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Thursday, May 28, 2009

A Tour of New York City's Zoning Dysfunction

I live in the Cobble Hill area of Brooklyn, giving me easy access to one of my favorite running routes – a roughly five-mile stretch of waterfront on the Upper Bay and East River that I call the “dysfunctional zoning tour.” Starting at the IKEA store in Red Hook and running past the Fairway Grocery, I can make my way north along the waterfront on Connoyer, Van Brunt, and Columbia Heights to Furman (right under the Brooklyn Heights Promenade) and on into DUMBO. The running route provides both athletic and academic benefits: There are few busy intersections at which an inattentive runner could be squished, and I get a worm’s eye perspective on what one might reasonably view as the Great Zoning Disaster of 1961 – non-cumulative industrial zones (“NCIZs”), meaning zones from which residential uses are forbidden in order to preserve space for manufacturing.

I can almost hear you yawning over the internet: You think that NCIZs are a topic only the wonkiest of local government law junkies (like myself) could love. But think again, gentle reader: As I shall suggest after the jump, it is possible that NCIZs have devastated the housing market not only in New York City but other big cities where they are used to retain industrial jobs. That these zones have persisted for almost a half-century is, I think, a tribute to the potent combination of (a) developer-driven corruption, (b) the Planner’s Meglomaniacal “Field of Dreams” theory that If You Zone It, They Will Come, (c) the political sclerosis induced by NIMBY-besotted neighborhood activists whose sense of civic duty ends at the shadow cast by whatever building is proposed next door, and (d) a Union-Town mentality that sees the retention of any manufacturing job in the city is worth any cost.

If I am right, then reports of some deregulating frenzy during the 1990s and early 00s might be exaggerated – or, at least, these alleged national trends never penetrated the Big Apple. NCIZ might also be a cautionary tale that our new distrust of markets in the wake of the financial crisis should not lead us too readily to jettison "public choice" skepticism about regulation.

My running route provides an object lesson of the zoning dysfunction. The view of the upper bay and Manhattan is spectacular, stretching from the Brooklyn Bridge to the Verrazano. These are obviously prime acres for residential real estate. Retailers like Fairway and IKEA who depend on residential consumers obviously think so, as do the developers with whom I’ve spoken. But the land, like roughly a third of NYC’s waterfront, is almost entirely zoned non-cumulatively for manufacturing, meaning that residential development is forbidden. Lest you think that this “manufacturing” land is teeming with busy wharves and cranes manned by highly paid union workers, think again: Much of it is empty lots or under-used warehouses. Some of the buildings are abandoned and downright derelict. American Stevedoring Inc still operates a small container port, aided by several millions in subsidized rent from the Port Authority. Golten Marine has a maritime repair facility next door. But, for the most part, my casual glance suggests that Marlon Brando would not be battling the mob but rather unemployment on this waterfront.

Why not let residential development in manufacturing zones as of right, protecting the latter from nuisance suits by the former with a “regulatory compliance” defense? The reason is an odd planners’ ideology, first triumphant with the 1961 zoning resolution, that seeks to reserve land for industry in NYC by preventing residential developers from bidding against manufacturers for lots. This theory maintains that, by protecting manufacturers from this competition, the city can keep good, high-paying union jobs in the city through a sort of indirect and off-budget subsidy of cheaper land.

I’ll assume, as a patriotic New Yorker, that keeping employment in the City from departing to New Jersey serves some greater social good, on the theory (I guess) that somehow Newark just does not need all those jobs as much as we do. Even so, NCIZs strike me as a terrible way to subsidize industry when compared to outright grants of tax revenue because they (a) impose large deadweight losses on residential users desperately seeking housing without actually guaranteeing good jobs; (b) are well-nigh invisible because they are off-budget, inviting tiny numbers of manufacturers to extract cheap land at excessive cost; and (c) encourage well-connected developers to snap up cheap land and then use their connections to secure a re-zoning to residential when the time is ripe for development.

Here is some initial evidence for my three objections to NCIZs. First, they hardly seem to be working well: NYC, after all, had 500,000 manufacturing jobs in the 1970s and only 118,000 manufacturing jobs in 2005. Maybe the thousands of acres of NCIZ'd land is somehow stemming an even greater outflow, but NCIZ defenders rarely tote up the costs of each job preserved in the City in terms of lost housing and foregone tax revenue. One study of Chicago found that Planned Manufacturing Districts did not do much to preserve high-paying manufacturing jobs. I know of no econometric study that makes any effort to see if the NCIZ game is worth the candle. Lots of planners, to be sure, tout the benefits of preserving manufacturing jobs in the City. (See, for instance, the Pratt Institute's study). But they make no effort to consider the opportunity costs of each job preserved in terms of lost housing and tax revenue.

Second, the "cheap land subsidy" provided by NCIZs is really hard to see when compared to on-budget costs of outright grants or even with tax subsidies. This invisibility invites enormous deadweight losses to preserve tiny numbers of jobs. When a manufacturer gets a grant or tax abatement, then it is obvious to minimally informed observers that they are receiving an unusual benefit for which they should be held accountable, because the layperson’s baseline of expectations is that one normally pays taxes and normally does not get grants of money from the City. By contrast, when a manufacturer gets a cheap lot because competing bidders have been zoned out of existence, there is no intuitive baseline of expectations by which to identify or measure the benefit. No one can tell why the residential users never bid on the lot (maybe the land just was not suitable for housing even if re-zoned), let alone the magnitude of the price reduction that the manufacturer received as a result of the zoning restriction.

Third, developers are notorious for seeking re-zonings of NCIZ’d land through intense lobbying through the Uniform Land Use Review Procedure (“ULURP”) of city council in which affordable housing, schools, and other blandishments are offered to buy support from politicians. This might be a nice sort of Henry George-style taxation of land rents if there were any systematic effort by the City to compare developers’ gains to the payout. But there is not, and, as Jerold Kayden noted long ago when studying plazas supplied by developers to the city in return for development rights, the evidence that the City is a good bargainer is not strong. (For the continuing wisdom of Kayden's observation, see this news item). The ongoing effort by the Walentas family to secure a residential re-zoning of land on Dock Street in DUMBO, greased by side payments of schools and affordable housing to city councillors, seems to be a typical illustration (conveniently located on my running route).

Why not, then, allow residential uses as of right in manufacturing zones, depriving the well-connected developers of their competitive advantage and enlarging the supply of buildable land for housing by the over 20,000 acres occupied by NCIZs? (If one wanted to keep that Georgist tax on the unearned increment from the change in use, then just impose a stiff tax on the increased valuation resulting from the re-zoning -- keeping the tax uniform to prevent the orgy of deal-making that would otherwise ensue). My guess, however, is that New York City is a union town with a planner's mentality and too many red diaper babies-turned-Brownstoner ever to adopt such a rational solution. Even the efforts of former deputy mayor David Doctoroff could not penetrate this potent combination. Instead of a frontal attack, the Bloomberg administration has assiduously pecked away at NCIZs by granting specific developers' applications for re-zoning or engaging in laborious re-zonings of selected sites (Gowanus, Red Hook, etc) through pitched battles with unions, neighbors, and land-use activists. Whether this grinding process will eventually produce a sane allocation of land is anyone's guess. But the decades of housing lost is a cost whatever the final outcome.

Posted by Rick Hills on May 28, 2009 at 12:45 PM in Current Affairs | Permalink


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"The Box" is highly recommended

Posted by: Dave Barnes | May 29, 2009 3:23:00 PM

Your post is particularly notable because one of the most common refrains of planners is the "obvious" necessity of separating industrial from residential uses, that illustrates the slippery slope down which a city would go if it abandoned zoning. This, in turn, is used to hold the line on the necessity of maintaining finder zoning segregations in residential density.

Posted by: ohwilleke | May 29, 2009 12:38:23 AM

Prof. Hills: If the NCIZs were opened up to competition and residential development, what kind of population increase do you think would occur? 20,000 acres is a lot of land... Industry in that area doesn't seem financially competitive with developers, and I wonder if those industrial companies could afford to purchase or lease enough land to stem a large influx of new residents. Would New York City be able to sufficiently improve/transition the infrastructure?

Posted by: Adam Richardson | May 28, 2009 4:28:30 PM

For an extremely interesting (to some, at least!) discussion of how this area (and others in NYC) went from an important industrial area to the wasted wasteland you describe you should check out Marc Levison's book _The Box_, about the rise of container shipping, and how New York's unwillingness and inability to adapt to container shipping lead to the rise of Newark and Elizabeth (and helped make New Jersey one of the most prosperous states in the Country), and permanently changed New York City. It seems pretty clear from that book that the sort of manufacturing that could make use of this zoning isn't coming back, and that the city as a whole would be much better of realizing that.

Posted by: Matt | May 28, 2009 2:52:22 PM

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