How Should Cities Value Industrial Land?

west-side-flats-areaIn a few weeks, Saint Paul is likely to adopt a new plan for the West Side Flats, a large area of former floodplain right across the river from downtown Saint Paul. While there’s a lot of agreement about the majority of the plan — dense but not-too-tall mixed-use, a reconnected street grid, storm water mediation, bike paths — a debate has popped up about the some of the industrial property covered by the plan.

While I don’t want to weigh in on my exact thoughts about what to do [at least until the Planning Commission votes on the issue], the debate about the flats’ industrial property has brought out a contrast in perspectives on the value and shape of industrial property in urban areas.

west-side-flats-future

Conceptual rendering of future land use from the Master Plan.

The Uniquely Situated West Side Flats

West Side Flats_thumbI’ve written about the unique history of the West Side Flats before elsewhere. They’re one of the many former floodplain immigrant neighborhoods that were basically bulldozed during the 1960s, the old working class neighborhood replaced by either empty parkland, featureless single-story office or industrial buildings (surrounded by parking lot moats). Or, in a surprising number of cases, much of the land was simply left vacant.

The elimination of the old neighborhood was particularly vexing because the city erected a protective flood wall at the same time, and today walking around the desolate land is to occupy an empty heart. The neighborhoods up the bluffs (where I live) seem far removed from downtown and the rest of Saint Paul, lacking the continuity and connection that they had in the past.

That’s why the new master plan is so encouraging. It promises to re-connect the West Side with downtown by infilling the flats with a bustling new neighborhood. But some of the plan’s property has raised the hackles of the Chamber of Commerce and the Saint Paul Port Authority (a quasi-governmental agency which develops a lot of the city’s industrial land). Basically, these groups would like to keep the existing light industrial street grid and densities between Robert Street and the (elevated) Highway 52, and have now written letters asking that the city scrap the plan. Their reasoning raises key questions about how cities should asses the value of different development proposals.

stp west side st paul flood 1952 6

The flats during the great flood of 1952.

Industrial Tax Value vs. Tax Burden

For the most part, the Saint Paul Port Authority has done a good job at the impossible task of buying and redeveloping old industrial parcels. There are good projects (for example, the Phalen corridor) and bad ones (see: Westgate). But every city and suburb in America is competing for industrial tax base, and it can’t be easy to rehab old urban industrial land and deal with white elephants.

A few years ago, the SPPA commissioned a study called An Industrial Strategy for the City of Saint Paul, that makes a case for why the city should focus on developing industrial land. The study offers a lot of useful information about economic trends around the country and paints the delicate picture of why (entry-level) industrial jobs are so important for the region. But it also makes a curious argument that plays a big part in thinking about how a city like Saint Paul should use its urban industrial land.

icic-1One of the key arguments of the study (referred to as the ICIC report) is that industrial land has a higher return on investment for Saint Paul than residential land uses. Here’s what it says:

To estimate the impact of different activities on fiscal outcomes, costs and revenues in Saint Paul were analyzed, using additional studies and the project team’s research in order to better understand the impact of residential and employment growth on fiscal conditions in the city. Based on a range of scenarios, we found that on average, existing industrial activities generate significantly more in revenue than they consume in city services.

As shown in Figure 11 [above], we estimate that industrial activity consumes only $0.60 to $0.70 in city services for every $1.00 in revenue that it generates. Note that the impact of visitors on city costs on city services is not accounted for, meaning that each the cost per dollar of revenue may be overstated across each of the three categories in Figure 11. While the impact of excluding visitors on each type of development is identical, the relative cost of each is not affected; in other words, it is possible that residential activity generates more revenue than it consumes but it will remain roughly 50 to 90 percent more expensive per dollar of revenue than industrial activity.

Over my years hearing testimony, this statistic has popped up again and again. But each time it strikes me as odd. If residential land loses money for the city, why do we keep building it?

Reading through the fine print, it’s not exactly clear how the ICIC report came to this conclusion.* As best as I can tell, they attempted to take all of Saint Paul’s annual expenditures and ‘divide them up’ amongst all the different ‘users’ of city land. (E.g., the fire department budget would be split up between the different calls according to land use type.) Thus you discover how much of a ‘tax burden’ each different land use is for the city budget. And lo and behold, industrial land ends up being the only type of land that ‘turns a profit.’

Contrast with The Strong Towns Approach to Value

The idea that a city full of (fully leased) industrial property would be an economically successful one seems reasonable on its face. After all, businesses do pay property taxes, and do have ‘trickle down’ agglomeration effects for other city businesses.** 

But at the same time, the idea that the best use of urban land (particularly land close to downtown) is a single-story building surrounded by surface parking seems to fly in the face of the years of research I’ve been reading from groups like Strong Towns. For example, a few years back Chuck Marohn wrote a post about the “nature of productivity” where he compares downtown-style mixed-use development with auto-dependent “STROAD” patterns:

The traditional development pattern of the downtown not only starts the productivity race 72% ahead of the STROAD, it has lots of opportunity to grow. All of the parking can easily be converted to more productive uses. When that low hanging fruit is consumed, all of the buildings can be improved. The second and third floors can be recaptured, renovated and remodeled. This doesn’t require one sugar daddy but can be accomplished through the organic functioning of many different players. And when this happens, it won’t suck the life out of the surrounding properties. To the contrary, this can only happen successfully in conjunction with the surrounding neighborhoods. Even though the current downtown is far more financially productive than the STROAD, the current atrophy and decline should be the low point. With a little different focus, it is easy to envision the value of these nine downtown blocks doubling, tripling or more.

Granted, retail and industrial property have different wage scales, but the overall land use patterns are similar. The key difference between the “strong towns”-type analysis of value and the ICIC report’s approach is that land is considered on a per-acre basis.  The crucial question: How much return on investment (or “value”) does a particular land use offer per acre? This seems different than looking at overall tax revenues and expenditures, where land uses are simply considered in the abstract.

strong-towns-productivity-comp

Two development patterns in greater Brainerd; image from Strong Towns.

And I’d be wiling to guess that adding in ‘per-acre’ accountability would dramatically change the conversation about properties like the existing West Side Flats development. This is important because a city like Saint Paul is going to be paying for a certain amount of services on a per-acre basis and a certain amount of services on a per-person basis. In other words, the rate of expenditure does not increase at the same rate as the rate of population. Thus, increasing the density of the city, in general, would improve the overall efficiency of service delivery, and decrease the ‘burden’ of residential land uses on the city.

Per-Acre Analysis for the West Side Flats

west-side-land-value-map

Scott Shaffer’s land value maps show the disparity on the West Side. Red is low value, green is high.

Frankly, I don’t quite know how to reconcile these opposing analyses. But my rough sense of the situation is that whether or not industrial property is the “best use” for an area greatly depends on context. For example, in a place like Phalen Corridor on the East Side (or Beacon Bluff nearby), where there isn’t very much alternative development, industrial uses are surely a great idea.

But in a place like the West Side Flats, where property values are absurdly low compared to the downtown land just across the river, there are surely alternatives that would be more economically rewarding for the city, both in agglomeration effects, property tax receipts, and in producing local jobs.***

Placing a definitive value on industrial land uses is very tricky, particularly on a municipal rather than a regional level. It’s probably best to avoid easy answers, and saying that “industrial land is the only kind that pays for itself” is an over-simplification that does cities no favors if it neglects the opportunity cost of potential mixed-use neighborhoods. I’d suggest that cities like Saint Paul look at industrial properties on a case-by-case basis that pays close attention to context, while keeping its focus on connecting the now disparate mix of urban land uses into a cohesive and walkable whole.

west-side-flats-land-use-comps

Development patterns of the flats (left) and downtown (right) at the same scale. These sites are 2/3 of a mile apart.

* The report states that “details about sources and methods can be found in the technical appendix on this topic.” * Note: I contacted ICIC a few days ago to try and get my hands on the Appendix mentioned, but haven’t heard back from them.

** Agglomeration effects are tricky, and depend a great deal on how much time and money employees might spend in the city itself. For example, each time a worker goes out to lunch, the local pizza place does better. But in my experience (and you’ll have to take my word for it here), most urban industrial workers do not actually live in a city like Saint Paul. (For example, wt a recent hearing on a West Side Flats property, all the testifying workers gave addresses in places like Prior Lake, White Bear Lake, Ham Lake, Inver Grove Heights, etc.) I’m sure it’s not a hard and fast rule, but in general, a city like Saint Paul has to ask itself about local benefits. Is Saint Paul simply a good location for a warehouse or factory, conveniently proximate to freeways?

*** In the case of the West Side Flats, the master plan is a long-term situation, 30-40 years out in the debated area. The plan does not suggest re-zoning or removing existing businesses. Rather, the plan is attempting to sketch out a general framework for how to develop the under-used land.

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21 Responses to How Should Cities Value Industrial Land?

  1. acs February 4, 2015 at 1:22 pm #

    This is a topic I’ve hit on in the forum section with regards to Minneapolis’ upper riverfront and other areas like the North Loop and the SWLRT corridor. In general my non rhetorical question is, why does density and industrial land use have to be an either/or scenario? Is there a way to do “high-density industrial” which maintains those blue-collar jobs in our core cities while maximizing the bang for our buck? Are there examples elsewhere?

    • Bill Lindeke
      Bill Lindeke February 4, 2015 at 1:29 pm #

      the best example i can think of is the MetalMatic plant in St Anthony Main by the 35W bridge, which now surrounded by loft development but still operates 24-hours a day.

      • Cameron Conway
        Cameron Conway February 5, 2015 at 7:46 pm #

        Someone from ICIC presented at a land use class that I took. Much of the presentation was talking about how the properties that ICIC produces don’t fit the ‘negative externality’ industrial stereotype. At the same time, I wasn’t able to get any good answers as to why their properties’ urban design tends to neglect the pedestrian, beyond the idea that industrial clients require custom building shape to accommodate for customized equipment configurations. I hear that to a degree, but I’m a bit more convinced that, at least right now, autocentrism is the path of least resistance. I heard the claim that industrial areas tend not to be ‘activity centers,’ which while true, ignores the fact that many of these industrial properties do abut traditional, older neighborhoods. That industrial property’s (sometimes theoretical) sidewalk may not be the most traveled in the neighborhood, but not having it at all represents a ‘totally’ rather than ‘somewhat’ unwalkable circumstance. I honestly don’t see why small scale neighborhood commercial and industrial uses can’t create mixed use circumstances. If you’re already going to have the (if minimal) impact of a frequently used industrial property, why not make it walkable and at least somewhat of a neighborhood center? All that parking could very obviously be storefronts, with parking left over.

        Another reason for tax policy that incentivizes appropriately dense uses of high value land! All the same, I’m not sure I’d be against leaving some land zoned industrial within the West Side Flats, it just needs to be designed as if pedestrians are a thing that exists…

  2. Elliot Altbaum
    Elliot Altbaum February 4, 2015 at 1:35 pm #

    Industrial and dense can be “and” not just “either/or”. The warehouse district is a great historical example. In general I think it builders will have to learn how to build multiple levels. A blog post is forthcoming with two current buildings.

    • acs February 4, 2015 at 2:01 pm #

      Awesome, thank you guys. Its enlightening to look back on history and see so many examples of this. Really, the unique geography of our core cities are what gave enormous advantages to industrial companies and in turn those industries are what grew our region into what it is today. There’s a reason why Pillsbury built their mill in downtown st. Anthony and why barges unloaded in downtown st. Paul, not in Maple Grove or Hastings. They clearly were able to build dense, thriving, and self-sufficient cities incorporating these land uses then, so it’s disheartening to see current city leaders abandon that wisdom.

      • Adam Miller
        Adam Miller February 4, 2015 at 3:37 pm #

        Isn’t the obvious reason why Pillsbury (and General Mills) built the mills “in downtown” because they needed the falls for power?

        Isn’t the reason barges unloaded in downtown St. Paul because there were breaks in the bluffs there and it was below the falls?

        As to these two specific examples, I think the cause was topography, not urban design.

        But I’m no urban geographer.

    • Bill Lindeke
      Bill Lindeke February 4, 2015 at 2:34 pm #

      yeah but *every* trend in conventional industrial activity is in exacty the opposite direction, larger footprints and one-story buildings with high ceilings. the only exceptions seem to be brewing and 3D printing, but you can hardly built a city out of those industries (at least at this point).

      • acs February 4, 2015 at 2:52 pm #

        “larger footprints and one-story buildings with high ceilings”, sounds exactly like what they were saying in the 1950’s about housing, retail, commercial and all other land. Yet, we now know that was a massive mistake to abandon all of our collective knowledge. I just don’t think city master planners should so lightly cast out an entire category of land use forever.

      • Matt Steele February 4, 2015 at 2:55 pm #

        Yeah, that’s the case because we build our places at motor vehicle scale rather than human scale. Much easier to have long, spread out assembly lines. Trucks input raw materials on one side and finished product on the other. Or a warehouse with trucks bringing goods in one side and out the other. It’s really our transportation regime that has fostered this land use: Workers can now drive to remote industrial parks.

        Back in the day, when industrial was more dense, many workers walked to the neighborhood factory (meatpacking in St. Paul, chemicals on St. Paul’s east side, tractors in Hopkins, etc). And materials often arrived and departed via train. Everything happened at a scale much smaller than it does now.

        It seems like there’s plenty broken with our current economic regime as it relates to land use. And it’s sad to see cities reinvent themselves for something that seems so fleeting and unsustainable.

        • Bill Lindeke
          Bill Lindeke February 4, 2015 at 3:17 pm #

          I’ve talked to market experts about this, and they tell me a TON of new industrial development is going in near places like Rogers or Western WI, along the very exurban fringe. http://www.loopnet.com/Minnesota/Rogers-Commercial-Real-Estate/ Massive footprints.

        • Thatcher Imboden February 4, 2015 at 8:51 pm #

          Also consider that many industrial buildings constructed in the 1980s or before are not very desirable by today’s standards for many office/warehouses, as users seem to want higher clear height and greater column spacing. Upside is that tenants can get a better deal on older industrial property and potentially use it for growing their business. Downside is that for some industries, the ineffective layouts or increased SF may eat into their margins.

          I haven’t been following industrial properties as much over the last couple of years, but a few years ago I was helping find some industrial space in Minneapolis and it was really hard to find desirable property (even to rehab) that could work financially for a fairly non-demanding client…especially when you want to own.

  3. Matt Steele February 4, 2015 at 1:55 pm #

    Curious why you cite the Phalen Corridor as a success. Granted, parts of the project are a success. But for the most part, it’s a new stroad surrounded by new parking-lot-oriented low density land uses. You’d think you were in Eagan if you had no frame of reference saying it’s St. Paul.

    I’m highly skeptical of SPPA projects. They seem to build utter crap.

    • Bill Lindeke
      Bill Lindeke February 4, 2015 at 2:33 pm #

      well, it’s a mix of many needs for the city. honestly, i like the road design and particularly the bike path. it also seems to be economically positive for a part of the city that sorely needs it.

  4. Adam Miller
    Adam Miller February 4, 2015 at 3:32 pm #

    The question I have is, “why here?”

    There used to be obvious reasons to place industrial facilities on the river front – hydro power and river transport of inputs and outputs.

    With those reasons largely gone, why should we allow industry to spoil our potentially beautiful scenic resources? Is it really “paying for itself” while it’s dragging down the property values of its neighbors?

    And why wouldn’t industry prefer a location nearer a freeway or working rail line (although I assume the one here is still in use at the moment)?

  5. Alex Cecchini
    Alex Cecchini February 4, 2015 at 8:13 pm #

    I wonder what makes things so different in other countries that industrial uses can be more urban and compact? Not talking low-income countries, but very high income ones like Singapore and Germany (the two I’m most familiar with).

    My former company has manufacturing sites I spent a good amount of time at in Wessling, Germany (location: http://goo.gl/maps/Jf7VB), Karlstein, Germany (loc http://goo.gl/maps/0Fyg5 & public picture of the facility http://goo.gl/7RjFs6), and Singapore (loc http://goo.gl/maps/vhTYC img http://goo.gl/Ax2lEZ)

    All three of these have multiple stories, aren’t surrounded by a sea of parking, and are within a reasonable (and safe) walk or bike distance to a decent number of homes (Singapore perhaps less so than the others but served by bus on the nearby highway). The 2 German facilities seem par for the course for other European light manufacturing I visited in my time interacting with customers. Oftentimes out in low-intensity places, near transit and homes but with very low impact and as good of urban interaction as you can ask of a small factory.

    So, what are we doing wrong that our suburban, and even urban, industrial uses are so blighting, sprawling, and auto-oriented?

    • Bill Lindeke
      Bill Lindeke February 4, 2015 at 11:02 pm #

      this quickly dives into international economics, which is way above my pay grade, i’m afraid. (though if you want to talk Marx’s “chapter on machines”, I’m your man.) the point is to think about how industrial demand fits or doens’t fit with what a city like Saint Paul or Minnepolis might need for valuable property. Not to say that local land policy isn’t connected to these larger market forces, but it seems like a realtively small municipality has almost no leverage when trying to shape national economic patterns.

      • Alex Cecchini
        Alex Cecchini February 5, 2015 at 7:55 am #

        That’s fair, and I agree these are separate questions. Even ignoring national economics, I’m not sure St Paul could get desired results (whatever that is) at a regional level. I was just pointing out that this design does seem to work in other wealthy places (anecdata!), and it would be somewhat interesting to know how/why.

  6. Keith Morris February 4, 2015 at 11:30 pm #

    There are examples in the USA of better coexistence of industrial and other uses like this neighborhood business district that’s just a few blocks, surrounded by industrial uses to the south and east, and cut off by a highway to the west. Still way more walkable than anywhere in Downtown St Paul.

    https://www.google.com/maps/place/San+Francisco,+CA/@37.7564498,-122.3875156,665m/data=!3m1!1e3!4m2!3m1!1s0x80859a6d00690021:0x4a501367f076adff

    And you don’t have to look abroad for dense industrial areas with much less parking than St Paul. just look at NYC as an example where you’d think they’d need way more parking. Again, this area abuts a residential area that’s literally across the street.

    https://www.google.com/maps/place/New+York,+NY/@40.7771149,-73.8973988,637m/data=!3m1!1e3!4m2!3m1!1s0x89c24fa5d33f083b:0xc80b8f06e177fe62
    I
    And locally, there’s Mid-City Industrial which is the only up-and-coming neighborhood no one else is talking about: it’s got taprooms (Insight and Northgate) and Wander North Distillery. For dining there’s Zakia Deli for Lebanese and for coffee shops Empire and UP, all of which are accessible by a bike path. And right on the edge is Chindian Cafe and Intelligent Nutrients. You can spend a day here: get some caffeine, work on your laptop, do a bit of shopping, dine, and head out for drinks. Granted, it’s more car-centric than it should be, but still.

    https://www.google.com/maps/search/brewery/@44.9948881,-93.2194758,1190m/data=!3m1!1e3!5m1!1e3

    • Bill Lindeke
      Bill Lindeke February 5, 2015 at 8:29 am #

      that’s a great example

  7. Nathan Landau February 5, 2015 at 12:37 pm #

    In central cities, residential and industrial often wind up side by side. There are some issues to think about if you want this to be a long term condition, rather than a short term transitional use:

    1. Residential land values in a high demand location will outrun industrial ones. If it’s possible to convert industrial land to residential use, there will be unending pressure. There needs to be industrial land that’s zoned to prohibit residential use, so it will be stable.

    2. Residents often complain about industrial impacts, even if they “moved to the nuisance.” They complain about over the road trucks on local streets. They complain about noise, they complain about 24 hour operation if that’s happening. They exert presure on the City Council.

    People have a right to complain of course, but I’d have them sign the equivalent of a “right to farm” statement when they move in–I know there’s industry in the neighborhood, I know it will have noises and smells and trucks etc. If they do complain, this can be pointed out to them.

    I haven’t researched this for awhile, but Portland and Chicago were leaders in dealing with this issue.

    • Adam Miller
      Adam Miller February 5, 2015 at 1:24 pm #

      I don’t understand the thinking behind your first point. If the land is more valuable for residential use, why would you not want to convert it to residential use?

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