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It seems like you can't do incremental development by building more real estage inside the cities because of the cities not wanting to give new building permits that might lower the value of existing real estage.
I think Seattle's South Lake Union development, kickstarted by Paul Allen and Jeff Bezos, is a counter example ...
http://crosscut.com/2015/05/why-everywhere-is-the-next-south-lake-union/
Perhaps gentrification is a more general counter example. But you're right, most developers opt for sprawl.