City is ignoring economic principles at Pacific Place garage

IN December, The Seattle Times ran an article about the Pacific Place garage in downtown Seattle losing money. We are sorry to see that the garage isn't generating cash for the city as it did in its early years, especially since the solution seems straightforward to us, as people whose careers deal with economics.

The concept of a city-owned parking garage was developed in the mid-1990s under the leadership of Mayor Norm Rice. A group of local investors and Nordstrom each agreed to invest more than $100 million in downtown Seattle, if a few problems could be solved. Key was the creation of a good, inexpensive, city-owned garage for the short-term parker. The hope was to bring people back downtown to shop and play, stemming the dollar leak to the suburbs.

Fortunately, it worked. The garage opened in 1998 and by 2007, the city's sales-tax revenues were 50 percent greater than they had been 10 years earlier.

From 2004 to 2007, the local economy was strong. Landlords raised office, retail and parking rates. Everything was going up, and it seemed we were headed for the moon. The city followed suit with the Pacific Place garage rates.

With the economic cold shower in 2008, the strongest in the private sector lowered rates to stimulate demand. Unfortunately, the city went the other way, instituting double-digit price increases in the Pacific Place garage in both September 2008 and again in August 2009.

For a garage, even more so than an office building, the capital costs are fixed. The key is to fill the empty spaces. For each new dollar of parking revenue (marginal revenue), 95 to 98 cents falls to the bottom line, because the marginal cost of that marginal revenue is only 2 to 5 cents. And, as we often say, everything interesting happens on the margin.

Understanding that empty parking spaces are wasting assets, the private sector lowered its rates to fill the empty spaces when times got tough. As the Pacific Place garage found in its early years, with lower prices you can actually generate more revenue.

In economics, this is explained by "elastic demand" — reducing prices 10 percent generates more than 10 percent in demand.

If we owned the garage, we would lower the prices to generate more revenue, as the competing garages have done. Consistent with the original concept for the garage, we would lower the rates for short-term, evening and weekend parking, until the garage was close to full.

Reducing parking rates would help the city generate more garage revenue, encourage people in the area to come downtown to shop and play, and continue to fill the sidewalks with people.

This strategy was key to saving downtown Seattle from classic urban decay, the path it was headed down in the mid-1990s. Today, thanks to significant investments in our urban core, including the Pacific Place garage, we enjoy one of the great downtowns in America, but it is fragile.

We encourage the city to take the right steps to fill that garage again.