America Can Build
I
‘OF course, the finest job of city planning being done anywhere in the world is in Westchester County, New York.’ The speaker was M. Jacques Greber, and this remark was made to me in the course of an informal conversation on the progress of city planning which we had in his Paris office about eight years ago. Naturally, I accepted M. Greber’s statement as authoritative; he has been a consultant on city-plan projects in four continents. Another European authority of equal international renown is M. Henri Vandervelde, a Belgian architect recognized as one of the pioneer leaders in modern design, who was in this country last year to supervise erection of the Belgian Pavilion at the New York World’s Fair. He told me that he ranks Rockefeller Center as one of the outstanding architectural achievements of all time.
Just a few weeks ago, a contractor friend of mine, W. J. Barney of the W. J. Barney Corporation, was telling me how his organization built a factory in England in less than six months, when the best time schedule any British builder could promise for the job was approximately a year. Having previously completed in this country, in the space of twelve weeks, a seven-story factory for the same British client, Mr. Barney was commissioned to build the London plant on his promise of six months or better, because every month was of vital importance in fulfilling orders arising from the Abyssinian war. Mr. Barney stated that not only his client but also a number of London builders showed the keenest interest in his demonstration of American construction methods and ways of speeding work.
It may be that foreign recognition of American architectural and construction achievements is needed to counterbalance our own matter-of-fact acceptance of miracles wrought almost daily with steam shovels, derricks, and hoisting engines on the sites and by fabricators in hundreds of plants throughout this country. Perhaps foreign recognition may leaven the somewhat glib, unrealistic criticisms which characterize the construction industry as America’s most backward enterprise. So continuous has been the progress of architectural design and const ruction technique in the United States since the development of steel and concrete construction and the invention of the safety elevator that we Americans take as a matter of course such triumphs of engineering as Rockefeller Center, the Westchester County Parkway System, the Panama Canal, the Golden Gate Bridge, Boulder Dam, Chatham Village, the Empire State Building, the Chicago Merchandise Mart, the Bankers Life Building in Des Moines, and scores of others far too numerous to list.
The stigma of backward industry comes from two principal sources. Social welfare workers and public-housing enthusiasts, both in and out of government, have charged the industry with failure to solve the housing problem. Since they usually consider the housing problem as consisting exclusively of the problem of the ‘underprivileged, underfed, and underhoused,’ this indictment practically means that the industry cannot provide model housing for people who cannot pay. Since no industry is expected to sell its product below cost, this phase of the problem is social rather than industrial. The other criticism is to the effect that the industry (sheer stupidity or crookedness, or both, being frequently implied as the basic reason) has failed to organize itself for mass-production methods like those of the automotive industry. This criticism comes frequently from imaginative journalists or from stock-market statisticians who want a speculative boom to exploit; it has been repeated so often that it has gained wide acceptance, even in the business world.
II
The men who have brought our great modern structures into being have all been technicians of the highest competence: architects, engineers, general contractors, who have been most ably abetted by the producers of materials and equipment. All are essentially professional men; general contractors and some sub-contractors belong in this category, since they must, combine engineering skill and industrial organization technique with the functions of business management. They have always had to achieve results in the face of legal regulations and complicated labor conditions such as other industries have only recently encountered. While professional status is officially and generally accorded to architects and engineers, it is not so generally recognized as belonging to t hose general contractors who erect large modern industrial and urban-type buildings and the more complicated engineering structures. Contractors rarely initiate or finance projects, or produce buildings to sell or to operate for income. The volume of operations of architects, engineers, and contractors is subject very little to their own control; they do as well as they can in the matter of maintaining permanent skeleton staffs, hoping for reasonable continuity of work. Many contractors also have considerable capital invested in construction equipment, much of which may lie idle a good part of the time.
Large general-contracting organizations employ specialists called expediters, whose job it is to schedule the ordering and delivery of all materials and prefabricated parts and the rotation of the various trades employed on the projects. Very often representatives are sent to factories and fabricating plants in order to guard against any unnecessary delays; time is money on a construction project. Here is a modern assembly-line process, more complicated than Mr. Chrysler’s, which must be organized anew for each job, and which rivals in efficiency any modern industrial process when extraneous factors, such as financial, legal, or labor difficulties, do not interfere with its proper functioning. During the first World War, when army cantonments, industrial housing, and other construction requiring speed were required, the government called upon the services of executive heads of a number of the big private contracting organizations to do these jobs.
Mechanization of processes has gone fairly far with respect to excavation and material handling, and there has been an increase in shop prefabrication. Low unit costs have always been a factor in large-scale buildings, probably counting most in factory and warehouse projects; most other classes of large-scale building projects have in the past been quality jobs, planned for fairly high-cost uses, and involving a number of skilled handicraft trades.
This modern professionalized largescale construction industry has not, as yet, functioned to any great extent in the production of moderate and low-cost housing facilities. The principal reason for this has been the fact that most of the large contracting organizations have wage agreements with the unions which prevent their entering into competition with open-shop operators who have, up to now, dominated the housing field. However, when favorable opportunities have arisen, such contractors have amply demonstrated their capacity to reduce costs. To this we may attribute the notable progress that has been made in reducing unit costs of public housing projects in New York City, to cite one example. It has been reported that the room cost, including land, of the Williamsburg project, built under the Housing Division of PWA, was $2296.50. The more recent Red Hook project, built tinder the USHA program, was constructed at a room cost of $1223. This was produced by the New York City Housing Authority, under the chairmanship of Alfred M. Rheinstein, a general contractor of high reputation. While simplification of design and elimination of unessential luxuries contributed greatly to the lowered cost, a big contribution was made by the successful bidders on the job, the George A. Fuller Company, whose technical staff spent months of research in cost-cutting methods before placing their bid. The Cauldwell-Wingate Company of New York built the Queensbridge project at a per-room cost of $1128.
III
According to the census of 1930, 76 per cent of the family dwelling units occupied by American families were single-family houses, 12 per cent two-family houses, and 12 per cent multiple dwellings. Only a small fraction of the multiple dwellings were very large buildings, the average number of family units per building in 1930 being slightly under six. While many operative builders have produced quantities of small houses for sale, most of their building operations have not involved any really large number of new buildings in any particular year, nor any great degree of continuity of operations. In the year 1938, fewer than 350 builders or building companies in the entire United States produced thirty or more houses each. Considerable numbers of the single-family houses that are produced for sale or rent are erected on the basis of one house per operation.
Consequently, most housing facilities have been produced by the small-scale construction industry, which dates back to the beginnings of man-made shelter and, in respect to construction methods, has changed but little until quite recently, although for some years progress has been made in such accessories as plumbing, heating and lighting equipment, and other conveniences and comforts. Since the industry consists to such a large extent of small individualized operations, material and equipment purchases are generally on a retail basis. Even where stock plans are used, variety is often sought in external appearance, aiming at the effect of a custom job. The small-house builder has frequently been a boss carpenter or graduate from one of the other handicraft trades; he may have been highly competent within the range of handicraft production of small houses, but only rarely had he anything approximating the professional technique of the architect, the engineer, or the large-project contractor. Even in this field, there is at present a great striving toward improved technique, and some real advances have been made; builders are giving measurably greater values for less money in small houses than they were able to do ten or fifteen years ago.
The operative builder who produces small-house developments for sale has been, for the most part, a land speculator, a small-lot subdivider. As, during the evolution of urban communities, it. became increasingly difficult to sell building lots, the addition of houses was made in order to sell the lots at a profit. This speculative technique was carried into the apartment field. Few builders of apartment houses have produced them with the intention of owning and operating them for income over an extended period of time, although they have frequently held them until they were fully occupied with paying tenants before selling the properties to investors, such sales usually being made in flush times when rental rates are high and current income seems to justify a high valuation of the project.
While the restricted residential development of the higher valuation has existed for a long time, the essential economic value of planned community developments in the moderate-price class, providing housing accommodations with a preconceived relationship to school, transportation, and social facilities and employment opportunities, has received general recognition only in recent years. With knowledge of such examples as Radburn in New Jersey, Chatham Village in Pittsburgh, Colonial Village and Buckingham Community in the suburbs of Washington, operative builders in our metropolitan centres today advertise community features just as emphatically as they advertised brass pipe, copper gutters and downspouts, and similar improvements fifteen years ago.
Thus far, large-scale production of single-family houses for sale has not developed to a degree comparable with what has taken place in England. Perhaps it is a question of giving this kind of business more time to develop; some housing students even consider it unsuited to our economic setup. We have expected it to come about through some spectacular invention of a patentable house to be rolled off an assembly line. When this happens, if it ever does, it will be in response to a market demand and the possibility of quantity orders from the field.
While large-scale production of small houses has not been the ruling procedure, it has existed for a long time. To cite only one example, Mr. John H. McClatchy of Philadelphia was an apprentice in a company that was building six hundred houses a year as early as 1894; he has been continuously in the housebuilding business for himself since 1900, having built and sold approximately ten thousand houses. About 80 per cent of his houses have been of the Philadelphia row type, and most of them have been in the range of what sells today for five to six thousand dollars. Along with his ten thousand houses, he has built up in his own community an exceptional reputation for integrity and honest value in his houses. There are today numbers of companies in the business of producing single-family houses for sale. Up to the present time, however, the cyclical swings of building demand and the fluctuations of costs have been so great that it has not been possible to regularize production programs or to operate on other than a hazardously speculative basis.
The small-scale building industry has not generally commanded any considerable amount of working capital, has had no opportunity to develop modern research, no real bargaining power in the material or labor market. It is not yet in any important sense a modern business; in certain important respects it is an archaic survival of ancient and mediæval construction techniques and nineteenth-century small-business management concepts. However, the concentration of population in metropolitan areas, population decentralization within these areas, lowered interest rates, and improved financing methods — all are tending to eliminate speculative factors and to create more concentrated and more stable housing markets in the lower price ranges. These conditions favor development of small-house production on a regularized business basis and invite men of high technical competence into the field.
IV
While real-estate speculation has been conspicuously present as a motivating force in the large-scale construction industry, it has not so dominated it as to exclude business considerations. Factories, office buildings, department-store buildings, hotels, large apartment projects, and the like, have had to proceed from careful analyses of their potential earning power as business enterprises.
There have been noteworthy examples of large-scale enterprise in the housing field. The Fred F. French group of companies has produced more than $100,000,000 worth of rental housing accommodations in the City of New York. The affiliated companies of this organization have included a holding company, a financing company, an architectural planning organization, a construction organization, and a management company to operate the properties. The Queensboro Corporation, also of New York, has produced more than $50,000,000 worth of rental housing accommodations, although it has, in contrast to the French organization, let out its construction on contract. The J. C. Nichols Development Company of Kansas City, the River Oaks Company of Houston, and the Roland Park Company of Baltimore are examples of well-capitalized companies which have produced planned communities of high quality as a matter of continuous operation over a considerable period of years; their projects have consisted principally of single-family residence properties. These outstanding exemplars of housing conducted as a regularized business have until quite recently operated in the luxury housing field, where they found their greatest potential market. They have all recently engaged in lower-priced operations, consisting both of rental projects with FHA-insured mortgages and of individual houses for sale.
In addition, there are such familiar examples of rental housing for middleincome families, undertaken on a strictly investment basis, as the projects of the City and Suburban Homes Company of New York, the Washington Sanitary Improvement Company, the Washington Sanitary Housing Company, Chatham Village in Pittsburgh, and some of the limited-dividend projects under the program of the New York State Board of Housing. These projects have, to a considerable extent, provided the pattern for the large-scale rental projects that have been and are being currently undertaken with FHA-insured mortgages.
The essence of investment housing is that it is undertaken for the sake of operating profits and equity appreciation over the years, rather than with the aim of a speculative profit from a quick sale. The management of housing enterprises for rental income is a continuing business, entirely different from housing construction which, for a particular project, is a one-time operation. Consequently, there is no fundamental necessity for the same business organization to play the dual rôle of housing constructor and housing operator. The incentive to develop such a dual business would come from a desire to provide continuous construction opportunities through setting up financing and operating companies as affiliates to a construction company. It is very interesting in this connection to note that the demand for housing construction must come from the real-estate field, as it always has. The basic difference in the situation is that investment and property management considerations have begun to outweigh speculative considerations in the formulation of building demand.
Earlier investment housing projects were mostly financed with the conventional 60 per cent mortgages, though two important ones, Chatham Village in Pittsburgh and the earlier Metropolitan Life Insurance Company project, were wholly owned by 100 per cent investment of institutional funds. The new Metropolitan project, Parkchester, now under construction in the Bronx, New York City, also wholly owned, will be the largest single-rental housing project in the country. It will cover 129 acres; will contain 51 apartment houses with garages, five theatres, two store buildings, and a central heating plant, a total of 59 buildings; is roughly estimated to cost $65,000,000; and is planned to accommodate 12,269 families in suites of varying sizes. It is perhaps significant that this project has engaged the talents and services of the architects, engineers, and builders of the Empire State Building. The story of its cost economies and how they will be reflected in rent scales has not yet been made public.
The Federal Housing Administration’s plan for insuring mortgages on largescale private-enterprise rental projects thus found already in existence a pattern of investment housing, a construction industry entirely competent to build on as hirge a scale as needed, and a ready supply of mortgage money. Although the life insurance companies were a little slow in taking up these loans at first, they are now ready to make almost any rental-housing loan that meets the requirements for FHA approval. As of December 9, 1939, mortgages on 293 rental housing projects, amounting to $133,217,250, had been insured by the Federal Housing Administration.
One of the earliest of these projects, Colonial Village in Arlington, Virginia, has proved so sound and profitable that it was refinanced in 1939 without mortgage insurance, the new mortgage being taken by the New York Life Insurance Company, which was the original mortgagee. The principal obstacle to more rapid progress in large-scale rental housing, therefore, has not been absence of mortgage financing; there is as yet a dearth of men and money willing to go into the business of selling shelter service on a long-term basis, making a reasonable income return over the years, and earning an appreciation of equity values. The big need in this field is equity financing and education as to the character of investment opportunities offered.
V
The speculative urge to real-estate and construction activities was in the past largely activated by rapid population growth, urbanization, railroad and highway construction, industrialization generally and the evolution of the automotive industry particularly, and the other factors that produced the phenomenal rate of economic expansion this country has enjoyed. Fundamental changes in the rate and character of economic expansion have taken place in recent years which reduce very materially the opportunities for speculative exploitation of real estate. In addition to a diminished population pressure, the automobile and the hard-surfaced highway have effected revolutionary changes. The daily cruising radius of the average man has been increased manyfold and the potential profits of congested land occupancy have been greatly diminished.
As a consequence of these changes, which are the phenomena of a maturing industrial economy, real-estate concepts have undergone very considerable alteration. Generally speaking, the period of speculative exploitation is over and we have moved into the management period. Large real-estate firms and companies which have done well during the depression years are the ones which have developed highly competent management departments. I am sure that in many local real-estate boards the management groups are today stronger than the broker groups. There are also changed attitudes toward appraisals and mortgages. Appraisals on the basis of capitalized income rather than anticipated sale price have come to the front. Realestate men are saying generally that practically all mortgage contracts should provide for periodic amortization. This last is highly significant; it recognizes that the once-popular process of renewing mortgages indefinitely so that transfers may consist only in swapping equities is no longer sound or desirable, and that continuous reduction of indebtedness out of property earnings is essential.
In the mortgage-lending field, changes in concepts and practices are notable. The emergency refunding operations of the HOLC effectively put a bottom to real-estate deflation and a ceiling to the volume of foreclosures. The FHA has popularized the long-term high-percentage amortized mortgage, has tended to make interest rates and lending procedure uniform throughout the country, and has already made a large contribution to reduction of the cost of financing housing properties. These agencies have assisted greatly in transforming the home-mortgage system from a pawnbroking to a long-term credit system. FHA mortgage insurance on large-scale rental projects is, in addition, promoting investment housing.
If we view all these trends in construction, real estate, and mortgage financing in the proper relationships to each other and to their economic background, we get a picture of a basic economic activity going through a highly significant evolutionary process, its very important changes taking place in a comparatively orderly manner, and progressing at a rate that is, viewed in proper perspective, quite satisfactory. There can be little doubt of continued technical progress, if legal, financial, and economic obstacles to cost reduction can be overcome. The problem of producing better houses for less money is principally the problem of
(1) Perfecting financing mechanisms;
(2) Promoting investment housing;
(3) broadening opportunities for largescale projects;
(4) Gradual removal of such legal impediments as high foreclosure costs, high costs of title search and registration, obsolete building codes, inequitable taxes, and the like;
(5) Improving labor relations in the building industry along such lines as the uniform work week, simplified labor organization with possible amalgamation of related craft unions, elimination of jurisdictional disputes, and, possibly, preferential wage scales on lowan d medium-priced housing.
Establishment of continuous employment and an annual wage in the building industry is not included in this list. Such a development would be highly desirable, but I believe consideration of it is premature at this time. It may eventuate as the evolutionary process develops large-scale housing companies with reasonable continuity of operations.
One very important means of creating new opport unities for large-scale bousing projects can be adopted by state legislatures. They could enact laws permitting the chartering of special franchise corporations which could use powers of eminent domain in assembling property in blighted urban areas, in order to rehabilitate and reconstruct those areas. Thus would private capital and private enterprise be invited into the field of slum clearance, which should be projected separately from programs of providing subsidized housing for low-income families, but coordinated with such programs. Bills to effect these purposes were introduced last winter in Illinois and Michigan; one is being prepared for introduction in New York at the next regular legislative session.
Consolidation of federal financing agencies, as effected in last summer’s reorganization plan, is a logical step to be taken in perfecting a national mortgage banking system. In the course of consolidating the actual functions of the several lending agencies, doubtless some legislation will be needed for defining and clarifying functions and, possibly, for broadening their scope. Thus far, provision has been made for facilitating mortgage lending in the housing field; many people believe there is a need for similar improvement in financing nonresidential property.
There is another whole field of construction activity to which the Federal Government has given enormous financial assistance in recent years, entirely on the emergency basis — the field of public building and engineering works. Great confusion exists in the public mind as to the soundness of the public-works financing we have had. There is reason to suspect that state and local governments have been all too willing to unload an undue portion of the financial burden on the Federal Treasury and to keep it there as long as possible. I do not know of any recent survey that would indicate the possibility of revival of the municipal bond market to a point where all needed public improvements can be properly financed. Now that there is also in effect a consolidated plan for works agencies, there should be a comprehensive objective inquiry into the tax and credit resources of state and local governments to determine a proper long-range publicworks policy for the Federal Government.
Another field of capital financing indirectly related to construction, said by many people to be inadequately served today, is the financing of small and medium-sized businesses. Improved machinery for such financing might result in some increased construction of small and medium-sized commercial and industrial buildings. If it is true, as some people have claimed, that there is today no adequate provision in our financial machinery to cover this field, the fact should be made clear by an impartial study and the problem met by carefully considered recommendations. I do not profess to know whether this need can be met best by relaxing present restrictions on investment or by creating new financial machinery, or both.
In view of these needs, in view of the fact that the depression was characterized principally by a breakdown in the mechanisms of long-term finance and also of the fact that there is today an inadequate flow of money into capital investment, I am inclined to think that further adjustments are called for in the field of long-term finance. It does seem to me, however, that the time is past for piecemeal emergency jobs or for major legislative enactments in the field of banking, or in finance, based merely on proposals of public administrative officials or governmental advisers, without the fullest possible consideration of the points of view of private finance and private business. Perhaps the survey being made by the Senate Committee on Banking and Currency will be of the comprehensive and objective nature that this situation calls for. It seems to me that such a survey should include analysis of the workings of regulatory agencies, as well as of lending and investment banking agencies and of the municipal bond market. To accomplish this purpose, for some time there has been advocated the setting up of a joint Congressional committee patterned directly after the National Monetary Commission of 1908, generally remembered as the Aldrich Committee. It was this commission whose studies resulted in the creation of the Federal Reserve System. The proposed National Long-Term Credit Commission, — or, in lieu of it, the Senate Committee’s survey, — paralleling the deliberations of a similar commission to study federal, state, and local taxes, could accomplish tremendous results in completing necessary adjustments, supplying any new instrumentalities of finance whose need is fully demonstrated, and removing such obstacles to further recovery as may exist by reason of governmental restrictions or inertia of banking institutions.
VI
Governmental policies that look to establishment of general confidence in the future and to encouragement of longrange commitments by private capital are, at the present stage, of primary importance. If I had anything to do with framing policies for the Federal Government, I should recommend: —
(1) Removing obstacles that hamper expansion of private productive enterprise and private investment, thus increasing employment and purchasing power for shelter;
(2) Perfecting the consolidation of lending agencies that has been started;
(3) Studying objectively and comprehensively the long-term credit needs of the country;
(4) Setting up a commission to study federal, state, and local taxes and credit resources;
(5) Determining, as one result of the above, on a long-range public-works policy;
(6) Abandoning emergency measures and concentrating on furthering sound evolutionary trends in real estate, mortgage financing, and large-scale housing production;
(7) Developing a sound policy on public housing;
(8) Encouraging research and educational programs in the housing field, in both technological and economic aspects, an excellent start having been made in two new bureaus of the U. S. Department of Commerce;
(9) Using the good offices of the government in promoting better labor relationships in the building industry;
(10) Encouraging simplification of the state laws concerning real-estate taxes, transfers, foreclosures, mortgages, and removal of other legal obstacles to reduction of costs;
(11) Using every proper means for modernizing local building codes and removing onerous requirements and restrictions.
I firmly believe that the refunding operations of the HOLC, the improvement of the Home Loan Bank System, and the institution of the FHA accomplished more for a sustained recovery than most of the other activities of the government since the present Administration came into power. There has been a continuous increase in residential building since 1934; the volume of residential expenditures in 1939 was more than five times the 1934 volume, and the prospect for further increase in 1940 seems good.
The construction industry has suffered from internal frictions and abuses; but it has achieved masterpieces of architectural and engineering skill through overcoming tremendous obstacles, most of them peculiar to this industry. Today’s problem is to remove or ameliorate the many remaining obstacles, in order that the great technical and managerial skills of the industry can function to their utmost capacity and make their fullest possible contribution to national prosperity and social well-being.