It is time to change zoning laws

Around the turn of the 19th century, the Western economy was going through at least two long-lasting transformations at the same time. One was electrification and the other motorization. Both had an immense influence on the real estate industry and the built environment in general.

Electrification led to better lighting and heating, improving residents’ living conditions compared to using oil lamps and other dangerous sources of light and warmth. Motorization made horse-led transport redundant – and avoided the environmental and health problems generated by the mountains of manure produced – leading to a collapse in the demand for stables. The space generated by their demise was a boon for the provision of new housing stock.

Take a walk around British cities and you will find ‘mews’ in various places, usually off a prime main street. Mews are former stables that have been converted to residential housing. This ‘Great Conversion’ was possible because zoning laws were limited and controlled fewer aspects of city planning than they do today.

In the present day, we face somewhat similar dynamics. Working from home is affecting companies’ demand for office space while carbon emissions need to be reduced – a serious matter for the real estate industry given its energy consumption and emissions.

Multiple low-quality, energy-inefficient offices are under threat of becoming obsolete as they fall out of favor with tenants. Many of them cannot be upgraded for an economically viable cost given the rental dynamic in their respective locations. Economically, they just do not make sense given their current use.

Such assets are yesterday’s stables. They have no demand for their existing use, are environmentally challenging and are financially stranded in their present form. Like the stables, these assets need to be converted or demolished and replaced with a best-use, sustainable product that is economically viable.

However, will such uses be permitted by complicated zoning laws based on urban planning theory established in a previous century? How do we move into the next century of urban planning when the zoning/planning processes are so slow? Our concept of an urban center is rooted in a previous century of working – are urban centers destined for a death spiral until planners realize their policies are creating economically unviable ghost towns?

Some notable US cities, such as Detroit or more recently San Francisco, have suffered due to the combined impact of work-from-home, e-commerce, suburbanization, chronic underinvestment in public transport, oversupply of parking, depopulation and a lack of political will power, all overlaid by the inflexibility of their zoning laws.

Finding the balance

It is sensible to have zoning laws; nobody wants to return to an environment where one can build a skyscraper without minimizing the impact on the environment. But zoning laws should be on a spectrum: too stringent laws have a negative impact on cities’ development and their capacity to reinvent themselves, just as too lenient laws lead to a chaotic metropolitan environment.

In addition, just modifying the zoning laws will not solve the problem. Government intervention in transport, infrastructure and housing will also be necessary to create economically viable uses where, at present, the cost is prohibitive for profitable urban regeneration by the private sector. At what point does the zombie center become a political liability that will force the government to act?

Sensible, flexible zoning laws permitting uses that previously would not have been considered suitable for urban centers have to be implemented, and juxtaposed with government intervention to facilitate private sector investment. We need to create the urban center for the next century that no longer exclusively relies on office workers commuting from the suburbs. We need to develop communities that provide homes for all demographics, provide education and, importantly, integrate educational institutions with business.

Radical but viable thinking has to be the way forward. For example, why not convert vacant, technically obsolete office towers into vertical farming, providing fresh produce from farm to fork without the need for carbon-emitting transport?

Converting stables to mews a century ago created enormous value because British cities were allowed to change. As our global economies evolve, cities must be allowed to acclimatize, embracing ESG and technology as the catalyst for change. If we do not embrace radical change, we will be wasting valuable resources in a straitjacket of self-imposed limitations.

Robert Rackind is global head of real estate for Credit Suisse Asset Management.