Cities create comprehensive development plans or downtown master plans after a public engagement process. The plan puts forth principles that underpin development. In many plans, specific projects are proposed according to the aspirational will of the public.
What happens when aspiration fails to align with finance?
In a previous article, we discussed the challenges for small to medium-sized cities in aligning capital with the aspirational development that the community wants to see. Moreover, residential redevelopment requires reinvestment at the individual or household level. If a region experienced job loss or if the local economy is declining, then it is hard for the region to meet neighborhood development targets.
There are models such as grants to homeowners, low interest financing, and community land trusts that can increase the rate of development. Local officials can also enforce standards on absentee landlords to ensure they fix up the property.
However, in many cases, redevelopment aspirations still don’t align with available capital.
The Great Rebuild
American society is still young. America is only beginning to grapple with obsolete infrastructure. During the last two generations, America was still in a phase of “growing out,” into the suburbs or migrating to the South and West.
As millennials grow older, they seek a more urban experience that revitalizes previously built infrastructure. However, the cost of revitalization is often unaffordable in older American cities. The cost to revitalize small cities with a couple hundred thousand people could tally at half a Billion.
Further, one-off projects are difficult to financially sustain. In smaller cities, residents don’t have enough discretionary income to purchase a new condo on the waterfront. Businesses operating locally or regionally can’t afford class A office space. Without local demand investors are skeptical.
As American population growth declines, cities will face a more competitive landscape to attract reinvestment. In the absence of population growth, Government offers subsidies or tax incentives to kickstart investment. What if the projects are still underwater even after healthy government intervention?
The only recourse becomes more government intervention that risks nationalizing the capital markets of the local economy. This is an interesting thought given the extent of the financial bailouts during the crisis. American tax producing infrastructure, in addition to public infrastructure, could be at a state of financial crisis.
Cities must better understand and forecast asset appreciation surrounding comprehensive plans and the economics of specific projects. For example, analysts might look at a region’s collective investments in different asset classes. Investments into tech startups or urban manufacturers can have a substantial impact on urban revitalization across residential, commercial, industrial, and retail real estate.
The Economics of Local Infrastructure Markets
By understanding how investment impacts nearby asset appreciation, we may be able to find a private solution or at least the true cost associated with development.
Tech Investment is a good example with a rent premium of 16% in places with substantial tech employment and investment.
Translating investment into a premium is an easy calculation. We can estimate how much a tech firm might invest in employee salaries and at what wage. A portion might live downtown. From there we can associate the rent premium with how many employees are hired at what cost.
Does the premium on employment offset the cost to rehabilitate a property? New institutions such as community foundations or social impact investors may take on some of the longer-term risk of projects that are too far underwater.
On the other side, we can estimate how much Governments and local Civil Society would need to invest to offset gentrification. Programs could include a community land trust and training to ensure diverse employment at nearby tech firms.
Moreover, we could understand the retail impact of employees. How many employees are needed to sustain a downtown, fresh food grocery store or other retail amenities such as an art gallery, cinema, bottle shop, etc.?
Understanding the holistic economies of local infrastructure markets is essential to creating a capital marketplace for private investors.