got caught in. Rather, the movie theaters tapered off somewhat as the movie industry itself leveled off, and entertainment retail petered down during the mild recession that followed 9/11. At about that time, however, the housing market began to take off.

The housing boom of the early 2000s was similar to the office boom of the 1980s in one important respect it was fueled by easy money. The boom didn't necessarily lead to overbuilding, but it did lead to overvaluation of housing. And while we are currently experiencing the downside of overvaluation the inevitable correction the upside was a surge in high-density urban housing projects that simply did not "pencil" back in the '90s. Again, cities and planners leveraged this boom in construction to help create and strengthen an emerging set of urban places that simply did not exist 20 years ago.

As cities and planners in California look to the future, three things about this history stand out.

The first one is that there is always another real estate boom. Real estate booms are usually the result of wealth creation all that capital has to be invested somewhere and since the early '80s we have seen unprecedented wealth creation throughout the world. We will likely see more wealth creation worldwide in the future and a good portion of this wealth will be re-invested in American real estate.

The second thing that stands out is that tomorrow's boom is never based on the same thing as yesterday's boom. Right now, for example, practically everybody involved in the planning and development business in California is waiting for the real estate recession to pass so that they can get back to the business of building urban condos and mixed-use projects. But history would suggest that urban condos won't be the hot product in the next boom simply because they were the hot product in the last boom.

It's true that California will always have a strong housing market if the population is growing, and the trend toward more urban living appears to be permanent. But it's also possible that urban condo prices won't rebound enough to make a lot of the hoped-for projects financially feasible. So it may be something other than condos that drives the next boom. It's impossible to know what that something else might be. Office buildings are experiencing a bit of comeback these days, while the retail development business is struggling.

The last striking point from the history is that the strongest places that have been created over the last 20 years mostly inner suburbs with strong downtowns or commercial centers have benefited from all three booms. They got offices during the '80s, entertainment retail during the '90s, and urban condos during the 2000s. They've emerged as great places today not just because they've gotten lots of investment, but because they've gotten different kinds of investment, during different boom times, so they have become interesting, varied, and successful places.

There will be another boom sooner or later. The boom will focus on specific types of real estate development products, but we can't yet predict what those products will be. However, if cities and their planners play their cards right, they will learn as they have in the last three booms how to leverage whatever the hot product is into further improving California's emerging urban places.

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