16 Chapter Three those in the surrounding suburbs. These higher costs have led to a lower supply of new housing in Philadelphia than would Barriers to Transit-Oriented have occurred if the production costs were Development in more in line with regional averages.15 Philadelphia High construction costs also accelerate the rate of decline in neighborhoods. When construction costs are high, existing residents reconsider whether they should reinvest in tating the obvious, to achieve the their homes, or move to another home, advantages of transit-oriented S where they could perhaps get more for their development (TOD) requires that investment dollar. High construction costs development actually take place. Different therefore lower reinvestment in stakeholders can play their part in creating neighborhoods, accelerating the decline of an environment that is friendly to such older neighborhoods. development, but ultimately developers have to decide whether or not to risk their own time and capital. Those locations, unfortunately, tend to be the ones near our best transit services. In When some of Philadelphia’s oldest other words, relative to other places, it is neighborhoods were developed, these expensive to supply Philadelphia with TOD. developers found transit-proximate sites to be worth that risk. In contrast, for much of What about the demand for TOD in the past 50 years, very few sites, transit- Philadelphia? From 1960 through 2000, the proximate or not, have been developed. population of Philadelphia fell from With the city now enjoying a resurgence in approximately 2 million to 1.5 million, a new construction, it is important to consider decline of almost 25 percent. This meant what needs to be done to induce that roughly one quarter of the housing in development that is near transit stops and Philadelphia was no longer needed. Up that capitalizes on the mobility that such until recently, this trend in decline in the locations afford. demand for housing looked as if it would continue indefinitely. Given the population decline, it is not surprising to learn that there were less than 100 new housing starts in Philadelphia in 1999; in contrast, the How Supply and Demand average number of starts in 1999 for each of Determines If and Where Transit- the four Pennsylvania suburban counties was Oriented Development Will Succeed 2,383 (see below). Basic supply and demand theory tells us that the price and quantity of a good is 15 “Construction costs within the city were determined by the intersection between considerably higher than elsewhere, whether another producers’ motivation to supply a good and urban center or an adjoining suburb. Even as recently as 2000, Philadelphia had the sixth highest consumers’ preferences to demand that construction costs among the 50 largest markets in the good. These simple economic principles nation – 20 percent above the average. The result was hold true in the case of TOD, so it is a situation in which construction costs exceeded instructive to consider the supply and market values, plaguing growth in city centers and demand of TOD in Philadelphia. precipitating a further decline in both jobs and population in the city itself.” “Advancing Regional Equity: The Second National Summit on Equitable It is well documented that construction costs Development, Social Justice, and Smart Growth,” in Philadelphia are significantly higher than Federal Reserve Bank of Philadelphia (2005). 17 Housing Starts, 1999 Even worse for the existence of TOD in Philadelphia, the impacts of this decline in population and jobs were not felt equally Philadelphia across the city. Typically, the oldest, most Montgomery obsolete development is abandoned first. In Chester Philadelphia’s case, this meant that the Delaware oldest communities that developed along the Bucks major transit lines were the most adversely 0 500 1,000 1,500 2,000 2,500 3,000 3,500 affected. Thus, rather than increasing density around the Market-Frankford Line, Source: Pennsylvania Builders Association the Broad Street Line, and regional rail stations, density was actually decreasing; instead of TOD-friendly sites attracting more These negative population and housing development, they experienced more disinvestment. trends went hand in hand with an even more severe decline in employment: from Despite significant development efforts, 1969 through 2002, employment in the City Center City Philadelphia, which was and is plummeted 27 percent from 939,000 to the focal point of the region’s transit system, 683,000 (see below). substantially lost its role as the predominant retail center for the region. In a sense, the Philadelphia Employment, 1969-2002 spreading out of purchasing dollars is the equivalent story as the physical erosion near 1000 transit stops: as the region decentralized and 950 cars made traveling to far-flung suburbs 900 850 more convenient, once-vibrant 800 750 neighborhoods and commercial corridors 700 lost their residents, commercial activity, and 650 600 retail dollars, creating a vicious cycle of Employment (in thousands) 1965 1970 1975 1980 1985 1990 1995 2000 2005 disinvestment and uncompetitiveness. Source: Bureau of Labor Statistics To further compound matters, some people during this time believed that this “de- During this time, manufacturing became densification” was not bad and perhaps even much more mechanized, evaporating the highly desirable. In fact, there was serious employment base that was distributed discussion at the highest levels about how to throughout the City, and taking with it the best “manage” decline; that rather than demand for housing in these neighborhoods. fighting the loss of people and jobs from the As jobs and population left the City, simply city, the city should become more like the providing basic services such as public safety suburbs in offering the type of low-density, and education became increasingly auto-friendly environment that it seemed challenging. Tax bases were declining, and more and more households were entrenched interests made fiscal adjustments demanding. difficult. Rising tax rates in response to declining tax revenues only accelerated the 16 decline. relationship between gross receipts tax rates and tax 16 “The city‘s share of U.S. employment in four of the bases is always significant for these sectors.” six industry divisions displayed an inverse relationship “Choosing the Best Mix of Taxes for Philadelphia: An to changes in the wage and gross receipts tax rate. In Econometric Analysis of the Impacts of Tax Rates on three of the four cases this relationship was statistically Tax Bases, Tax Revenue, and the Private Economy,” significant for the impact of the wage tax rate. The Econsult Corporation (2003). 18 Recall that TOD is valued to the extent that Development Hurdles the mobility that access to transit affords is Philadelphia Faces valued. Combine lower density in neighborhoods and the declining retail role of Center City with the relative convenience At the most basic level, development occurs of retail and employment options in the when a developer can make a competitive 17 suburbs as a result of easy automobile rate of return on a project. Projects are access, and it is clear that the demand for TOD undertaken when the value of the revenue plummeted during this time. generated by the project, either through the rent or through the sale of the project, 18 Any good that is expensive to supply and exceeds the construction costs. diminishing in demand is going to see its quantity plunge. Even worse for TOD, this For most of the last 40 years, it has been downward trend became a bit of a self- difficult to develop in Philadelphia, fulfilling prophecy, as disinvestment repelled especially in the neighborhoods, for the interest even more, begetting even more simple fact that demand has been disinvestment. If there was any consolation insufficient to set rents and prices high for Philadelphia, it was solely in the notion enough to justify the costs of development that other, older cities were experiencing and construction. Unfortunately, the similar pains from the industry shifts and conditions that made development changing residential and employment unprofitable in Philadelphia also made TOD even less likely to occur.19 What little patterns of the second half of the 20th century. development that did take place near transit stops could only be charitably described as Fortunately, in recent years, these negative transit-adjacent (physically proximate to trends have largely run their course, re- transit but not really leveraging the full value opening the possibility that TOD could be of transit proximity). reasonably considered in Philadelphia: However, due in large part to a citywide ten- year property tax abatement on new • The transition of the city from a manufacturing-heavy location to a construction and major renovations, and service-heavy location has been aided by a national movement towards largely completed; urban living, these negative trends are easing if not completely reversing (see below). This • The rapid expansion of the suburbs, as creates a genuine opportunity for TOD to associated with massive highway take root in Philadelphia. investment and low land costs, has slowed; and • The negative association that many people have towards all things urban 17 Note that it is not sufficient for a project to simply is dissipating. be profitable, but it must also earn a rate of return that is greater than or equal to other, similarly risky investment options. With expectations of the future improving 18 This is the case for for-profit developers; in parallel, for urban areas, it is likely that transit could a growing number of equally sophisticated non-profit once again contribute to the positive value developers are capitalizing on tax credits, grants, and and growth of neighborhoods. This creates other funding sources to bring developments to light. a development context that is more 19 Additional barriers experienced by Philadelphia are welcoming to TOD. endemic to locations in many, older urban centers: the need for environmental remediation, the cost of fixing debilitated infrastructure, and fragmentation of lot ownership.