When Capitalists Build Too Much

Rachel Weber

Real estate developers aren’t just gentrifying residential areas — in cities like Chicago, they’re also building lots and lots of office buildings, often totally unnecessary ones. Understanding why can help us work to build just cities for all.


Interview by
Adam Kader

Rachel Weber’s From Boom to Bubble: How Finance Built the New Chicago examines speculation and overbuilding of commercial real estate, focusing on Chicago in the 2000s. The book is based on ethnographic research of key real estate actors, pairing interviews with an analysis of financial structures and public policies that power the building (and overbuilding) machine.

Developers do not just respond to demand from potential occupants, Weber argues. Buoyed by an abundance of capital made possible by deregulation and the invention of new financial instruments, and pushing the idea of “obsolescence” of older buildings, the real estate sector actively produces demand. “Real estate” is a collection of individuals working for institutions: brokers, advisers, market analysts, appraisers, building managers, attorneys, and developers.

Weber’s insight is that these private sector actors create and operate within their own professional culture that rationalizes and sustains irrational practices that produce capitalist overproduction. Planners and other public sector professionals participate in this culture, resulting in urban development policies biased toward a never-ending pipeline of new construction. These policy choices include loosening construction and zoning requirements, enhancing private developments with public infrastructure investments, hyping new development with branding and place-marketing, and, of course, subsidies like tax increment financing (TIF districts).

According to Weber, in times of stagnant population, employment growth, and high commercial vacancy rates, a narrative that all buildings have a natural life that inevitably reaches an end enables the expansion of unneeded real estate. Commercial realtors lure tenants from these “obsolete,” slightly older buildings toward new, shiny developments.

Overbuilding contributes to capitalism’s tendency toward uneven development, valorizing some areas and devalorizing others. Overbuilding is a problem for municipal finances, as cities are responsible for dealing with abandoned or vacant properties and their associated public costs. Understanding the processes and actors responsible for the resulting urban environment is necessary in order to begin the work of constructing a just city.

I had the opportunity to sit down with Rachel to discuss her book and its implications in light of Chicago’s recent election of socialist council members and a new mayoral administration.

Adam Kader

Why did you write this book?

Rachel Weber

I moved here in 1998 from upstate New York, and my husband’s work put us up in a short-term corporate apartment, right downtown. Everything I was reading about Chicago’s economy spoke of weakness, and yet everywhere I saw cranes and new construction and new development downtown. Trying to understand one of the contradictions of capitalist urbanization — in terms of the real estate sector of the economy detaching itself from the productive economy or from the business cycle — got me interested in the degree to which these cycles feed off of each other. It’s hard to make these distinctions (between real estate, finance, and the rest of the economy) cleanly because so much of our economy now depends on real estate and real estate investment, but I was interested in that tension.

Also, I’ve always been interested in the idea of obsolescence and how we decide that something old is lacking in value. As somebody who collects old record albums and other people’s junk, I’ve always been interested in what we consider junked space or how actors in different markets decide that a particular building type or location can no longer generate value.

Adam Kader

Can you review what the Left gets wrong about explaining this contradiction, that economic weakness should not indicate a lot of new development, particularly new commercial development, and yet it’s still happening?

Rachel Weber

There hasn’t been a tremendous amount of attention given to this subject other than a small and sort of speaking-to-themselves group of critical urban political economists who have really taken real estate seriously — I think a lot of scholars see real estate as window dressing for bigger issues related to class conflict. Certain academics with standing, like David Harvey, got folks interested in urban issues and urban change, and as a result, into the built environment more. But even Harvey can be a little detached when it comes to the actual artifacts of capitalist production and the feeling of being on the street. That’s important to bring back into our work.

The Left just assumes that there are these structural reasons why cities morph and neighborhoods change, and nowadays there’s a tremendous amount of attention to gentrification, which is a word I shy away from. The Left has really been attracted to shiny objects, to shiny buildings, and saying “oh, this is gentrification.” But I don’t feel comfortable using that language myself because I see gentrification as just being a reflection of larger processes of capitalist urbanization.

There’s a preoccupation with gentrification, which is primarily about residential development. But I look at office buildings, downtowns, and commercial space. You might think, “Why is that important to our struggle?” We’re seeing similar trends in commercial districts — the “renewal” of these districts and the attraction of certain kinds of capital, which can also lead to displacement. It’s displacement of tenants and small businesses, which are really critical to the functioning of our entire economy. There are comparable issues of displacement and rapid appreciation, but there’s also a larger scope of impact in that the downtown commercial area is the place that holds the majority of economic activity in an urban region, and how that is accommodated physically has implications for the entire region.

I’m not disagreeing with David Harvey and other critical political economists about the drivers of change and the impacts of change, but my work adds attention to the actors and people and institutions and laws and regulations and financing tools that allow these structural changes to take place. The number of people working in real estate in a place like Chicago is huge: everybody from the assessor to the broker to the real estate lawyer to the big Wall Street firm who’s hoping to securitize these loans that the private equity funds use. I ask, how do we make sense of their activity as a sector?

Real estate is a distinct kind of business with its own incentive structure, its own highly social, very networked group of actors and professional associations. There’s a value in learning how that sector operates, and which dynamics (financial, political) affect it.

Adam Kader

Can you explain the prevailing discourse that you describe about obsolescence? What are these forces at work that enable the problem of overbuilding and overdevelopment that you write about?

Rachel Weber

It’s similar to what Marxist critics talk about in terms of accumulation crises. Overbuilding is the physical embodiment of an accumulation crisis in the broader economy, but in the real estate sector. It’s not as if all these folks who work in real estate are just brainwashed, but there are certain precepts like obsolescence that they hold on to, which may have some basis in reality and in history. Those precepts exist to enable their professions to make money and to profit off of change in the built environment.

This goes back to Neil Smith’s idea of the rent gap, that capitalists seek out and construct differential rents, the possibility of taking a building that is underutilized given the potential value of its location and investing in it and converting it, and then being able to capture the difference in value. This is the basis of tax increment financing (TIF) — we’ve got land that is not taking advantage of its “highest and best use,” and if the public or private sector invests hard in that land, you can go from zero to sixty almost overnight, in terms of the returns you’re generating from that land. Capturing those differential rents is what motivates the real estate industry.

But you come up with discourses that stigmatize space because of the whole idea that you should buy low, sell high. How can you suppress the value of a property even lower than it may already be? How can you construct it so that you can turn it into something very high value in order to capture that difference?

It involves lowering it on the low end and raising it on the high end, and I argue that obsolescence allows real estate actors to do just that. It’s a value judgment, but it’s used so pervasively in the real estate industry, this concept of obsolescence, very flippantly. Obsolete means no one values it anymore because it’s old or just not right. What do you mean that a building that was built in the 1980s, that cost millions of dollars to build and had some of the highest-profile tenants in it, is now “obsolete”? I can understand a record album or something, but this massive investment suddenly is not valuable to anybody?

Architects and engineers will tell you why a building that was built in the 1980s is no longer adequate for the needs of the modern economy, and they’ll tell you how these days, office buildings don’t have as many partner offices; they have more communal, collective space, and there’s more of a trend toward this “hot desk” idea, where people come in, come out. They don’t need an office with a door. They want more light. There’s just a different aesthetic.

You’d think from the way real estate brokers talk that all these 1980s buildings had been afflicted with some kind of terminal disease. My informants used really harsh language to describe them, and then they would say, as evidence, “Look at their vacancy rates, no one wants to be in them anymore,” as opposed to pointing out that the tenants had been poached and offered all kinds of concessions and inducements and TIF funding to move into these new buildings across the street. They made it seem like it’s just that preferences have changed, there’s nothing we can do about it, and we have to build more buildings because these 1980s buildings suck. Paying attention to these kinds of very common discursive tropes allowed me to question one of the real estate industry’s explanations for why all these new buildings had to be built.

Adam Kader

You explain how Chicago, in particular, has a reputation as a place where you can’t just drop in and invest in a building and then leave. You have to navigate the existing associations, affinities, and clubs. To what extent is this phenomenon that you’re trying to grapple with in Chicago, and to what extent is this just a generalized urban phenomenon?

Rachel Weber

I set out to write a book about urban change more generally, but I had so much good information about Chicago. The dynamics that I’m describing are to some extent generalizable. You find a less developed, more disorganized real estate industry in other cities. In other cities, the degree to which you have to interact and encounter the local government is a lot less. Chicago has for decades been an active manager of its real estate assets.

There’s a case to be made for taking seriously the real estate sector as an intermediary for global capital, and you have to look at those interactions with the local state to understand which neighborhoods are the recipient of the flood of global capital and which ones are starving for it, or for any kind of capital.

Global real estate investors see Chicago and a few other cities in the Midwest as a means of diversifying their portfolios. It’s known as a stable, reliable market, where you’re not going to get the appreciation that you’d get in the tighter coastal markets, but maybe you won’t get the volatility that you also do in those markets. It’s an older city, for the United States, built out, so you’re not going to have one single project have a tremendous valuation effect up or down. So it’s known as an investment-grade city that has always had a strong core of real estate professionals, and a local government that has tried to accommodate them. I was writing about the Richard M. Daley years. I wasn’t even touching on Rahm Emanuel.

Adam Kader

What about the neoclassical economists on the Right? What are they missing in their analysis? What’s the embedded critique when you’re explaining how you see overdevelopment?

Rachel Weber

A typical neoclassical economist wouldn’t even think that overbuilding exists or that it’s a problem. They think that, at least in the long term, the market works itself out, prices adjust — sure, there may be a little oversupply, but that will cause prices to go down. New buildings will be compelled into existence when there’s a need for them, and they’ll be demolished when there is none. There’s a natural process to the built environment. Obviously, I don’t agree with that kind of perspective as I think real estate markets spend a lot of their time in disequilibrium, whether there’s an undersupply and it’s forcing prices up, or there’s an oversupply.

But I don’t think the oversupply of commercial space, particularly the period I was looking at in the 2000s, had the effect of depressing prices. Another thing that neoclassical economists haven’t taken that seriously is the issue of “price stickiness” because they believe in the idea that supply and demand always calibrate out. The argument we hear from the pro-growth advocates is that, like in (the Chicago first-ring western suburb) Oak Park, the reason why prices are so high is because there’s restricted supply, and if we just allow a bunch of new towers to be built, prices will deflate, everybody will be happier, and it’ll become a much more inclusive community if we build more. The problem with that argument is that what is built is often very high-end housing, and so new construction often inflates market prices. That goes against the law of supply and demand.

Adam Kader

So, accepting that overbuilding is a problem, talk to me about the stakes at hand. Why is this something that the Left needs to be concerned about beyond displacement in the residential markets? Why should the Left be concerned about overdevelopment of commercial space?

Rachel Weber

For growing places, overbuilding may not be such an economic problem (although it still may be an environmental one), but in places that have relatively stagnant populations and economies or are even declining, it can distort the location of public and private investment. You can put up all these new buildings and not have much tenant interest in them, but the public sector still has to service these places and still has to provide infrastructure, like building new schools for the people that might come. Overbuilding redistributes resources in ways that don’t necessarily make sense.

From the perspective of the global economy, the overbuilding of the real estate sector is a serious problem; it was partly to blame for the crash of 2007 and 2008, where all this household wealth, most of which was in their houses, was wiped away. A lot of places still haven’t recovered from that crisis. Some cities, like Milwaukee or Fresno, they haven’t gotten back to the property values that they had before the crisis. As a result, they’re in pretty desperate fiscal straits — so overbuilding can be a fiscal stress on the public sector. And then other claims made on scarce public sector revenue, things that are important to urban life are ignored or disinvested in, austerity is imposed, and cuts are made.

In some ways, Chicago’s overbuilding of the 2000s doesn’t look so bad in 2019 because many of those buildings were able to find occupants after the crisis as corporations moved from the suburbs to downtown Chicago. There was some economic growth, although it was mostly poached from other parts of the region. Moreover, it’s still the Class B buildings from the 1980s that have the highest vacancies. There’s overbuilding, but the newer buildings are rarely the ones with the vacancies. Those buildings from the 1980s are still having a hard time. These buildings are not old enough or historic enough or architecturally interesting enough to convert to residential uses, but neither are they in demand for office tenants who can now find space in the new towers that have popped up since 2000.

Adam Kader

Toward the end of the book, you propose a variety of solutions to keep real estate in check. What are they?

Rachel Weber

One thing is monetary policy. We have had these unnaturally low interest rates, so there’s an incentive to always be borrowing and building. In other countries like Sweden and even China, when things were getting out of hand, their central banks tried to stall this process because they knew that this money was hot, and banks were just trying to get it out of their hands, and they were making loans that they shouldn’t have made. One way to stem that is through monetary policy, by raising interest rates.

But then on a local level, local governments need to be tracking the issue of overbuilding better and seeing where there might be a mismatch between population and employment growth and the amount of new space that’s being developed. The city of Chicago has not followed it. In fact, they make it worse. There’s really no reason to subsidize so much new construction, particularly in hot market areas, when private capital is freely flowing. That, to me, is just throwing fuel on the fire. So there are certainly city governments with more restraint in terms of offering subsidies and certain kinds of zoning bonuses. When the market’s going crazy, when it’s frenetic, it’s a time to demand community benefits in return from those developers.

Adam Kader

In the book, you acknowledge that the solutions you propose rest on the assumption that there is a political will for them. We just had a dramatic municipal election, with a mayor whose self-image is that she’s not beholden to any specific interests (like finance), as well as six socialist-aligned aldermen who were partly motivated by antigentrification fights. What does this mean for the future of development and the policy correctives you point to?

Rachel Weber

It’s not just Chicago. All around the country, the operations of real estate capital are becoming more obvious — whether it’s private equity funds buying apartment buildings and raising rents, or developers of mega-projects asking for hundreds of millions in tax subsidies. Urban landscapes have experienced rapid and disruptive transformations while housing costs continue to outpace wages and income.

A lot of city residents do not see themselves benefiting from infrastructure and public investment that is supposedly made in the name of a public good. It’s not surprising that the object of activism and fury is now the landlord, the developer, and the accommodating city government.

My hope is that these recent political changes in Chicago bring new scrutiny to the deal-making that passes for planning in this city. It will likely be harder to get subsidies and zoning modifications passed in city council. It remains to be seen what happens to aldermanic prerogative, that is, whether new aldermen play along or challenge projects in wards other than their own. There will need to be new ways to engage residents in planning for mega-projects and infrastructure, new sources of financial support for affordable housing developers, and new taxing mechanisms that mitigate the negative effects of building activity and redistribute some of its benefits across the city. Just making developers jump through a few more hoops is not going to dramatically change things for the better.

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Rachel Weber is a professor in the urban planning and policy department and a faculty fellow in the Great Cities Institute at the University of Illinois at Chicago. She is the author of From Boom to Bubble: How Finance Built the New Chicago and Swords into Dow Shares: Governing the Decline of the Military Industrial Complex.

Adam Kader is the Worker Center director at Arise Chicago.

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