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Growing Private Investment in Urban Redevelopment

By Barry Hersh

The redevelopment of American cities is not what it used to be. Once largely led by the federal government as a response to urban blight, urban revitalization is becoming more market driven, local, and self-supporting.

Many federal funding programs are now in jeopardy, but there are also now more private resources flowing into urban redevelopment. Planners and economic development professionals are often expert at utilizing various governmental programs, but now will need to strengthen their capabilities to gain maximum benefit from private capital to accomplish revitalization projects.

Some of the federal programs in greatest jeopardy, such as Community Development Block grants and support for Public Housing, are legacies from New Deal urban renewal efforts. In a speech shortly before the election, Mr. Trump referred to his approach as "urban renewal" but was surely not advocating a return to older programs with mixed results.

More recent, targeted programs, notably the EPA Brownfields program (despite the proposed draconian cuts to EPA), seem more likely to survive as it continues to show strong bi-partisan support in very recent congressional hearings.

It does appear likely that overall, traditional, funding for cities will be reduced, even if some proposed cuts, such as the proposed $6-billion reduction in HUD spending, are moderated. For those who care about improving cities, clearly one strategy is to advocate for fewer cuts, strongly support effective programs such as brownfields, and take advantage of new government initiatives—particularly the proposed, but still largely undefined, infrastructure spending.

Another strategy is to make greater use of private capital resources, capitalizing on the millennial led market swing towards urban life style.

As large as the federal government is, it's relevant to note that private real estate capital resources are enormous and growing. The HUD budget today is $57 billion, the EPA brownfields program is less than $200 million. Commercial real estate is estimated to contribute $465 billion to GDPi , and housing including both construction and consumption is now estimated back up to roughly 18% of GDPii (NAHB), roughly equivalent to all federal spending, including defense.

In 2015 S&P made real estate the 11th category of the S&P 500, reflecting the growth of publicly traded real estate companies, especially the now 224 Real Estate Investment Trusts with over a trillion dollars in market capitalizationiii . One illustrative example is how Toll Brothers has gone from a private builder of large single family homes, to a publicly traded real estate developer, with a growing "City Living” business of high rise housing. Real Estate Investment Trusts such as Acadia and Forest City have made major investments in cities from San Francisco to Savannah, Ga. Brandywine Realty Trust announced in 2016 a partnership with Drexel University in Philadelphia's Schuylkill Yards Innovation redevelopment.

There has also been an increase, to over $100 billion annually, in foreign investment in U.S. real estate. Hudson Yards, the huge project over a rail yard on the West Side of Manhattan, is 50% owned by Oxford, the Canadian pension fund. Hudson Yards also raised over $800-million in EB-5 Visa funds, largely from Chinese investors. The EB-5 Visa program will expire in April, 2017 unless extended. However, other forms of foreign investment in U.S. real estate have also grown, both in size and interest in U.S. markets beyond the gateway cities.

Another growing source of private investment for redevelopment is crowd-funding, gathering investments in real estate via an internet platform. Begun about five years ago, these new vehicles are mostly for smaller (under $20-million) projects.

Among the largest such platforms are Fundrise, Realty Mogul, Prodigy Network, all of whom invest in urban projects, sometimes attractive to local investors. At least one platform, Small Change, is focused on equitable investment in cities. It is a decade from the real estate led financial crisis and there are now real estate financial resources available beyond local banks and developers.

Access to all this real estate capital by urban redevelopers is already increasing. The generational market shift of millennials who have shown not just a tolerance, but a preference for urban life style has already impacted cities across the United States, opening doors to real estate financing.

While Leigh Gallagher's book title, The End of the Suburbs, may be exaggerated, there are on-going pro-urban shifts in the American economy and life style preferences. Richard Florida's writings on the Creative Class and Who's Your City describe work place growth that favors urban living, though in some cities more than others.

Led by the gateway, 24-hour cities such as New York and San Francisco are now more urban redevelopment success stories than can be kept up with, with a changing mixture of local and state government as well as federal funding, tax incentives and an increasing share of private real estate financing.

Neighborhoods from the Arts District in Asheville, N.C. to Deep Ellum in Dallas, Texas, are being reinvented. Even the grittiest of our cities, such as Newark and Camden in New Jersey; Gary, Indiana: Toledo, Ohio; and Reno, Nevada, have successful redevelopment projects with multiple funding sources.

These redevelopments do use whatever government funding they can obtain from federal, state and local sources, but they also utilize market driven, private financing. The challenge for urban professionals will be to find not just more private financing, but funding for the early, start-up phased now often from federal sources. The role of Dan Gilbert, a local real estate finance billionaire, in initiating as well as funding numerous Detroit projects is a valuable example.

Courtesy of flickr The Schuylkill River Trail, Philadelphia, PA

While federal funding may be reduced, there will still be growth in public-private partnerships. Greater use is being made of state and local tax credit as well as other local programs that catalyze urban investment, including Tax Increment Financing (TIF) and Industrial Development Bonds.

Some major foundations are shifting emphasis to aid distressed communities. The proposed increase in infrastructure spending should include more than highways, but to extend to other types of infrastructure, including water and sewer, mass transit, and the electric grid that can support urban redevelopment. The overall strategy for a nimble urban advocate will be to utilize what financing is available when it is available.

Private capital, whatever its source, is always looking for a return, making low or no financial return projects such as affordable housing, parks, and community facilities harder—but not necessarily impossible.

Dealing with the thorny downside of urban redevelopment, gentrification and displacement will also be even more difficult, but the federal track record in this arena has not always been stellar. How to insure equity, provide affordable housing and preserve neighborhood character while relying more on private resources, is a very serious challenge that must be addressed in most urban redevelopments.

The HUD-DOT-EPA silo-breaking initiative now remains on the books, but the federal effort that will be made for anything tied to climate change is highly questionable, leaving corporations, foundations and citizen organizations with more to do in this arena.

Many large firms remain committed to energy efficiency and sustainability, and often prefer urban locations. Whatever the regulatory framework, investors also want quality remediation to avoid future liabilities. The overall future of American cities, even with less federal intervention, can be seen as quite bright, but with significant variation, as market forces favor urban growth.

i Fuller, Stephen, PhD, Economic Impacts of Commercial Real Estate, NAIOP Foundation2016 Edition

ii National Association of Home Builders, Housings Contribution to the Economy, 2017.

iii NAREIT, Total Capitalization of Real Estate Investment Trusts, 2016

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