Real Estate Recovery – A Proposal
July 21, 2009
A Proposal for Economic Stimulation and Revitalization of Real Estate throughout the United States of America
By John G. Stockman
Summary
The collapse of the residential real estate market in the United States, which began more than 18 months ago, has lead to an economic crisis unprecedented in modern history. The economy of the United States, now inextricably linked through globalization and free trade legislation, has precipitated a collapse of economies on a planetary scale. This collapse has plunged the world into a recession that now threatens to rage out of control despite the best efforts of governments, businesses and economists.
This proposal, while ambitious, does not propose an all-encompassing solution to the crisis. It does suggest a series of actions, programs and supporting legislation meant to address the root cause of the crisis while simultaneously setting the foundation for the future real estate development standards (both commercial and residential) throughout the United States.
Simply put, at the time of this proposal, there is a 9.5 month supply of unsold homes throughout the United States. A healthy economy consistently maintains a 3 to 4 month supply of unsold homes. Massive tracts of residential developments in states like California, Nevada and Florida stand abandoned and repossessed by mortgage companies and banks now on the verge of collapse. Commercial real estate, while not in this situation yet, is soon forecast to feel the effect of this “economic tsunami”.
At a practical level, real estate speculation coupled with lax standards for financing, have created a situation where these assets will continue to be devalued with little hope of ever being occupied or sold. This proposal details a five-part plan that will lead to a massive reduction in this inventory while simultaneously creating coveted “green jobs” and establishing a program of materials reclamation that will be used to incent insurers, builders and citizens to reuse building materials, reclaim open spaces and save on insurance premiums.
How Will This Program Work?
This five-part program will, if enacted and managed properly, establish a Federal program designed to systematically reduce commercial and residential real estate inventories while reclaiming usable resources used to build these now-abandoned or devalued properties. It will need to be administered and monitored at the Federal level through a series of agencies within the Department of Interior, Department of Energy and the Department of Labor. Other agencies that may be involved include the Department of Commerce and the Department of Homeland Security.
At its most basic level, the Federal government will establish a program that, coupled with current plans within the Administration to buy up toxic assets (“Bad Bank Option”), acquire and disassemble residential communities and commercial properties that are deemed no longer viable.
Under this program, toxic assets that are acquired by the Federal government will be evaluated and ranked to determine their future viability. If the property or community is deemed not viable due to the constraints established under the program, these assets will be targeted for “Inventory Reduction”.
Once targeted for reduction, a property or community will be scheduled for deconstruction by authorized Federal contractors that must have or acquire a valid Federal contracting schedule. These properties will not simply be torn down and the materials sent to a landfill. These properties will be disassembled with all possible materials being reclaimed. This will extend, where possible, to materials in the ground itself including sewage systems and electrical distribution systems.
Reclaimed materials will be inventoried, categorized and sent to newly established Federal Reclamation Warehouses throughout the country. These warehouses will store the materials for future use. Under the a proposed Federal Materials Recovery and Reuse Program (detailed further below), both private and governmental resources will be required to use a percentage of these reclaimed materials in any future construction in the United States. In addition, insurance companies, builders and citizens will receive significant tax breaks for the use of these materials above and beyond the required mandates.
Land that is reclaimed from disassembled properties will become the property of the United States Federal Government. It will then be auctioned off via a bidding process to be established. Guidelines will be established for the future use of reclaimed land before the auction in cooperation with State and Local authorities charged with maintain zoning and usage standards within the affected community. Simultaneously, new Federal standards will be adopted to minimize the expansion of communities away from population centers (i.e. “urban sprawl”) and incent the construction of high density communities near transit systems.
Collectively, this program will:
- Systematically reduce unused commercial and residential real estate over a predictable, controlled period.
- Spur construction companies to hire thousands of workers to disassemble targeted assets.
- Preserve resources for reuse in the construction of new homes and offices or in the reconstruction of areas destroyed by man-made or natural disasters like Hurricane Katrina.
- Reclaim green space throughout the United States and potentially help slow the pace of global warming.
- Create tax breaks and incentives for citizens, developers and companies to reuse materials that could lead to a “cultural shift” in how we think about our resources.
The sections that follow will provide greater detail regarding the specifics of this proposal.
I. Real Estate Assets Inventory Reduction Program
According to the latest statistics from RealtyTrac.com, “A total of 3,157,806 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 2,330,483 U.S. properties during 2008, an 81 percent increase in total properties from 2007 and a 225 percent increase in total properties from 2006”. Last October, it was reported that 58% of all homes for sale in Las Vegas were vacant. That is nearly six in ten homes. The numbers are not encouraging elsewhere in the country. Commercial real estate vacancy rates are high and projected to increase exponentially as companies close operations and delay or cancel plans to relocate to new buildings.
To put it bluntly, the United States is awash in available developed real estate. With credit tight, massive job losses and consumer spending virtually paralyzed, there is no easy path to revitalizing these properties. This massive over-supply has a doubly-disastrous effect. First, it depresses the value of occupied properties. The higher the over-supply in any one community, the lower prices fall. The second effect is that it decreases the appetite for further risk in development and drives down future demand for properties along with the goods and services this activity spurs. The net effect is a cascade of canceled contracts and layoffs all the way down the supply chain directly back to the consumer, be it a company or a family.
This cycle must be broken to effectively reduce the inventory of homes and offices currently vacant. Since market forces are unlikely to reduce this inventory in time to prevent or reverse significant negative economic consequences, a more proactive approach can and should be taken.
Under a Real Estate Asset Inventory Reduction Program, the United States government (through legislative mandates passed by the United States Congress) will systematically acquire, assess, classify and deconstruct these properties over a period of three to five years. The goal is to bring down the current inventory of vacant properties (especially residential) to a level that is more in line with the 3 to 4 month supply of a healthy economy.
This program will be structured to create jobs in trade and professional sectors. Workers that have previously been hired to build homes and communities will be put to work systematically and carefully taking them down. A new computer inventory and tracking system will need to be developed and maintained to support the Recovered Materials Program (explained in the next section). This will put technology and logistics personnel back to work at the Federal, State, Local and civilian level. Land will need to be reclaimed and this will provide jobs to the emerging “green” sector. The list goes on.
This program can be rolled out nation-wide in less than six months with resources and techniques currently available. The next section describes the Recovered Materials Program that will create a repository of recycled building products and raw materials that can be repurposed for our current and future needs.
II. Materials Recovery Program
The Materials Recovery Program is a critical component of the effort to reduce the quantity of vacant and unviable residential and commercial properties throughout the United States. This program will simultaneously address xx problems:
- Put people to work in good paying jobs that require skills readily available in our workforce.
- Recover usable materials for times of national disaster and/or future expansion.
- Incentivize a greater push toward “green” strategies while greatly reducing impact on landfills.
- Recover land for other uses and reduce urban/suburban blight zones.
At its core, the Materials Recovery Program will employ potentially tens of thousands of people in the government and private sectors in an effort to systematically reduce vacant properties and, thus, drive down the supply available on the market. The net effect of this effort will be an increase in employment across the nation and a stabilization of real estate prices as the supply drops.
Simply put, we are “un-building”. The Materials Recovery Program will receive lists of properties throughout the country that are targeted for reduction from the previously detailed Real Estate Asset Inventory Reduction Program. Ideally, areas that are suffering the most with an oversupply of abandoned properties will be targeted first. Areas of California, Nevada and Florida are ideally suited for this phase.
However, the program can be extended even to decaying and blighted urban areas that are deemed no longer viable due to population shifts or geo-demographic economics.
Recovered materials are inventoried and sent to a series of staging warehouses (Federal Reclamation Warehouses) where they will enter the reuse/redistribution cycle. The government should incent major home supply chains, such as Lowe’s and Home Depot, to establish Recovered Products sections of their stores where bulk supplies can be viewed and purchased. The chains could charge a small mark-up to cover inventory and overhead costs (capped at 5%), but would get a corporate tax break based on actual sales volume for recovered materials that would make the program financially beneficial to them.
Other recovered materials and products would be available for direct purchase from the United States Federal government for via GSA schedules and auction-style events at the individual Federal Reclamation Warehouses.
Legislation in the form of usage mandates, insurance rebates and incentive programs can further boost the reuse of these materials throughout the United States to assist in recovery from natural and man-made disasters such as hurricanes, earthquakes and general fire scenarios. These options are detailed in the section entitled (Disaster Recovery Reuse Incentives in Section IV).
III. Land Reclamation and Rezoning
The question of what to do with land that has been recovered after deconstruction of assets and recovery of materials presents a series of opportunities for Federal, State and Municipal authorities to “rethink” land usage.
Since these recovered lands have become the property of the United States Federal Government, they should be auctioned off as a first option. However, prior to any auction of land, it should be reviewed and possibly rezoned under a new framework to be legislated by the United States Congress governing land usage and population distribution standards. This framework should include guidelines to encourage rezoning to achieve:
- A higher concentration of residential density within a specified zone of a major population center.
- Ability to recover land adjacent to natural areas, protected habitats and national parks.
- Ability to reduce/eliminate transportation and infrastructure from land to help save money on maintaining unused infrastructure.
- Additional expansion of farmlands.
- Concentration of commercial services development closer to urban areas and combat “sprawl”.
These are some suggested guidelines for rezoning mandates that must be passed prior to deconstruction and recovery.
Wherever possible, citizens need to be encouraged and incented to leave areas that cost more to support than they produce. This will conserve financial, energy and human resources.
Once property has been rezoned (which must meet a Federal approval), it can be auctioned for use to private citizens or companies for development and reuse. It may also be absorbed into the National Park system if it is deemed a viable option.
All “reuse” land is subject to a timeline for usability and owners will receive a one-time tax break for meeting the deadline to help incent redevelopment.
IV. Disaster Recovery Reuse Incentive
Finally, a series of legislative mandates, incentives, tax breaks and rebates should be put in place to encourage reuse of recovered materials in the construction/reconstruction of commercial and residential properties after a natural or man-made disaster.
Every year, the United States incurs billions of dollars in damage from natural disasters such as tornadoes, earthquakes, forest fires, flooding and hurricanes. Federal and State governments declare these areas disasters based on evaluation by inspection that clears them for low-cost loans and grants to recover.
Under this program, the “disaster-area” declaration and funds made available should require a minimum 10% recovered materials mandate in the reconstruction. This will reduce our dependency on new materials and save time and money during reconstruction. Obviously, if there were insufficient recovered materials available, waivers could be applied to allow reconstruction with new materials.
In addition, insurance firms should be given a tax-break for achieving certain milestones when their customers use recovered materials after a casualty loss. For example, if an insurance company hits a 20% threshold for customers using recovered materials, they could receive up to a 5% tax break on their returns for that tax year. This is just one example, but would encourage insurance companies to offer discounts and incentives to their customers to use recovered materials.
Finally, citizens that build renovate or rebuild a home should be eligible for a one-time rebate based on the type of recovered materials that are used and what valuation the property achieves after completion. This program would encourage a cultural shift in thinking about reused and recovered materials in both commercial and residential construction.
V. Legislation and Oversight
Beyond the obvious needs for legislative mandates for the deconstruction, recovery, rezoning and reuse programs, a broader series of legislative changes may be needed at the Federal, State and Local levels to ensure a consistent application of standards for evaluation of areas and specific structures targeted for deconstruction. Shrinking suburban areas and reducing unused infrastructures will take years and require consistent oversight.
Some suggested legislation includes the creation of an oversight function within the Federal government that is part of the Department of the Interior or the Department of Commerce. The Environmental Protection Agency should be involved in the oversight of land assets and recovered materials as it advises on pollution risks.
Overall, the program will be broad and will represent a potential financial benefit on multiple levels across the United States.
VI. Summary And Recommended Follow-Up Actions
In conclusion, this proposal is designed to provide an approach to the current challenges facing the real estate and construction sectors that can survive beyond the current financial and economic downturn and be used as a model for future development of land and material assets within the United States.
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