Let the Market Fix It

After New York City, Los Angeles has the second most populous metropolitan area in the U.S. And yet, only 10% of L.A. commuters use public transportation to get to work, compared to over half of New Yorkers. With 90% of its commuters driving to work every day, it’s no surprise that L.A. has the worst traffic in the U.S. One study, from 2005, found that the average L.A. driver loses 72 hours a year to traffic delays.

While there’s no question why L.A. has such terrible traffic (because everyone drives everywhere), it is a bit of a mystery why everyone drives everywhere.

Over the years, I’ve heard various explanations, most centered around the city’s sprawl, which makes distances un-walkable, and the city’s inadequate public transportation. Of course, people also say that the public transportation is lousy and things are far apart because everyone drives. So which is it?

I recently read an enlightening article in Los Angeles Magazine that blames the problem on an entirely different culprit: parking. In particular, there’s too much of it and it’s too cheap.

As Donald Shoup, an economist, parking policy expert and the main source for the story, said, “When people pay comparatively little for something that’s expensive to produce, the result is collective irrational behavior.”

In Los Angeles, the law requires that new buildings and developments include parking spaces. The number of spaces required is largely dictated by outdated estimates whose origins are a mystery—two spaces for every residential unit, four to five spaces for every 1,000 square feet of mall, one space for every 2,500 gallons of water in a public swimming pool and four spaces for every 1,000 square feet of office space.

When L.A.’s Disney Hall was built on the location of a former parking lot in 2003, it was required to include a 2,188-space parking garage. The concert hall itself seats 2,265 people. The $110-million cost of building the underground garage, which the county paid for by issuing bonds, rivaled the $130-million cost of the Frank Gehry-designed building. And since the $9 cost for concertgoers to park in the garage isn’t enough to recoup the cost of building it, a portion of concert ticket revenues is used to pay off the parking garage’s debt.

As Donald Shoup told Los Angeles Magazine, “The garage—designed to serve the public good—instantly made the Metro immaterial to concertgoers, placed several thousand cars on the road every week, and pumped a few hundred tons of carbon dioxide into the atmosphere each year.” It also robbed nearby restaurants and bars of the potential business of concertgoers walking to and from the Hall and cut into revenue that should have gone to the philharmonic.

Disney Hall is just an extreme example of a story that has played out all over L.A, which has more parking spaces per acre downtown than any other city in the world. Laws require that parking be built, so developers build it, often at exorbitant cost, then charge drivers less to use it than it cost to build, incentivizing citizens to drive.

Midtown Manhattan, by contrast, is the most expensive place in the country to park your car, with rates averaging $41 per day. Decades ago, to comply with the Clean Air Act, requirements to build parking spaces in Manhattan were replaced with a cap on the number that could be built. As Jeremy Smerd wrote in a recent article for Crain’s, “It was the city’s first acknowledgment that garages encouraged driving.”

Rick Cole came to the same realization in the 1990s, when he was mayor of Pasadena, California. He noticed that the city’s 1920s-era bungalows were being replaced with bland blank boxes with no windows or doors at street level. Instead, the boxes had parking on the ground floor, with front doors hidden inside the garage. Like similar California-style buildings of the time (see the “Dingbat“) these boxes were designed to comply with regulations requiring two parking spaces for every residential dwelling.

Cole, in his first term as mayor, decided to test his theory—that more expensive parking means less driving, and is better for cities—by installing parking meters in a seedy, run-down business district of Pasadena. To the surprise of most, it worked!

From the Los Angeles Magazine article: “The area took off. The Gap moved in a block away from the old Le Sex Shoppe. Cole pushed his project further: Unlike other cities, Pasadena would not require businesses to build parking lots or garages. Two city-owned parking structures would rent spaces to merchants for $50 a month—a cost of $600 a year per space instead of the tens of thousands of dollars to construct one. Soon the meters were earning more than $1 million annually. Some $415,000 covered the city’s garage debt, while $700,000 went back to neighborhood improvement every year. People who once drove to Westwood on Saturday nights now visited Old Pasadena.”

Unfortunately, few if any other cities learned from the success of Pasadena. Nearby L.A.’s laws haven’t changed, and the city is still snarled in permanent traffic. In the meantime, urbanites, environmentalists and urban planners continue to chase the holy grail of the green, walkable, vibrant city. The secret, it would seem, is just to get rid of the parking.

However, Shoup, the expert, doesn’t advocate war on parking lots. Instead, he says, just get rid of requirements that developers build them. “Would you require every home to come with a pool or every office to include a dining room because someone might want it?” he asks. “Why not let developers build parking where the market demands it and charge its true value?”

If you did, you might end up with something like Manhattan.

Now, on to the stock market. I couldn’t find a parking-related stock for today (STAN, the only one I could find on a major exchange, is not a compelling investment) but I did find a car-related stock.

Maxwell Technologies, Inc. (MXWL) makes ultracapacitors, which are like very large batteries. Game-Changing Stocks Editor Andy Obermueller recently recommended Maxwell in the Investment Digest, and described the advantages of ultracapacitors:

“Anything that moves wastes some degree of energy. If a mechanical device could capture some of that energy for future use, then the overall efficiency of the machine would be improved. As engineers endeavor to create systems and machines that use ever less energy as efficiently as possible, this is a burgeoning area of basic research. At the heart of it is a device called the ultracapacitor.

“The idea is almost three centuries old. It’s an invention that traces its roots to a device dating to 1745 known as the Leyden jar. A capacitor is a ‘passive electronic component’ made of a pair of conductors separated by an insulator. When a potential difference—that is, voltage—moves across the two conductors, a static electric field develops and produces a mechanical force (electricity). Capacitors’ ability to release a burst of energy quickly prompted scientific explorers to develop a technology that could release a sustained current. That device is known as a battery, and came about 50 years after the capacitor, invented by Alessandro Volta, an Italian physicist. So a capacitor, like a battery, is an energy-storage device. The new-generation ‘ultracapacitor’ is a super-duper one. These storage devices operate mechanically and dispense their stored jolt of electricity very quickly, as opposed to a battery, which generates power chemically and unleashes its charge far more slowly.

“Capacitors have some very appealing advantages: 1) They can be made from lots of easily obtainable materials, which makes them easier to produce than batteries; 2) Because capacitors operate mechanically and not by chemical reactions like batteries, a capacitor can work in any temperature with no loss in performance, which batteries can’t do, and 3) They can collect and dispel millions upon millions of charges with no loss of efficiency, whereas batteries can only be recharged so many times, and batteries lose efficiency with each recharge. When these devices are used in systems like electric cars, they can collect energy dispelled when a car brakes and expel the energy when the driver wants to accelerate. This does much to increase the vehicle’s limited range.”

Fueled by the promise of ultracapacitors, Maxwell had a great year in 2009, when it was “discovered” by analysts and investors who wanted to invest in practical green technology. It tripled in value, from $6 to $18, and investors who had gotten in early took their gains and patted themselves on the back for finding this revolutionary little company.

Since then, it’s done nothing. MXWL has been more volatile than the market, and ended 2011 in the high teens for the third year in a row. The company is still struggling to make money, and investors got tired of waiting. Romance phases can only last so long.

But now, some analysts think Maxwell may be ready (or almost ready) for the big time. The company’s projected earnings growth is stellar—EPS are expected to jump from two cents per share for this year to fifty-one cents per share for next year (up from negative EPS for the trailing 12 months). Triple-digit revenue growth would certainly pique Wall Street’s attention in Maxwell again, and if the company can actually make money, the love affair might be sustainable this time. As Andy Obermueller wrote in his recommendation:

“Maxwell is growing revenue, up some 160% in the past four years. It has a lot of equity on the balance sheet, which shows it has been able to earn a strong return on shareholders’ capital. Debt is light and easily manageable, and the company has plenty of cash on hand for operations, including research, where it allocates about $5 million a quarter. Maxwell is poised to continue to deliver and monetize break-though technology.”

Of course, the catch here is that no one can say when Wall Street will rediscover this stock. It could be later than sooner. But if you’re willing to be patient, you will probably be rewarded. Maxwell has excellent potential for buy-and-hold investors.

Wishing you success in your investing and beyond,

Chloe Lutts

Editor of Investment of the Week


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