Smart Property Investing by Anticipating the Path of Urban Growth

Anticipating the path of urban growth is very important for making smart property investments aiming at achieving substantial profits. In the normal course of the urban development process, the attractiveness of a property and location, and therefore its value, changes through time as the area’s development proceeds gradually from its initial stages to its final stages, through a multi-year and multi-stage process. Most of the long-term increase in the value of a property comes from the increase in location value, assuming that it does not change use, or does not undergo any significant capital improvements. That is why smart property investing

Investors that can identify, early in the development process, sites that will be demanded in the future as the development of the area matures, will be able to achieve high profits, since at this early stage, prices will be considerably lower than in the final stages, when the identification of such sites will be much easier. For this reason, anticipating the path of urban growth within a growing metropolitan area can help identify investments with high-return potential. Within this context, it is important to understand the dynamics and evolutionary path of the urban and the suburban development process.

Patterns of Urban and Suburban Growth

Understanding how cities and urban areas grow can provide a powerful framework of reference in terms of spotting locations and properties that are likely to experience developments that will increase their values. There are four basic models describing the urban structure and the way cities grow:

  1. The Axial-Central theory, introduced by Hurd (1924), postulates that cities grow in an axial mode along a transportation axis due to the accessibility advantages offered by sites on this axis, or in a central mode, around a point of attraction based on proximity. Hurd suggests that in the course of urban development, axial and central growth compete with each other, as the city grows in an axial mode away from the center, and central growth follows constantly around the new axial expansions of the city. Thus, urban growth is the result of the combination of these two growth patterns, as the city grows first along the main transportation axes, radiating from the center of the city, with the parts between being filled in at a later stage.
  2. The Concentric Circle theory, introduced by Burgess (1925), postulates that the city consists of several concentric rings of various uses extending around the city’s core area—the central business district (CBD). This core area is the most densely developed section of the city and typically represents the prime business, commercial, administrative, and cultural center of the urban area; it contains large office buildings, government agencies, prestigious shopping areas, cultural centers, and entertainment facilities.

The first ring around the circle designating the city’s CBD is the transition zone, containing low-income housing, lower-quality commercial activities, and light manufacturing uses. The second ring, moving away from the CBD, contains residential neighborhoods, housing workers employed at the CBD or at the light manufacturing facilities in the first concentric ring. The third concentric ring contains single-family and multifamily residential uses, housing mostly middle-income households. The fourth and final concentric ring is the commuter zone, with low housing density, populated by high-income groups that have chosen life in a less urbanized environment over shorter commuting times. This urban settlement model is based on the dynamic process of filtering, during which the wealthiest households move to new, better, and larger homes in the outer rings, while lower-income households move into the lower-quality, older neighborhoods abandoned by these wealthy households.

  1. The Sector theory, introduced by Hoyt (1939), combines the axial and concentric ring theories to suggest that a city develops partially in sectors and partially in concentric ring zones. Sectors extend along the main transportation arteries, beginning from the center of the city, and represent different uses—wholesale trade, light manufacturing, and low-income housing. Partial ring zones develop further away from the center of the city with uses, such as middle- and high-income housing.
  2. The Multiple Nuclei theory, introduced by Harris and Ullman (1959), postulates that a city grows in multiple clusters of complementary uses. These clusters consist of homogeneous residential areas housing households with similar incomes, and commercial areas serving the specialized needs of these household groups. Although new suburban commercial clusters are no match in terms of size and concentration to the CBD, they do challenge its prominence in the urban fabric. Clusters of special-purpose buildings often found in urban areas, such as the concentration of retail uses in downtowns, the concentration of manufacturing and distribution firms in industrial parks, and clusters of medical offices and facilities around hospitals fall within the scope of the multiple nuclei theory, as they represent groupings of complementary uses around a central use.

Hartshorn and Muller (1992) argue that the new wave of urban growth that will prevail in the 21st century is the urbanization of the suburbs and further development of the suburban downtowns in the nation’s largest metropolitan areas. These suburban downtowns are often found at suburban nodes of high accessibility, such as key intersections of radial arteries and circumferential highways. According to these authors, these suburban downtowns have further growth potential in the future with the addition of uses that will make them more comprehensive and/or specialized. They also foresee that the retail landscape will become more differentiated in terms of market niches because of increasing purchasing power and differentiation in consumer preferences. Hartshorn and Muller describe a five-stage model of suburban development:

  • Bedroom community, which refers to the development of residential communities in the suburbs, motivated by the availability of cheap land and financing, as well as the location independence brought by the car and high-speed highways
  • The stage of independence, which refers to the development of suburban regional malls, as well as office and industrial parks, which brought jobs close to suburban communities, reducing or eliminating the dependence of suburban residents on central city employment
  • The stage of catalytic growth, during which housing and commercial development intensifies and becomes more diversified in terms of quality and price
  • The high-rise/high-technology stage, which was marked by the emergence of high-rise office towers housing the growing middle and upper-middle management functions and corporate headquarters, as well as the emergence of high-tech research and development activities, located in selected suburban corridors.
  • The mature town center stage, during which cultural, social, and recreational facilities are developed, completing the full spectrum of land uses found in mature urban areas.

Urban Growth and Smart Property Investing

The theories discussed in this article can provide a very useful framework for interpreting spatial developments and projecting the path of urban growth, which can lead to the identification of properties and land sites with significant value-increase potential. For example, according to the axial-central theory, the beginning of an axial development along a circumferential freeway is a hint that at some point in time, central growth will follow around that point. This suggests that sites around that axial development have significant appreciation potential.

The multiple nuclei theory suggests that new developments of large residential communities will attract demand for close by services and, therefore, demand for close by commercial space. This suggests that commercial sites most conveniently located with respect to rapidly developing residential communities are likely to have a significant value-increase potential.

Hartshorne and Muller’s five stages of suburban development suggest that identifying suburban development patterns that are at the beginning of the independence stage can provide clues to identify residential and commercial sites most qualified to attract the next stage of development—catalytic growth, which should boost property values significantly. This will allow investors to achieve a higher capital return. Suburban areas that are at the independence stage can be identified using as reference regional and super-regional malls under construction, as well as office and industrial parks under construction. Residential and commercial sites most qualified to accommodate the upcoming expansion of housing and commercial development, within the area of influence of these shopping malls and employment centers, should have significant value-increase potential. Finally, Hartshorne and Muller’s prediction that suburban downtowns will be the focus of considerable growth in the coming decades suggests that commercial properties in these downtowns may have a significant value-increase potential.

In sum, the aforementioned theories of urban and suburban structure and growth provide very valuable insights to an investor trying to identify the future path of growth and development in a specific market. In doing so, these theories can be used, in isolation or in combination, to identify which dynamics describe best the situation observed in the area examined.

References

Burges, E. 1925. The City. Chicago: University of Chicago Press.

Cisneros, H. 2015. Urban Real Estate Investment: A New Era of Opportunity.  Washington, D.C.: Urban Land Institute.

Harris, C. and E. Ullman. 1959. “The Nature of Cities.” In Readings in Urban Geography, eds. H. Mayer and C. Kohn. Chicago: University of Chicago Press.

Hartshorn, T. and P. Muller. 1992. “The Suburban Downtown and Urban Economic Development

Today.” In Sources of Metropolitan Growth, eds E. Mills and J. McDonald, New Brunswick, NJ: Center for Urban Policy Research.

Hoyt, H. 1939. The Structure and Growth of Residential Neighborhoods in American Cities. Washington, D.C.: FHA.

Hurd, M. R. 1924. Principles of City Land Values. New York: The Record and Guide.

Sivitanides, P.  2008. Real Estate Investing for Double-Digit Returns. BookSurge Publishing.

 

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