MidwestCRE The big problem: Vacant properties still plague many Midwest cities Dan Rafter June 7, 2018 Share on Facebook Share on Twitter Share on LinkedIn Share via email Want your city’s downtown to thrive? Want shopping centers, office towers and hotels to dot your municipality’s suburban areas? Then you better hope someone moves into all those vacant houses filling your city’s neighborhoods. That’s the message from Alan Mallach, senior fellow with the Center for Community Progress in Washington, D.C., and the author of new report on vacant properties published by the Lincoln Institute of Land Policy in Cambridge, Massachusetts. This report, The Empty House Next Door: Understanding and Reducing Vacancy and Hypervacancy in the United States, is a sobering look at how vacant properties continue to drag down neighborhoods in cities such as Chicago, Detroit, St. Louis, Cleveland and many others. This might seem like a residential story. It’s little surprise, after all, that empty buildings would drag down property values in residential neighborhoods. But it’s actually a commercial real estate story, too. Those same empty buildings slow the arrival of new shopping centers, restaurants, apartment buildings and office towers. And that’s why commercial real estate professionals should want to see those vacant houses become filled, too. Mallach says that Detroit provides a good example of how vacant residential properties can impact a city’s commercial real estate. As Mallach says, just 15 years ago, nearly all of downtown Detroit was empty. “The office buildings, the commercial buildings, they were all almost entirely vacant,” Mallach said. “Now they are being filled up.” Why? Mallach says that a residential revival came first, and then commercial activity followed. “When you start to see an area revive residentially, commercial follows,” Mallach said. “Restaurants, nightclubs and taverns start to come in first. That is followed by more retail-oriented commercial activity. You see this in a lot of areas, in the downtown or near the downtown. You’ll see a conversion of old commercial buildings into residential. When that is successful, commercial follows.” This pattern has played itself out across the Midwest, not just in Detroit. Cleveland, for example, is enjoying a revival in its downtown that’s largely been fueled by rising demand for apartment units in the urban core. The challenge, though, comes in the outlying areas of a municipality, Mallach says. It’s far more difficult to eliminate vacancies in the farther-flung communities of a city. And when these areas are filled with vacant houses, there is little incentives for retailers to open new shops or for developers to build modern apartment buildings. The Lincoln Institute of Land Policy reports that just a few decades ago what the group terms hypervacancy – an extreme level of vacant residential properties – was limited to just a few neighborhoods. Today, though, large swaths of cities are dealing with this problem. In 2015, for example, more than 49 percent of the Census tracts in Flint, Michigan, suffered from extreme hypervacancy, in which more than a quarter of the residential units in each tract were vacant. And Flint isn’t an anomaly. The institute reports that in 2015, 46 percent of the tracts in Detroit also had the same problem, while 42 percent of the tracts in Gary, Indiana, suffered from extreme hypervacancy. In these areas, the housing market basically ceases to function, according to Mallach. If houses do sell, they only sell to investors at incredibly low prices. The neighborhoods surrounding them become areas of concentrated poverty and unemployment. The center reports, too, that the number of housing units that have been abandoned across the country has jumped by 2.1 million units, rising from 3.7 million in 2005 to 5.8 million in 2016. Mallach says that areas plagued with hypervacancy generally have no commercial activity other than the random fast-food restaurant on a busy street corner. This is a change. When these cities were built, every neighborhood had its own shopping street, Mallach said. “They were pretty much wall-to-wall storefronts, often with apartments above them,” Mallach said. “These streets, to the extent that they still exist, are in big trouble if they are in high-vacancy areas. There simply is not the demand in those areas for that walking-oriented commercial space.” Part of the problem? Consumers’ shopping patterns and entertainment habits have changed. Mallach again pointed to Detroit, and the neighborhoods in the parts of the city with less dense populations. The people in these neighborhoods with disposable income have cars. They get in their cars and drive to the supermarket in a nearby suburb. They don’t walk the four to six blocks to shop in their local neighborhood. Because of this? The commercial in these neighborhoods tends to wither. “When you ask people if they’d shop in a neighborhood shopping street with a baker or grocer, they always say they would,” Mallach said. “But in reality, it doesn’t pan out. They still get in their cars to do their shopping.” What causes a shift in these neighborhoods? Mallach says these areas need a critical mass of residents and disposable income. Once developers do attract residents to an area with modern apartment units, commercial uses follow. These residents want somewhere to eat or drink, so taverns and restaurants pop up first. Then come the grocery stores, additional apartment units and other retail uses. Mallach uses the busy Warehouse District in Cleveland as an example. The rejuvenation in this now trendy neighborhood started with a few residential rehabs. Once people started moving in, the restaurants and bars followed. “It became a destination,” Mallach said. “It finally got a supermarket. You need a critical mass before that can happen.” And that critical mass of residents with disposable income? It has to be a big number. As Mallach says, a couple hundred families can’t support a retail use like a supermarket. You need far more. Until those residents move in? And if houses remain vacant? Don’t expect commercial real estate development to kickstart an area. The lesson from the institute’s report is clear: Residential needs to kickstart any area’s rejuvenation. Commercial in this instance? It follows.