Anticipating the Path of Urban Growth

Anticipating the path of urban growth is very important for real estate investors aiming at achieving substantial profits.



In the normal course of the urban development process, the attractiveness of a property and location, and therefore its value, changes through time as the area’s development proceeds gradually from its initial stages to its final stages, through a multi-year and multi-stage process. Investors that can identify, early in the development process, sites that will be demanded in the future as the development of the area matures, will be able to achieve high profits, since at this early stage, prices will be considerably lower than in the final stages, when the identification of such sites will be much easier. For this reason, anticipating the path of urban growth within an expanding metropolitan area, can help identify investments with big profit potential. Within this context, it is important to understand the dynamics and evolutionary path of the urban and the suburban development process. Patterns of Urban and Suburban Growth


Understanding how cities and urban areas grow can provide a powerful framework of reference in terms of spotting locations and properties that are likely to experience developments that will increase their values. There are four basic models describing urban structure and the way cities grow:



a. The Axial-Central theory, introduced by Hurd (1924), postulates that cities grow in an axial mode, along a transportation axis due to the accessibility advantages offered by sites on this axis, or in a central mode, around a point of attraction based on proximity. Hurd suggests that in the course of urban development, axial and central growth compete with each other, as the city grows in an axial mode away from the center, and central growth follows constantly around the new axial expansions of the city. Thus, urban growth is the result of the combination of these two growth patterns, as the city grows first along the main transportation axes, radiating from the center of the city, with the parts between being filled in at a later stage.



b. The Concentric Circle theory, introduced by Burgess (1925), postulates that the city consists of several concentric rings of various uses extending around the city’s core area-the central business district (CBD). This core area is the most densely developed section of the city and typically represents the prime business, commercial, administrative, and cultural center of the urban area; it contains large office buildings, government agencies, prestigious shopping areas, cultural centers, and entertainment facilities.
The first ring around the circle designating the city’s CBD is the transition zone, containing low-income housing, lower-quality commercial activities, and light manufacturing uses. The second ring, moving away from the CBD, contains residential neighborhoods, housing workers employed at the CBD or at the light manufacturing facilities in the first concentric ring. The third concentric ring contains single-family and multifamily residential uses, housing mostly middle-income households. The fourth and final concentric ring is the commuter zone, with low housing density, populated by high-income groups that have chosen life in a less urbanized environment over shorter commuting times. This urban settlement model is based on the dynamic process of filtering, during which the wealthiest households move to new, better, and larger homes in the outer rings, while lower-income households move into the lower-quality, older neighborhoods abandoned by these wealthy households.



c.  The Sector theory, introduced by Hoyt (1939), combines the axial and concentric ring theories to suggest that a city develops partially in sectors and partially in concentric ring zones. Sectors extend along the main transportation arteries, beginning from the center of the city, and represent different uses-wholesale trade, light manufacturing, and low-income housing. Partial ring zones develop further away from the center of the city with uses, such as middle- and high-income housing.



d.The Multiple Nuclei theory introduced by Harris and Ullman (1959), postulates that a city grows in multiple clusters of complementary uses. These clusters consist of homogeneous residential areas housing households with similar incomes, and commercial areas serving the specialized needs of these household groups. Although new suburban commercial clusters are no match in terms of size and concentration to the CBD, they do challenge its prominence in the urban fabric. Clusters of special-purpose buildings often found in urban areas, such as the concentration of retail uses in downtowns, the concentration of manufacturing and distribution firms in industrial parks, and clusters of medical offices and facilities around hospitals fall within the scope of the multiple nuclei theory, as they represent groupings of complementary uses around a central use.



Conclusion
These theories can provide a very useful framework for interpreting spatial developments and projecting the path of urban growth, which can lead to the identification of properties and land sites with significant value-increase potential. For example, according to the axial-central theory, the beginning of an axial development along a circumferential freeway is a hint that at some point in time, central growth will follow around that point. This suggests that sites around that axial development are likely to have significant appreciation potential at least in the long-term, assuming no development constraints and moratoria are in place. 



The multiple nuclei theory suggests that new developments of large residential communities will attract demand for close by services and, therefore, demand for close by commercial space. This suggests that commercial sites most conveniently located with respect to rapidly developing residential communities are likely to have a significant value-increase potential.



In sum, the aforementioned theories of urban and suburban and growth provide very valuable insights to an investor trying to identify the future path of growth and development in a specific market. In doing so, these theories can be used, in isolation or in combination, to identify which dynamics describe best the situation observed in the area examined, and get a feel of its potential path of growth in the years ahead.



This is an excerpt from the book Profitable Real Estate Investing: A Value Growth Approach by Petros S. Sivitanides.


References

Hurd, M. R. 1924. Principles of City Land Values. New York: The Record and Guide.

Burges, E. 1925. The City. Chicago: University of Chicago Press.

Harris, C. and E. Ullman. 1959. “The Nature of Cities.” In Readings in Urban Geography, eds. H. Mayer and C. Kohn. Chicago: University of Chicago Press.

Hoyt, H. 1939. The Structure and Growth of Residential Neighborhoods in American Cities. Washington, D.C.: FHA.