In American suburbs, home owners are the voting majority; in cities, renters may be the crucial pressure bloc. Local officials, wanting to keep voters happy, create more and more mechanisms to restrict development: environmental impact reviews, architectural review boards, subdivision regulations, historic preservation districts, landmark commissions, building permit requirements, rent controls -- all part of the multilayered gauntlet of American land-use controls. Think of each of these mechanisms as a phantom tollbooth along the road to real estate development. Each tollbooth may have made sense on its own terms when initially enacted. Collectively, however, regulatory layering adds up to gridlock with mind-boggling costs for society.
Although they are bad for society as a whole, BANANA republics, like most forms of gridlock, offer profit opportunities for savvy investors -- in this case, regulatory arbitrageurs. As the New York Times noted a few years ago, "Some of the largest publicly held real estate investment companies say they would rather own property in Boston than in Atlanta and Dallas. Steven Roth, the chief executive of Vornado Realty Trust, says there is an easy way to explain this seeming paradox. It is difficult to build in Boston where land is scarce, residents are vocal, and zoning disputes can last years. The opposite is true in Atlanta and Dallas, 'Whenever it's almost impossible to add supply,' Mr. Roth said, "that's where I want to invest.'"
Big developers enjoy economies of scale that allow them to invest in regulatory expertise. It's the local developers who suffer most from the regulatory gauntlet.