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The economics of heritage buildings

Last week, I took a quick look at the relationship between gentrification and the preservation of historic buildings. People often argue that preserving old buildings as they are is a good way of preserving the culture and community of an area.

This does not seem to be true in practice. For example, regulating to preserve villas in Ponsonby didn’t prevent the suburb from gentrifying. It may have actually contributed to gentrification by making it more difficult to build new housing to serve increased demand for living there. In this context, every lawyer moving into the area inevitably displaced an artist, musician, or working-class family.

So there seems to be some confusion about what exactly is accomplished by historic preservation. And unfortunately, this confusion seems to get worse, not better, when people start using the language of economics to talk about the issue.

To give an example, here’s an article on the topic written by Donovan Rypkema, an internationally recognised consultant on the economics of heritage. (He gave an Auckland Conversations talk here in March 2015.) Rypkema identifies five “economic values” generated by heritage preservation.

I want to focus on the last two “values” that he identifies. On the one hand, he says, we know that old buildings are valuable because they sell for higher prices than similar, newer buildings:

Property Values

The United States is a country obsessed with property rights. As a result, the area that has been studied most frequently is the effect of historic districts on property values. The most common result? Properties within historic districts appreciate at greater rates than the local market overall, and they appreciate faster than similar non-designated neighborhoods. The worst case is that historic district houses appreciate at rates equivalent to the overall local market.

In England, they’ve found that a pre-1919 house is worth on average 20% more than an equivalent house from a more recent era, and the premium becomes even greater for an earlier historic home. On the commercial side, the Royal Institute of Chartered Surveyors has tracked the rates of return for heritage office buildings for the past 21 years and found listed buildings have consistently outperformed the comparable unlisted buildings. Similar analyses in Canada demonstrated that 1) heritage buildings had performed much better than average in the market place over the last 30 years, 2) there is no evidence that designation reduces property values, and 3) the price of heritage houses was not affected by cyclical downturns in property values.

And on the other hand, he argues that old buildings are valuable because they provide cheap space for start-up businesses:

Small Business Incubation

An underappreciated contribution of historic buildings is their role as natural incubators of small businesses. In America, 85% of all net new jobs are created by firms employing less than 20 people. That ratio is similar in Europe and even greater in the developing world. One of the few costs firms of that size can control is rent. A major contribution to the local economy is the relative affordability of older buildings. It is no accident that the creative, imaginative, start up firm is not located in the office park or the shopping center–they cannot afford the rents there. Historic buildings become natural incubators, usually with no subsidy of any kind.

Pioneer Square in Seattle is one of the great historic commercial neighborhoods in America. The business association asked firms why they chose that neighborhood. The most common answer: it was an historic district. The second most common answer: the lower cost of occupancy.

Now, I hope you see the problem with Rypkema’s argument. Old buildings cannot simultaneously be both cheap and expensive, like some kind of Schrödinger’s historic preservation district. Either the buildings are commanding high prices – and thus attracting well-heeled tenants – or they aren’t.

Due to its internal inconsistency, Rypkema’s argument would seem to imply that there is always a case to preserve any old building. (Or any new building, for that matter.) If the building is expensive: Preserve it, it’s valuable to its owners! If the building is cheap: Preserve it, it’s valuable to its occupants!

But I don’t think that makes sense. As I wrote last week, we should be more interested in the social and economic processes going on within buildings, rather than the buildings themselves. There is an link between buildings and social processes, but it’s not very direct. That’s because an individual building can serve multiple functions over its life-span. An office building that starts life as an A-grade location for a commercial law firm may turn into a B- or C-grade tenancy for small professional service firms or tech start-ups. This can also happen in reverse: a run-down old building can be refurbished to attract A-grade tenants again.

Does this imply that there is no rationale for preserving historic buildings? No – there often is a good argument for historic preservation. Many (but not all) old buildings are attractive and aesthetically pleasing. Their presence in a neighbourhood or a downtown area can have positive “spillovers” to neighbours and passers-by.

If those spillovers are large, which may be true in the case of especially notable buildings or even specific areas with a number of attractive buildings all from a single era, it can be worth regulating to preserve the buildings. But that is a case for heritage preservation that can and should be expressed directly – it’s about the aesthetics of the building and the characteristics of the place! – rather than indirectly, as Rypkema does when talking about job creation and property values and yadda yadda.

What do you think about the economics of heritage preservation?

40 comments to The economics of heritage buildings

  • helgaarlington

    There is also the argument for community memory – say, in the case of the former ‘lunatic asylum’ which is now a great burden for UNITEC. That building and its history tells us a great deal about our recent past. It is also a substantial enough building to anchor the area, even though now sadly cut off from its environs. I can’t imagine living in a place with only new buildings – soul-shriveling.

    • Peter Nunns

      I tend to agree with Jane Jacobs, who points out that areas with buildings all of a single age don’t tend to work well. Either all the buildings are new (or recently renovated), in which case they’re all too expensive to allow startups and lower-income households to live in the area, or they’re all old, in which case the area’s getting run-down and unattractive to people/businesses with more money.

      However, maintaining this diversity in perpetuity requires ongoing construction in the area, which sometimes means that something old gets torn down. It’s a challenge.

  • conan

    Did Rypkema test his pricing against location? You could argue that heritage buildings in Auckland are by nature going to be more expensive than newer buildings simply because most of them are located in suburbs close to the city that have high demand. I suspect that it is this location not the age of the house that determines prices. The most expensive house sold in my neighbourhood of villas was a brand new house (admittedly a villa replica). I live in a villa for this reason. I’d much prefer to live in a 70s box house but there’s only 3 of those anywhere near where I live.

    • Peter Nunns

      Most papers investigating the value of old buildings control for location – generally by including variables for proximity to the city centre and to other amenities like coastlines.

      In Auckland, old buildings aren’t solely concentrated near the centre of town – there are also pockets around the coasts, near Onehunga and the old Fencible settlements, etc.

  • Lord Maths

    The ultimate unit of economics isn’t the dollar, it’s the util, and aesthetics generate utils. Case closed.

    • Matthew W

      I think you still need to measure net utils from different scenarios, i.e. redevelopment vs preservation. So – case reopened!

      • Stu Donovan

        yes, and utils are simply the output of utility functions, which are arbitrary and monotonically increasing functions which can’t readily be compared between people. In this context, relative utility is pretty much all we have to go on!

        Unless you’re using indirect utility functions, which take prices and wealth as arguments. But then you’re measuring utility indirectly in $$$ form. So we’re back to where we started … ONWARDS!

    • Doloras LaPicho

      The util is totally imaginary. Neo-classical economics is superstition, which is why it doesn’t work.

  • mfwic

    All you need to do is find the best six buildings in a row and preserve them. Have you ever seen a publicity photo of San Francisco? Always the same houses. https://en.wikipedia.org/wiki/Painted_ladies#/media/File:Painted_Ladies_San_Francisco_January_2013_panorama_2.jpg

    • Guy

      Nice try, but no. Just keeping 1 or 2 or 6 petrified examples of everything is a sort of Victorian bird-spotter type of mentality, and just as harmful to the eco-system. Much better to have lived-in, well-used, vibrant communities of buildings / birds.

      • Peter Nunns

        That’s a terrible analogy. Buildings aren’t birds, they’re habitats for humans. You simply can’t have a community of buildings, because buildings aren’t alive.

        • Guy

          Terrible it may be to you, but it works fine for me! I think you need to broaden your perception of when a building is alive. You’ve probably been to a “building museum” of some sort – Howick Village is one such I guess – there are a few in the UK that I have been to – and to me, they’re like a ghastly living death, buildings preserved in aspic (so to speak).

          Buildings do (to me) only really come alive when lived in, when you can see the detritus of everyday human life. And to me, that is the way to make sure that heritage is maintained – allow it to be lived in, cared for, and if necessary, at times, altered. Its cheaper, also, because then the houses are owned by individuals, and not just preserved in some sort of ridiculous state of suspended animation, whilst being owned and run at a loss by the Council. It makes the city far more interesting for everyone.

          • bjfoe

            When people see a nice area, they tend to think it’s because of the architecture. I would argue that as long as the buildings have human scale then it’s actually the people who make the area. Notting Hill used to be considered slums but has gentrified to the point it’s synonymous with blockbuster romcoms.

        • Lord Maths

          According to you. To me, most humans are not noble enough to live in noble buildings without contaminating them.

          There’s nothing special about the detritus of daily life.

  • mfwic

    My first boss at Auckland City Council used to say that if the Council was serious about preserving heritage buildings they should buy Dunedin. The buildings are better, cheaper and far enough away that they don’t limit our opportunities.

  • mfwic

    A really good case study is to compare Amsterdam with Rotterdam. The first has heaps of old and quaint but the second has lots of business. The difference was that Hitler destroyed Rotterdam and the Dutch being resilient people rebuilt a modern city.

    • Peter Nunns

      … did you just Godwin the thread?

      • mfwic

        Didn’t mean to. I am not suggesting it as a policy direction or anything but it is a good comparison of two cities with similar culture and heritage but different building stocks.

      • Here in NZ we have the example of Christchurch being destroyed by an earthquake. I was there one year ago, and apart from the container mall, the CBD was still mostly gravel and surface parking lots.

        It would be interesting too to compare the rebuilding process of Rotterdam and Christchurch. In the latter a quarter of the CBD (!) was just sold to a single developer. (but I have no idea of how it happened in Rotterdam)

    • Ted F

      Is anyone able to compare Rotterdam and Amsterdam? What are the major points of difference?

      • mfwic

        I have only been there once and that was 20 years ago but Rotterdam was a kind of soul-less business city with the biggest port I had ever seen. http://www.nomadicmatt.com/travel-blogs/rotterdam/
        Amsterdam is a great place for tourists, old, pretty, lots of medium density and easy transport. The biggest hazard is the cyclists. My take is Amsterdam if you are a tourist but Rotterdam if you want a highly paid job.

        • Stu Donovan

          this may have been partly true 20 years ago. I’d encourage you to visit Amsterdam again, I think you’ll find it’s far more than tourists. As per my previous post, where I discussed it’s economic performance more generally. http://transportblog.co.nz/2015/09/10/amsterdam-is-bad-ass/

          I think the key thing that many visitors to Amsterdam miss is that when the city secured UNESCO world heritage status for the canal district circa 20 years ago, they then set about developing a new commercial centre of considerable scale at Zuidas. You can see from the photo below that it’s starting to gain a critical mass of development intensity.

          https://www.amsterdam.nl/publish/pages/421790/700px/20110728_zuidas_foto-peter-elenbaas.jpg

          Zuidas been 20 years in the making, and is far from complete/perfect, but it’s definitely quite impressive. And there’s a new metro line opening up soon-ish, which will further enhance the location. It is also adjacent to a university, so has some human capital to draw on. Plus great transport links (one stop on NS network to schipol, proximate to highways). But it’s not a location that tourists will often visit or even see …

          My university is right in the middle of Zuidas, and there’s several new buildings under construction right now. So even during an economic downturn it’s still expanding.

          Main message: While Rotterdam has a large port and a great university (Erasmus), it still doesn’t really challenge Amsterdam’s primacy. Amsterdam remains the economic and cultural centre of the Netherlands…

  • JimboJones

    The real question is, if old buildings are indeed more valuable, why do we need rules to preserve them? If you took all preservation rules away, what percentage of ‘heritage’ buildings would be demolished?

    • Peter Nunns

      Yes, exactly. I would argue that the argument for heritage preservation rules depends upon on the existence of positive aesthetic spillovers from old buildings.

  • Scott M

    Perhaps the question is “Why does everything have to be justified in economic terms?”

    Economics is the most dismal “science” after all.

  • Evan James

    It’s a chicken and egg situation – would a neighborhood be such an attractive place and command high prices if it didn’t have well kept old buildings as its shop window – probably not. There are villas in less desirable suburbs, but they don’t have million dollar plus price tags just because they are villas. If Remuera looked like Nelson Street, would those Nelson Street type of units attract million dollars plus? Of course not.

    • mfwic

      But it isn’t heritage buildings that makes Herne Bay expensive. It is the convenient location, northern slope and view of the harbour. If everyone had kept the original villas there is perfect twee versions of the original it would be worth less.

  • Warren S

    All of which just seems to illustrate that what your neighbours do around you has a big bearing on the value of your property – heritage or no.
    And of cause the value of good design……………….

  • Kim Yeoh

    Yes, remove the pre – 1944 demolition controls from the Unitary Plan. How do you expect to build a high rise building when you have a run down shack in the front??

  • stevenz

    Don Rypkema has it right, he just didn’t explain it well. It’s a land use issue. For residential purposes a building doesn’t have to show a rate of return, because it’s for people to live in. His reference to low-cost “old” buildings and start-ups relates to how the cost of the space impacts the financial condition of the business and the owner. In this case, residential and commercial have very different economic characteristics, and the buildings themselves are often very different. A villa in Ponsonby isn’t comparable to a 50 sqm footprint building in a commercial strip in Sandringham.

    There is no good answer to preservation and gentrification unless you want to regulate who can buy a particular property in a particular neighbourhood. Once the owner doubles the value of his house through sweat equity, neighbouring properties also rise in value. Can’t do anything about that, either. Preventing gentrification requires intervention, so if you want poor and middle class people to stay in their listed 1880s villa, you have to make it work economically for them.

    Demolishing heritage properties *really* isn’t the answer. The marketplace can handle them very well, thank you.

    • Peter Nunns

      Even if he had explained it better it would still be a bad argument for heritage preservation. The case for heritage preservation rules has very little to do with whether people are paying high or low prices to occupy the buildings. It rests on the existence of positive spillovers from old buildings – i.e. whether people _other than the tenants/owners_ derive some aesthetic or cultural value from them.

  • Evan James

    Auckland is full of examples where the renovation of old properties has had a spillover effect into the rest of the neighbourhood – Ponsonby, Kingsland, even the Bassett Road area of Remuera. Even as recently as 1981 properties in Manuwera were more desirable, and more expensive, than Ponsonby or Kingsland, and trying to get a bank loan to buy a property in one of those two suburbs was near on impossible. But young couples saw the potential of a do-up (I was one), and over a period of time – it didn’t happen over night – those suburbs became more and more desirable, and now the people buying into those suburbs are paying million dollars plus price tags and wanting their neighbourhoods to stay exactly as what attracted them into there in the first place.

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