Collective action problems in real estate

I have heard more than one person say that the most important role that a developer plays in risk management. The developer is responsible for finding a good concept, testing it for general feasibility, and then taking actions to get it built in the face of often daunting uncertainty. This requires dealing with the need to make working assumptions by establishing risk-mitigating contingency plans and protections. (An aside: I don't know if its ever been applied explicitly to real estate development, but the concept of "Discovery Driven Planning" formalized by Rita McGrath and Ian MacMillian seeks like a great way to understand the developer's process.)

Developers are well versed in dealing with market risk, credit risk and construction risk, but what about "collective action risk?" What do I mean by this? Basically, that there is a risk that the full value of a development will not be realized unless other beneficial development occurs on adjacent properties in a timely fashion. (I guess it could be called "neighborhood risk" too.) There is the potential for both positive and negative externalities from their adjacent properties, which creates a lot of uncertainty that need to be managed. It's your quintessential non-zero sum game. There are a few ways to deal with it:

• Planning: Having the area master-planned and zoned. This is still not fool-proof and most parts of the US this kind of top-down approach is not very welcome.
• Control: Own all of the properties and develop them all as needed. This control-based strategy can work, but it requires deep pockets and so is not compatible with my vision of democratic development. A related strategy is holding options on adjacent properties: cheaper but still imperfect.
• Avoidance: Build junk that can make money on its own in the short run, but does nothing for the broader neighborhood. This is the parasitic approach and is quite common. It is an integral part of sprawl: build low density crap that you can recover your investment on in a 5-7 year period, but that will need to be demolished later. It is not suitable for building dense, lasting, beautiful, pedestrian friendly communities where what is next door is critically important to the overall "ecology" and functioning of the community.
• Engagement/Value creation: Figure out a way, through collaboration, to address the collective action problem directly and eliminate risk. In some (rare) highly active areas, this happens naturally through the partnering of developers who know each other well. The problem with this is that it is basically an elitist and closed old boys club. Such networks are "efficient" in some way, but they are not creative (creativity requires diversity) and not innovative. In other words they may be operationally effective, but they do not problem solve well. So you end up with more of what didn't really work well in the first place.

What can we do to foster creative solutions to the collective action problems present in development? I see a combination of complimentary approaches that will greatly improve the situation. they all have the goal of reduce barriers to entry: making it possible for collections of investors to get into the development game and act in a coordinated fashion.

• Get little guys into the game by developing more creative financing options that allow small investors to pool resources. More people involved, especially people who have been traditionally excluded, will stimulate innovation.
• Improve information availability about land and the housing market through the creation of publicly available GIS systems that allow the easy visualization and "what if" planning by average folks to spot opportunities.
• Improve the ability to act collectively through online tools that improve the efficiency of the market. These tools should make it possible for people to signal interest, find partners, form contractual relationships, secure financing, engage and oversee contractual professionals as needed, etc. (It is important to remember that the owner/inbvestor role can be separated from the development manager role. This means you should be able to invest in projects without knowing how to get them built.)

Figuring out how to do this will make the most different in places off the beaten track. Those neglected cities and towns that have seen disinvestment and decline, usually as a the result of manufacturing jobs pulling out. These places have cheap land and great opportunities for redevelopment, but no one is willing to do work there because it would take a critical mass of folks to turn them around, and it is almost impossible to reach that critical mass without the kind of tools described above.

Imagine if it were possible for interested developers to learn about these locations, to put out proposals, find partners, and coordinate a sequenced, phased development plan that would address the problem of jobs, services, housing, office space, etc. all in the right order to maximize value creation and reduce risk? It would really be amazing. The land is so cheap in these places, we could really do very high-qality development, even for average folks, and still make good money. There is much we know about the process of the sequence and ecology of successful redevelopment. It's more a matter of being able to make it happen. (My favorite authority on the subject is Chris Leinberger, who has served as a Fellow at the Brookings Institution and written some papers for them.)

Let's get these collective action problems solved so we can really get to work...