Neighborhood privatization is no panacea

Contra Tomas Pueyo on urbanism

Tomas Pueyo

believes urban problems would be better solved if private entities owned and operated entire neighborhoods. This is wrong. Not because neighborhood-scale private developments don’t work, Pueyo highlights some compelling ones, but because he misunderstands why they work. And that has to do with the business model his examples employ — and how that model solves the incentive problems he calls out in the first place.

Incentives are the problem

Pueyo starts by making the case that cities have an incentive problem due to fragmented ownership. He writes:

Few people love their cities’ urbanism. There’s always a problem: Streets are ugly, dirty, expensive, inaccessible, lifeless, overcrowded… But it seems to me that they all boil down to one single problem: Who owns what?

According to him, when something doesn’t get done, or is not as good, clean, or convenient as it should be, it’s because no one has the incentive to take care of it — whatever it is (he’s a bit vague here).

In his telling, property owners will only ever concern themselves with their own properties and the modern municipal government is hamstrung by electoral dysfunction. So we’re stuck in a world of parochial local optimizers (individual property owners) and ineffective global optimizers (municipal governments).

The solution? Make the local optimizers slightly less local. His proposal is to consolidate ownership: instead of companies owning properties, they should own and operate entire neighborhoods.¹

Pueyo continues with an anecdote about a hawker center he visited in Singapore. These semi-open air food markets are common in the region and provide a place for food vendors to congregate.² In his story, a friend says that the land with a one-story market could be put to much better use if it were developed more intensely like all the adjacent parcels with their skyscrapers.

He points out, however, that the hawker center might be creating a lot of value for the surrounding real estate owners. And if the individual owner of the market decided to develop the parcel, it might actually reduce value at the level of the neighborhood.

hawker center in Singapore, courtesy of Tomas Pueyo

What he identifies is that the hawker center is a neighborhood amenity, generating a positive externality for all the properties around it. Turning it into another office or residential building (and taking that amenity away from the neighborhood) might be optimal at the level of the individual land owner and still sub-optimal for the neighborhood on the whole.

His intuition on the interdependence of land values is spot on. But it’s in the next bit where we jump from a valid premise to an incorrect conclusion.

Private neighborhoods as the solution

So, Pueyo’s worried about his hawker center getting turned into a high-rise. His solution is to have the entire neighborhood owned and operated by a single property owner.

His logic is that when a single entity builds the housing, the commercial space, the amenities, and the infrastructure that stitches it all together — and internalizes the financial upside — we get much better urbanism (e.g. a neighborhood owner would recognize the value the hawker center creates for the rest of the neighborhood and not replace it with a high-rise). Therefore, we should expand the scope of private ownership from the level of an individual property to the scale of an entire neighborhood.

He argues that if private companies can maintain building lobbies, they can manage the streets outside too. To support the point, he even references

Samuel Hughes

’ The fewer the merrier which describes the benefits of privately owned and operated neighborhoods in London.

Herein lies the mistake.

Pueyo looks at the very real and interesting examples of privately run neighborhoods and imagines that they work because of their size. But there’s nothing inherently special about the neighborhood scale. It’s the business model that matters here; and it’s a model that we don’t have to limit to mere sections of a city.

How cities create value at scale

Before we continue, allow me a conceptual gripe. An immediate problem with Pueyo’s recommendation is that there’s no coherent definition of what constitutes a neighborhood. Pueyo offers the idea that it’s bigger than a block and smaller than an entire city. This is intuitively correct and also non-actionable. In reality, individual neighborhoods come into being gradually, are defined (and redefined) as populations shift and local culture evolves. Absent some topographical constraint like a river, you can’t predetermine them in advance.

Ok, let’s continue.

Pueyo’s basic insight is correct. Having a single entity solely responsible for the built environment can make a lot of sense. The reason this works, though, is when that single entity gets to internalize the financial upside of all the value it’s creating — not because there’s anything special about planning at the scale of a neighborhood. If a municipal government actually got to internalize the value it created in the same way Pueyo is proposing that a company running a neighborhood should, we’d still end up in the same place.

For this to make sense, though, we need a quick refresher on how city governments create value and how that drives up land prices:

City governments support land prices in both direct and indirect ways.

Indirectly, generalized services like sanitation, or law enforcement provide broad-based support for urban growth. New York’s first urban planners set the stage for what the city would become by drawing the first property lines and laying down the first road grid. That didn’t directly make the city what it is today, but it laid the literal groundwork for the subsequent things that did.

City governments can also drive land values in more direct, localized ways via physical infrastructure.

Transit increases property values everywhere from New York to Hong Kong to Paris. Neither is this limited to transit; other location-specific amenities like public parks have the same effect.

So, infrastructure and amenities — clean sidewalks, safe bike lanes, public parks, effective transit — can make a place nicer. The nicer and more accessible a place becomes, the more people want to be there. The more people who want to be there, the more valuable the real estate (read: the land) becomes.

To the extent Pueyo is correct about his privately owned neighborhoods, it’s because a private neighborhood operator is getting to retain the upside from all the investments that increase the value of their land. When this isn’t the case for municipal governments, it’s not because of the scale they’re operating at, it’s because much of the upside from public investment gets internalized by private land owners. For modern municipalities, the feedback loop is weak, causing incentives to remain broken.

Design is downstream of the business model

Going back to his Singapore example, Pueyo sets up the problem by imagining a property owner might want to develop the hawker center, putting that one specific parcel to a higher value use while destroying value on the whole for the larger neighborhood. The question we should be asking, though, is why that hypothetical is hypothetical.

As it turns out, the hawker center is owned and operated by Singaporean Government.³ Also, the vast majority of land in Singapore is government owned and leased out to private entities for development. The Singaporean government creates value by building high-quality infrastructure and it monetizes that value through land leases.

Admittedly, policymakers probably don’t run hawker centers for financial reasons alone. After all, there’s a public health angle and probably some political calculus that goes beyond mere revenue maximization. But, if anything, that makes the case for solving urban problems at the municipal level even stronger.

A city needs things that don’t turn a profit — like soup kitchens or cooling centers — even if they lower nearby land values. The very problem Pueyo wants to solve via neighborhood consolidation would still exist in a city full of consolidated neighborhoods.

Now, that’s not to say neighborhood-scale projects don’t have their place. Many cities suffer from institutional dysfunction (see: trying to build a duplex literally anywhere in the U.S. or Canada), so we should be open to anything that’s directionally correct. In fact, one of my favorite new projects, Vancouver’s Senáḵw, is akin to the type of neighborhood-scale project Pueyo’s describing. The thing that makes it work, however, isn’t that it’s neighborhood-ish sized. It’s that it has a land rent based revenue model that incentivizes maximal value creation over the long-term.

Senáḵw High-Rise

Ultimately, Pueyo is on to something. Much of making a city ‘work’ comes down aligning incentives; often that involves solving the right problems at the correct scale. That said, his thesis looks at something that seems to work and misunderstands why.

We don’t need to break cities into private islands of functionality to make them work. We just need to let them capture more of the value they create — and watch their incentives adjust accordingly.

1. Or at least I’m reading him as advocating for for-profit ownership; his argument, and my critique, still stand as-is even if he imagines deploying different corporate structures.

2. In Singapore, specifically, they were set up as a way to concentrate street vendors selling food such that the government would be able to enforce food sanitation standards. Outlawing street vending itself was beyond state capacity (killing markets is always hard), so the Singaporean government did the sensible thing: they gave vendors a way to do business without worrying about state sanction and, in the process, made public health regulation possible to implement.

3. Singaporean hawker centers are owned by a combination of government agencies, including the National Environment Agency (NEA) under the parent Ministry of Sustainability and the Environment (MSE), Housing and Development Board (HDB) and JTC Corporation.