A newly issued working paper from four economists, including the late Nobel prizewinner Edward Prescott, reports that easing regulations on commercial land use would unleash a boom, producing, "large allocative efficiency effects, with output gains of about 3 percent to 6 percent and welfare gains of about 3 percent to 9 percent of lifetime consumption."
The other authors of the National Bureau of Economic Research working paper, "The Impact of Commercial Real Estate Regulations on U.S. Output," are Fil Babalievsky of the Census Bureau, Kyle F. Herkenhoff of the University of Minnesota, and Lee E. Ohania of UCLA. They use the CoreLogic commercial real estate database to look at what would happen nationally if real estate regulation—zoning and also community and environmental review—were rolled back to the unrestrictive levels of Midland, Texas.
They found:
Our baseline counterfactual evaluates the positive and normative effects of a national deregulation such that the average level of regulation in all metro areas is equal to that of the least-regulated metro in the dataset (Midland, Texas). We thus compare the steady state of the model with the identified distortions to that of the economy with the Midland, Texas average distortion, while leaving the dispersion of parcel-level regulations unaltered. National output increases by 3.0% as commercial investment booms. Notably, the commercial building stock increases by 18%. The higher wealth arising from this deregulation reduces labor supply, which promotes higher welfare. Labor is modestly reallocated from the Midwest to Florida and California, but this reallocation is not large enough to contribute significantly to the output gain, because higher congestion in areas attracting more workers limits this reallocation. Our results also suggest that rent-seeking may be a factor in the regulatory process: building developer profits decline in the deregulated counterfactual as building supply expands and rental rates of commercial real estate decline.
The part about developer profits declining is particularly interesting. There's a widespread assumption that less regulation helps business, but on some level the regulation helps certain existing businesses by protecting them from market competition. Another surprise is that Florida, which from a land-use perspective (sprawl, strip malls) or political view (Republican governors) might look deregulated to a lot of people, resembles California more than Texas in terms of robust environmental reviews, and protections, and zoning laws constraining commercial development.
