Revitalization projects in weak real estate markets are very hard to finance
As critical as I often am of community development corporations, the nonprofit development and revitalization organizations that were created starting in the 1960s to jump start reinvestment in center cities when development and financing trends shifted toward preferencing of developments in the suburbs, the reality is that financing projects in weak real estate markets is very very difficult.
In December, the New York Times ran a story, "New Thirst for Urban Living, and Few Detroit Rentals" about the irony that there is demand to live in Downtown Detroit, but comparatively few places to do so.
The Detroit Free Press has an excellent follow up story, "Downtown Detroit projects slowed by financing, red tape," on why this is so.
It's because in weak markets like in Downtown Detroit, properties won't "pencil out" in terms of financing from strictly for-profit sources.
Most projects require up to 50% financing from nontraditional sources, and projects end up without the same kinds of funding streams that in normal situations would support tenant build out allowances*.
Rising demand for urban housing is filling apartment buildings like the Auburn in midtown Detroit.
One of the examples in the story is how a suburban-based fitness center company ended up pulling out of a deal because after already spending double the typical amount to open a location, they were then asked to spend $27,000 on sound-deadening materials because their space was to be on the ground floor of an apartment building, and code required limiting the nuisance possibilities for residents.
From the article:
The Auburn, with about 12 retail spaces available, has only three occupied several months after opening, despite predictions of full retail occupancy. It stands as an example of just how difficult and agonizingly slow it can be to close retail and development deals — large and small — inside the city of Detroit.
* Note that there is a similar but different issue with retailers in traditional commercial districts in strong real estate markets. While they might get build out allowances, typically they don't get breaks on rent--because new construction is expensive (which is the point that Jane Jacobs makes in Death and Life of Great American Cities about how "a large stock of old buildings" enables lower rents).
At least for the first year and often longer, business isn't high enough to justify paying market rate rents.
Retailers are considered key "amenities" as part of these projects, but at the same time, they are expected to pay for the privilege of being the amenity.
Similarly, in small single property owner spaces, build out allowances are unlikely, and the properties typically require extranormal investment and renovation to get up to speed. This is why properties often languish for such a long time in areas that had experienced significant disinvestment.
This H Street building has been empty for all of the 25+ years that I have lived in DC. Now it's half a block from a new Giant Supermarket and I expect something will finally happen. But I expect it will cost a lot of money. 25+ years of deferred maintenance is very expensive.
To me, this and the continuing massive debacle over the long term lease by Chicago of their municipally-owned parking meters, lots, and structures (see "Parking meter settlement: Free Sundays, extended night hours," "Too early to tell just how little settlement improves parking meter deal," and "Emanuel’s parking meter fixes get frosty reception from aldermen" from the Chicago Sun-Times) is another example of why a municipal-county-state infrastructure bank is in order, although given all the other problems with contract steering and the like, it would be subject to significant gaming.
Still, it's a way to provide funding to good projects and would accelerate improvements.
See "Bank local, shop local campaign in Illinois," "It's a wonderful life revisited: George Didden III, Rest in Peace" and "In I-Bank Debate, States Provide Successful Model" from the New York Times.