Seismic Upgrade, Moral Hazard and Gentrification

While there has not been a recent major earthquake in the Pacific Northwest, research has proven that the area is seismically active. Building codes were established to withstand earthquake damage and new buildings have been held to this higher standard. However, there is a substantial portion of the commercial and residential buildings which have not been retrofitted to date. This cool interactive map shows earthquake risk in Portland based on the age of construction… and the pervasive color “red” is bad.

While wood frame houses may fare reasonably well in an earthquake, the highest risk buildings are large structures made of brick. The term for these sorts of buildings in Portland is “unreinforced masonry” or URM for short. They are the buildings that give Portland all of its “character” like classic old apartment buildings and multi-use commercial and residential structures. Many schools, churches and community centers also fit in this classification. This article estimates that it would cost $4.6B to retrofit the remaining URM buildings in Portland. They also note that at the current rate of upgrades, it would take 100 years to complete the effort.

I read a different local article and an engineer put it most pithily

The value of an URM building is zero

I do see some building owners “biting the bullet” and doing a seismic upgrade. When I look out the window of my building I can see many of the older buildings that gabapentinoral have been upgraded in this manner, and many that have not. Here is a construction notification for a nearby 5 story masonry building that is being retrofitted.

There are two threads here that are most interesting to me:

1. How do owners of apartment buildings, where residents will most certainly be at higher risk of death during an earthquake, sleep at night? They talk about the costs of retrofitting as if it is an abstract event; but not doing so creates an economic externality of human misery that apparently they value very little if at all

2. Any mandate the city or region employs on URM will almost certainly drive gentrification because owners will have to invest in higher cost apartments and in turn raise rents; ironically, the city’s mandates on re-use and burden of oversight rules will make the future rent increases even more burdensome

The likeliest solution is some sort of “muddling along” in the near term. For valuable commercial and high rise residential locations, the inevitable commercial upgrades will drive the URM upgrades. For apartment buildings, the future is much dimmer, because if you are a landlord owning an URM building, you can’t raise and invest the money if your local competitors are just going to “accept” the URM risk (on behalf of their residents, ironically). In fact, it makes no sense at all to invest anything more than the cosmetic minimum in these URM buildings, which will move them down the road of being slums at some point in the future.

Cross posted at LITGM

10 thoughts on “Seismic Upgrade, Moral Hazard and Gentrification”

  1. I believe – at least for public buildings, California has BTDT. We used to have a lovely high school from the 1930s- California Jr High, and it had loads of character. All but one small building was torn down replaced by something sterile.

  2. Moral Hazards: Governments in general, and especially governments where the same party has been in power for over a couple of decades do not believe in reality impinging, consequences, or that anything can’t be postponed to a future that will never happen. Add in that the one common belief in American culture today is that there are no consequences for actions or inactions, and they feel no moral hazards. And when things happen, they accept no blame and expect someone else to pay for what happened.

    The attitude of the government constrains the rules they set on private enterprise. They don’t want to fix the problem. They want there to be no problem that can be blamed on the government.

    Dissembling is also a major tool of government. Granting that we do not have the seismic problems that Portland has, my small Colorado town has buildings dating back to just after the Civil War on its main drag. Codes have been updated, and they frequently do not meet them. They are grandfathered for most purposes, until they change hands.

    Our city fathers are mendacious cloth containers of excrement. They will promise a prospective new owner that they will give a variance allowing a term of years to bring a building up to code. Usually it is a matter of electrical or plumbing. This holds until the signature on the bill of sale, at which point there are demands of instant compliance with all codes before any business can open in those buildings. And if there are existing lessee businesses, they have to shut down. And our city fathers cannot understand why we have so many empty buildings and storefronts downtown.

    8 miles down the road is a smaller city, that was hit even harder than we were by the Obama Depression. The town and downtown are about the same age as ours, maybe parts of it going to the 1880’s. They are in a business rebirth.

    Same thing with the grandfathering. Except that they are telling the truth about the variances. The mayor, the members of the city council, and the city manager each will personally visit every business downtown monthly [n.b. I know the city manager and several business owners with storefronts there, some of which are business refugees from our main street] and ask if there is anything the city can do to help them. The building inspectors and code enforcers are instructed to work WITH the building owners and each other to help them figure out what needs to be done in what order, and to do it without bankrupting the business.

    Smaller town, yet only a couple of outlying storefronts are empty. Downtown on one block it is the cosmopolitan food center of our county. It has a good steak/prime rib place, a Sushi/Japanese place, an Indian/Nepalese place, a gourmet bakery, and another that just changed hands because the owner retired and I am not sure what the new owner is remodeling the place into. All opened in the last few years, and all are doing well.

    I’m pretty sure that the government in Portland has habitually treated business/real estate owners in Portland as a cross between sheep to be sheared and enemies to be wiped out. And businesses have to expect that and react accordingly. Which means that nothing gets fixed.

    There is no easy fix for seismic upgrades, but starting with the city treating them like assets instead of enemies would help. I am not familiar with Portland, but my first thought would be using limited tax abatements and zoning variances as carrots instead of only using sticks might be a start.

  3. How is this anyones problem? The tenants accept the lower rent for the increased risk. Just like car owners accept a lower safety factor in a cheaper vehicle. The market in action.

  4. “They will promise a prospective new owner that they will give a variance allowing a term of years to bring a building up to code. Usually it is a matter of electrical or plumbing. This holds until the signature on the bill of sale, at which point there are demands of instant compliance with all codes before any business can open in those buildings.”

    Any business owner who doesn’t get this in writing is insane.

  5. Mr. Black,
    I think you have it essentially correct. There is very little moral hazard in this situation because seller and buyer share the risk. One could argue that there is asymmetric information between the seller and the buyer, but a renter should and can do a little homework to find out the risks. But they are not educated that this is their personal responsibility. There might be a role for government in providing objective public information on such risks, but we all know how it has no idea what we want or need or can absorb. Private sources do based on demand.

    The lack of choices is probably increased by the barriers to entry erected by the government in requiring all available upgrades be included in new construction rather than allowing the entrants to decide the level of risk they are willing to accept based on the market. SB’s comments on the actual functioning of the government are correct and the conditioned attitude of the public is the real source of the moral hazard of the situation. “What, me worry? Big Brother is taking care of all my safety and risks.”

    The truth is that government reacts almost exclusively ex post facto. After the earthquake happens, the blame will be placed on the greedy builders and landlords who failed to build and offer only risk free bunkers as living and working environments. Followed by “This must never happen again.” Followed by more accumulated government regulation power, staffing and budgets. Followed by more moral hazard conditioning of the public to assume that BB has ensured their personal safety. “Wonder why housing is so unaffordable and ugly and why local taxes so high around here? Why are people moving away?”


  6. }}} How do owners of apartment buildings, where residents will most certainly be at higher risk of death during an earthquake, sleep at night? They talk about the costs of retrofitting as if it is an abstract event; but not doing so creates an economic externality of human misery that apparently they value very little if at all.

    I’m with Mr. Black. I suppose an owner ought to call in a contractor for an assessment, figure out the numbers, and identify the concern to his tenants, asking them whether they want to live with the risk or if they would accept the needed rent increase, but that would be the limit. My money is that most will reject the rent increase…

  7. In the real world, pre-purchase inspections are not worth the paper they’re printed on. You would be horrified to learn just how much the average inspector misses, or what winds up being found after purchase.

    The really big killer in the next major earthquake is not going to be collapsing masonry buildings, but the supposedly “properly built” structures that were bolted to their foundations through corrosively treated sill plates, and which have since corroded out their anchor bolts. And, again, this is one of those things the environmentalists have foisted off on us, with the changes to the treatment for wood.

    Right now, most of the housing stock built from the 1970s on are assumed to have decent frame-to-foundation connections. Friend of ours is a retired contractor out on the west side of the Cascades, and he had an interesting experience when he went to remodel his own home, one he built for himself in the 1980s. Due to the corrosive nature of the wood treatment used, he discovered that every single anchor bolt in his foundation was corroded down from a 1/2″ or 5/8″ bolt to something narrower than a pencil lead. He retro-fitted every single bolt in his house, but when he went back and looked at the several hundred homes he’d built over the years, his lawyers basically told him that he’d be insane to raise the issue. So, he didn’t–But, he has essentially shut down his business, and done what he can to separate his finances from the risk. And, understand this: Everything that he did was done as a conscientious builder, following “best practices” in the industry: The problem is that nobody considered that the interaction of the treated plate material under all those houses with the anchor bolts would be a problem, and hot-dipped galvanized bolts simply were not required.

    Come the day, there are going to be a bunch of houses around the Northwest that go slip-sliding away, and there’s a really bad set of assumptions going about the longevity and safety of these anchor systems under the higher humidity levels prevalent up here. Based on what I’ve seen doing remodels, and other things, I’d personally want to check things like that out in anything I was living in, on that side of the Cascades. The thing that was most scary, talking to our friend was that he only figured out he had a problem when he went to remove the bolts–They looked fine, visually, but when he went to remove them from the foundation wall after cutting out the floor and wall where he was adding on, bingo… The sill plate came off in his hands, with the bolts just sitting on top of the plate. Your mileage may vary, and his house sits in a very wet area, but, still… That’s some scary stuff that I don’t think “the authorities” are taking into account.

  8. Kirk,
    Seems like your concern is likely nation wide. I just built a stand alone equipment garage on a slab using stick lumber. Treated plate and raw mild steel anchor bolts were used. This is the code here in Texas and as far as I know pretty much the professional standard. At my age it will out last me, but I really thought I was building a 100 year building and living in one as well.

    The fix for this seems likely to be about the equivalent of interior flood damage in complexity and cost. I’m assuming one must pull interior sheet rock and hammer drill into the slab to install expanding, corrosion treated anchor bolts on all perimeter walls. What a mess that is going to be. I guess you know you have the issue when a hurricane or earthquake moves the building off the slab (at least partially) and you find the plate gone with failed anchors.

    I have never heard of this issue, but it seems to be a reasonable concern.


  9. Most renters have shorter time horizons than most owners do, for good reason. If you are leasing year to year why would you care about the risk of outlier events that might occur once every few generations? People on the low end probably have more pressing concerns, and one of the benefits of renting is that you get to offload most of the long-term outlier risks of property ownership to your landlord. The average renter is probably more likely to prefer cheaper rent over increased safety against infrequent earthquakes. So, it’s unlikely that renters will want to share the costs of structural improvements with owners. A corollary is that developers will tend to prefer to build high-end over low-end rental housing as the costs are similar and the profits greater with higher-rent housing. It was always like this, and for these reasons lower-$ rental housing will tend to be older and less safe (also against fire and other hazards) than will newer, more-expensive rental housing. To put it differently, the revealed preference of low-income tenants is for lower rents over greater protection from unlikely disasters that might not cost them much personally.

    The more risks you require property owners to hedge against, the higher rents will be. It might be better to allow property owners and renters to make their own risk assessments and tradeoffs individually, as opposed to mandating standards that increase costs and reduce choices for people on the low end of the income distribution who are the supposed beneficiaries of such standards.

  10. Death 6, it’s not a concern in most parts of the country. Hell, it may not even be a concern in some cases in the area I’m talking about, assuming the moisture is kept at bay. It just depends on factors like landscaping, and how much space you’ve left between grade and the top of your foundation. Code requirements at their bare minimums are probably inadequate in a lot of situations.

    Quick way to check? Have yourself a crawl under your house in the crawlspace, assuming you have one. Find an anchor bolt in the dampest area you can find, and apply a socket wrench. If your tightening of the nut breaks the tie-down bolt, and you discover a rusty mess where there should be a bolt…? Well, now you know you have a problem.

    Fixing it is another issue; I believe Simpson makes a retro bracket you can attach to the foundation and then to your joists and floor system, but I would highly recommend finding a PE to do a real structural analysis of your individual situation, should you find corroded bolts in your foundation. Hell, on an older house, I’d check to make sure you even have them–For years, they just used to set nails into the top of the foundation at pouring, upside-down, and pound the sill plates down onto the nails. Needless to say, that is no longer considered “best practice” in the industry.

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