Do cities need zoning reforms post Covid -19?

As a result of the economic changes brought by Covid -19 some industries and firms will grow while others shrink. Physical space and the built environment will have to adapt as well for instance some commercial space will shift to residential; stores, restaurants, and offices will alter their layouts; and consumers will demand more outdoor seating and open space.

These economic changes could be especially damaging to city centers, which are tourism hotspots and where high commercial rents often make it unprofitable for businesses to reorganize interior spaces to comply with social distancing guidelines that limit customers.

Do cities need to reform their zoning policies post Covid -19?

Zoning Reform Is Needed Post Covid-19

The economic lockdowns related to Covid-19 have devastated America’s economy. Over 20 million people are still receiving unemployment benefits. The United States is officially in a recession and the IMF projects global economic output to decline by 5% in 2020. Some are arguing for more government spending and intervention to prop up the economy, but what’s really needed is more innovation, more flexibility, and a greater willingness to build and create that starts with zoning reform.

As states carefully reopen, many are wondering what the U.S. economy will look like going forward. A recent study predicts as many as 42% of the pandemic-induced job losses may be permanent.

This economic fallout, some claim, demonstrates the need for more government regulation, higher taxes, and a bigger social safety net to protect workers from the volatility of the market economy.

But while more government spending and regulation may help some people and firms in the near term, both are band-aids that fail to address the country’s bigger economic problem—a lack of dynamism and flexibility.

The technology sector is where most of today’s innovation and progress occurs because governments have chosen to lightly regulate this sector, which creates room for experimentation and competition. Meanwhile, in the physical world outside of bytes and bits, excessive regulation reduces competition, productivity, and total output. Nowhere is this more apparent than in our built environment of housing, commercial buildings, factories, and infrastructure.

Working from home has become the new normal over the last few months and it’s likely that many will continue working from home even after it’s safe to go back to the office. Other responses to the pandemic may also have staying power—less travel, less dining out, and less in-person shopping.

As a result of these economic changes, some industries and firms will grow while others shrink. Physical space and the built environment will have to adapt as well—some commercial space will shift to residential; stores, restaurants, and offices will alter their layouts; and consumers will demand more outdoor seating and open space. These economic changes could be especially damaging to city centers, which are tourism hotspots and where high commercial rents often make it unprofitable for businesses to reorganize interior spaces to comply with social distancing guidelines that limit customers.

Some people and firms will want to move to adjust to these changes in market conditions. Some of this movement will be within the same metro area—city center to suburbs—while some will involve moving to different metro areas. Unfortunately, land-use regulations hinder such mobility and adaptation.

In a 2017 study, economists Peter Ganong and Daniel W. Shoag found that housing supply regulations that increase housing prices deter migration. As shown in the left panel below, the states with the highest incomes in 1940—California, Delaware, Connecticut—also experienced the most population growth on average from 1940 to 1960, meaning people moved to where the money was. But from 1990 to 2010 this didn’t happen (right panel), and if anything, the states with the highest incomes experienced less population growth on average. Strict land-use regulations that make it hard to build are a big part of this problem.

Income and population growth 1940-1960 and 1990-2010 GANONG, PETER, AND DANIEL W. SHOAG. WHY HAS REGIONAL INCOME CONVERGENCE IN THE US DECLINED?. NO. W23609. NATIONAL BUREAU OF ECONOMIC RESEARCH, 2017.

Land-use regulations that prevent new housing and upgrades to the built environment have adverse micro and macro effects. The higher housing prices and less mobility that follows prevent people, especially lower-income people, from living in places with the best climates (e.g. Southern California), urban amenities, and job opportunities.

For those denied access the result is a lower quality of life and often less economic mobility. For people who can afford to live in expensive areas, they still feel the financial pinch via lower incomes net of housing costs due to the artificially high price of housing.

On a larger scale, strict land-use regulations reduce economic growth. Cities are places of innovation and they are responsible for most of the country’s GDP—the 25 largest metro areas by GDP account for around 60% of total U.S. GDP. Recent studies estimate that zoning and other land-use regulations that prevent people from living and working in the most productive areas decrease national economic output by around 8%, or close to $2 trillion per year.

Post Covid-19, we need more flexible labor markets that facilitate adaptation and improve the country’s economic resiliency. This means a renewed emphasis on building and mobility.

Currently, there is a strong bias towards maintaining the status quo. Instead of letting market forces determine urban form, builders are forced to justify new projects and innovative designs. The result is months of delay and piles of paperwork for even simple projects.

A recent study that examined new construction in Washington D.C. found that increases in housing values are only associated with more construction in neighborhoods with more permissive zoning. In neighborhoods with restrictive zoning, additions and alterations to existing structures are more common. This is an example of our inability to build new things despite strong demand.

In fact, some of our greatest cities could not even be built today. One analysis estimates that 40% of New York City’s buildings violate the city’s current unit density rules, height requirements, or commercial floor space rules.

And it’s not just zoning or height requirements that stand in the way. Historic districts are another manifestation of the country’s can’t-do attitude regarding building. Historic districts generate many of the same adverse effects as strict land-use regulations. They limit the types of buildings that can be constructed, the alterations that can be made to existing buildings, and in general prevent uses established residents believe will harm a neighborhood’s “character”.

In short, historic districts freeze many of America’s most desirable and walkable neighborhoods in time, precluding even the possibility that the country’s older buildings could be replaced by newer and better buildings. One can’t help but think that if today’s historic district advocates lived 400 years ago many of us would still be living in one-room log cabins, complete with historic dirt floors.

The list goes on. In neighborhoods across the country, wasteful parking mandates mean restaurants, stores, and apartment complexes have too much space devoted to cars when what they really need is more outdoor space where people can mingle.

Malls have been dying for years: Hundreds have closed across the country and Covid-19 is only going to accelerate this process. Some dead malls have been revitalized as mixed-use development with retail, commercial, and residential space, but in many places a shift to mixed-use or denser development requires zoning changes that delay projects or stop them altogether.

The result of all this regulation—minimum lot sizes, height restrictions, parking mandates, historic districts, apartment bans—is that space is misallocated. We are too slow to change commercial buildings to residential, turn a single-family home into an apartment building, or convert a warehouse into a park. There is too much housing where people don’t want it and not enough where they do. A more dynamic and innovative economy must include a more dynamic and innovative built environment, and reforming land-use regulations is a vital step in the right direction.

This article was written for Forbes by Adam Millsap a Senior Fellow, Economic Opportunity at the Charles Koch Institute