Commercial And Industrial Growth Management:
Economic Issues

William Anderson, AICP

Growth management policies are a response to the public's concern that desired standards for public services, facilities, and environmental quality are not sustainable if a city grows too quickly. Government cannot keep pace with the growth, and, therefore, must manage it.

Growth management programs have focused on three aspects of growth: the ultimate capacity allowed for incremental growth, the rate of growth until build-out, and the quality and location of growth that is permitted.

Most city growth management programs in the United States attempt to manage population growth by controlling the rate of residential development. They either specify annual caps on development, or require that a proposed development meet certain performance criteria. Petaluma, Boca Raton, and Boulder are early examples.

Some programs control the character and location of all development, including commercial and industrial, without controlling the rate of growth. These programs apply conditions for subdivision approval and infrastructure provision. These conditions may include facility financing plans that demonstrate a project's self-reliance without public subsidy, requirements that public facilities be in place concurrent with development, environmental impact mitigation, and geographic preferences for density allocations. Many Californian cities, such as San Diego, Carlsbad, Santa Barbara, and Davis take this approach.

Most cities with growth policies that directly cap the rate of growth have focused on residential development. The simple logic is that people live in houses, so control the number of houses built annually and you control the number of people. A few cities, however, such as San Francisco, Boulder, and Walnut Creek have taken growth management one step further. These cities have decided to control the rate of some aspect of commercial or industrial growth.

Why commercial or industrial growth management?

The two most common reasons cities consider commercial and industrial growth management are: 1) to reduce population growth pressures, and 2) to improve local jobs/housing balance and manage impacts associated with commuters.

Advocates of commercial and industrial growth management believe that residential controls to manage population growth are not enough. In some regions, substantial in-migration causes a significant share of population growth. Employment opportunities induce in-migration. People move from one part of the country to another to fill a job, or in hopes of filling a job. Control the rate of new commercial and industrial space, you control job growth. Control job growth, and you control a major source of population growth pressure. As they perceive it, the city is not necessarily better off if new jobs simply means more people.

Some growth control groups in San Diego held this point of view in the late 1980s at a time when a majority of the region's rapid growth was attributable to job-induced migration. San Diego's recession of the early 1990s effectively quieted such proposals.

A few cities that already control the rate of residential development, like Boulder, realize that their jobs/housing relationships are imbalanced. In these cases, the number of jobs in the city, and the households supported by these jobs, far exceed the city's existing and planned future supply of housing. This imbalance means extensive commuting into the city and increased congestion, which puts pressure on local road infrastructure and diminishes regional air quality. Either the city can increase its housing supply, or it can reduce the potential number of jobs within the city. Boulder chose the later approach.

Economic Considerations

A city should evaluate several aspects of its economy if it considers establishing commercial and industrial growth management policies.

Economies Are Regional

Economies are regional and a city's actions affect the region. Just as we have notions of watersheds, viewsheds, and air-quality basins, we also have economic sheds. A single city's limitations on commercial and industrial development will force development elsewhere. This could lead to regional dispersion of commercial and industrial land uses. Unplanned dispersion could have dire consequences for regional congestion, air quality, and open space preservation. Planned dispersion, however, could be of regional benefit, particularly if certain economic activity is located closer to the workforce associated with the activity, and the housing stock that is affordable to that workforce. In this regard, a city that considers commercial and industrial growth management should define its economic role in the region, in cooperation with neighboring communities.

How Secure Is the Local Economy?

It is interesting that several of the cities with growth management policies that apply to commercial and industrial development have major institutional employers, such as state universities or federal agencies. Davis, Boulder, and Santa Barbara are good examples. The military stabilizes San Diego's economy, and much of the city's economic growth in the early 1980s was attributable to an influx of federal defense manufacturing contracts.

The economic safety net provided by these institutions and outside sources of government funds help stabilize a local economy relative to the rest of the region. This economic base, which is not as wholly tied to market forces, provides a level of security. Restrictions on the market economy does not necessarily affect the livelihood of many of its citizens. This security emboldens its citizens to consider policies that other cities would never consider, policies that risk impeding potential economic growth.

San Diego found out, however, that these outside sources sometimes are not so secure, when federal defense manufacturing expenditures were cutback, industry consolidation occurred, and most of the local operations closed or moved elsewhere.

Cities that are relatively small and only one of many in a larger economic region can take actions that restrict commercial and industrial growth within the city without imperiling the regional economy and the jobs of the city's residents. In these cities, many of their residents commute to work, and the city's restrictions do not affect their jobs. If new commercial and industrial development is pushed into neighboring cities, citizens in the growth management city would still have access to these developments. Newport Beach and Walnut Creek are examples.

Poorer cities, or cities whose economy is almost wholly dependent on the local private sector, typically are less willing to consider managing the rate of commercial and industrial land development.

Don't Kill the Golden Goose

A city's economic base and wealth are tied to the primary industries that are located in the region. Some sectors are more important than others to the health of the local economy.

Primary sectors, those that export goods and services outside of the economic region and bring dollars into the regional economy, are fundamental and necessary for the region's and the local city's economic health. If primary industries must relocate out of the city because they cannot expand when they need to, they may look at all of their options for relocation, including outside of the economic region. Even the risk of not being able to expand when necessary may cause firms to choose another location. Policies that affect commercial and industrial development associated with these sectors should be careful not to push industries in these sectors out of the region without understanding the potential consequences.

Secondary sectors, such as most of the retail sector that are not tourist oriented, are supported by the expenditures and wages made in the primary sectors. If a city already has an adequate supply of space to accommodate these secondary sectors, most additional space is simply a transfer within the regional economy. Restrictions on the their rate of growth would not affect the regional economy as seriously.

Different Industries Have Different Growth Impacts

Different industries generate fewer jobs, and less growth pressure, than other industries. For example, manufacturing firms often generate fewer jobs per $1 million of output than service firms in the tourism industry. These industries generate less employment because they are capital intensive, export industries selling high value-added products that generally pay higher average wages. They are important to a city's and the region's economy not just because of the jobs they generate, but more importantly because of the wealth they bring into the local and regional economy. If a city decides to formulate a commercial or industrial growth management policy to reduce population growth pressures, without jeopardizing economic wealth, the policy should give preference to those industries that are less growth inducing.

Fiscal Health and Quality-of-Life

Quality-of-life is a valued asset that residents, including employers and workers, cherish. Maintaining this quality is the key objective of any growth management effort under consideration. A city's ability to afford good public facilities and services, which is a component of the city's quality of life, depends on a strong economic and fiscal base. Smaller size does not necessarily mean a greater quality of life. There are cities that are smaller, but, because they are fiscally poor, cannot support the quality of services that larger cities provide their citizens. A city should evaluate the fiscal impact of alternative growth management approaches it considers.

Growth Control and the Market System Are Alternative Forms of Rationing

While the issues of supply constraints and rising prices will occur eventually as a city approaches build-out, a cap system may force these issues prematurely. A cap system is a form of rationing. The usual method for rationing, within the context of the general plan and zoning, is the market price system. Under the market system, prices will rise as surplus supply is absorbed. The rise in prices induces new development that increases the supply, which relieves prices. A cap system may not add to the supply sufficiently in time to relieve prices. Even if a cap was set at a level consistent with long-term trends, there are natural economic fluctuations (such as business cycles) which a cap allocation system may not be able to anticipate as well as the market. Therefore, under a cap system, space is rationed based on some other criteria, such as queuing or policy designed preferences, rather than market demand.

The Effects of Rising Prices

Constraints on the supply of commercial and industrial space, short of demand, lead to rising prices and unintended impacts. Rising prices will cause some firms and businesses to locate elsewhere or decide not to move to the city. Rising prices will increase the cost of conducting business, possibly putting cost pressure on local consumer goods. Rising prices may also lead to more efficient, albeit more intense, utilization of space, possibly increasing employment densities in certain locations, which the city may or may not desire. Rising prices may lead to the conversion of existing space to a higher use that pays greater rents, such as from warehouse to commercial, thus diminishing the supply of low rent space needed for some uses and services that the public demands. Rising prices may push out some small locally owned businesses, the kind that makes a city unique, forfeiting space to national or regional chains that can afford the higher rent.

The only relief from rising prices would be a reduction in demand. A national or regional recession, the enhanced competitiveness of neighboring communities, or diminishing interest in a city due to the higher prices and development constraints could reduce demand. The consequences of rising prices are not a function of growth controls alone. They are inevitable as a city approaches build-out of its general plan while growth continues regionally.

How Well Does Space Relate to Growth?

Commercial and industrial growth management operates under the premise that a city will control employment growth by controlling the development of building space. But is square footage a good surrogate measure for growth? Due to technology, the amount of employees per 1,000 square feet of space is changing, and the change differs by the type of industry. Office space per employee is falling due to desk top computers and shared offices. Manufacturing space per employee is increasing due to the use of automation in the manufacturing process. R&D space per employee is greater than other industrial uses. Efficiency in the production and delivery system has reduced the need for backroom inventory space. Warehouse retailing and entertainment driven retailing have changed retail space allocations per employee. Therefore, an increase in commercial and industrial space does not necessarily mean a corresponding increase in commercial and industrial employment.

Plausible Situations

A commercial and industrial growth management policy should try to anticipate plausible situations that may occur. The following are examples:

  1. The product of a bio-tech or other tech-oriented R&D firm becomes a worldwide hit and they need space quickly for manufacturing.
  2. A major manufacturing firm downsizes by outsourcing professional services to new firms made up of former employees. There is no net increase in citywide employment. The new firms need independent space. The major manufacturing firm has surplus space that it is not allowed to subdivide.
  3. Warehouse or industrial space is subdivided into office space to capture higher rental income, diminishing the supply of space for warehouse and industrial uses.
  4. Existing retail space in the historic commercial area is rented to the highest bidder - national chains - as existing leases terminate.
  5. A national boom occurs and existing manufacturers expand by borrowing against future permit allocations, diminishing the allocation pool for future expansion or new development.
  6. The amount of space for new office development is constrained relative to market growth, forcing higher employment densities at existing office locations, adding to congestion in those areas.
  7. The permit allocation pool has been exhausted, but, in a recessionary year, a major employer in a desirable high-tech industry wants to locate in the city now.
  8. A major employer threatens to leave the region if it is not allowed to expand.
  9. A warehouse retailer proposes to add a store, generating significant fiscal revenues for the city, but taking a significant share of the permit allocation pool.
  10. A bio-tech firm needs to expand laboratories, taking a significant share of the permit allocation pool. Due to their high space/employee ratios, however, it does not generate major employment or population impacts.

As one can see, designing an allocation system that is flexible and responsive enough to adequately address many of these plausible situations is difficult. It requires substantial administrative oversight and review, and rations development based on biases inherent in the particular growth management program.

Alternatives To Growth Caps

Several of the few commercial and industrial growth management systems that exist rely on growth caps and allocation pools based on some merit criterion. Boulder's commercial and industrial growth management plan, or San Francisco's office development policies, are good examples. Two alternative growth management approaches that are more flexible are a market approach to caps , and performance based program.

Market Approach to Caps

This is a theoretical approach for discussion purposes. It is untested. This approach rations permits by a combined market and cap mechanism. In this scenario, development permits (by square foot blocks) are sold either at a set price or by auction. A three to five year pool of entitlements is sold at a time. The pool is divided into development categories, such as industrial, office-commercial, and retail-commercial, with a sale occurring separately for each category. Buyers of the permits may use them, hold them, accumulate them, sell them later at a market price (creating a secondary market), or retire them (if purchased by a local no-growth conservancy). There would be no time limit on the use of the permits. The buying and selling of permits, and the speculation that would occur, helps ration the permits over time. This rationing more closely reflects market demands through the amount people are willing to bid for the permits.

This approach would be unique in the United States. It is similar to the way seats on stock and trade exchanges, taxi licenses, pollution credits, and even personal seat licenses at new stadiums (other activities that have capacity constraints) are bought and sold. There is no merit determination, rather the market and people's willingness to bid for the right to develop will determine who receives a permit. Zoning regulations to control development quality will still apply. The city must maintain minimum development entitlements that protect reasonable economic use of private property. Speculators may decide to hold on to permits until a later time as the city approaches build-out, when permits will be more valuable. The rate at which permit blocks are released and sold, and the certainty that the ultimate build-out of the city is set, will influence the market price of the permits issued. Since this approach is theoretical and untested, its specifics, legality and impacts would have to be explored more thoroughly.

Performance Based Program

An alternative growth management approach that does not cap growth rates is performance regulations. Under this scenario, the city would establish performance criteria related to use, design, public facility provision, traffic and environmental impacts, etc. Development can occur by right as long as the performance criterion is met. Applicants for larger projects have to submit a report for public review that describes how the performance standards will be met concurrently with development, how impacts will be mitigated, and how the applicant proposes to fund the required onsite and offsite improvements to meet the performance criterion. Projects that do not meet the criterion simply are not approved. In order to provide the applicant some regulatory certainty, so that the applicant can properly design the project and pay a feasible price for the land, it is important that criteria be measurable and objective, rather than discretionary and subjective.

Since performance criterion is designed to maintain quality of life standards, quality of life is maintained as development occurs. Only those uses that can maintain these standards are developed. The ultimate build-out of the city is defined by the general plan, and in each community by subarea plans. The rate of growth is not controlled explicitly, except by development's ability or inability to maintain quality of life standards. City sponsored subarea plans and impact fee requirements would address the marginal impacts of smaller infill projects, and the method of financing improvements to mitigate their impacts. This approach, which is in place in many cities, is based on three principles:

  1. Quality of life performance standards
  2. Improvements and mitigation concurrent with development
  3. Development pays the full marginal cost of its impacts

This approach addresses the impacts of development on quality of life directly, rather than use the rate of increase in commercial and industrial space as surrogate measures of impacts. At the same time, this approach avoids many of the arbitrary actions and unintended consequences associated with a growth management system that caps annual growth and allocates permits based on policy biases.

Good Old Planning

Growth management of commercial or industrial development, the land uses that allow the economy to function, is tricky business. Many would consider the notion of caps fundamentally contrary to our free market system. A city that considers commercial or industrial growth management must carefully understand its regional economic context, the city's economic role in the region, and potential economic and fiscal impacts. In the end, a city will weigh these considerations against the benefits of managing commercial or industrial growth. Of course, the alternative that most cities prefer is no commercial and industrial growth management program, just traditional planning, zoning, subdivision regulations, and a simple reliance on market demand.
William Anderson, AICP
Principal
Economics Research Associates 964 5th Avenue, Suite 214
San Diego, CA 92101
PH: 619 544 1402
FAX: 619 544 1404