Achieving success in economically challenged communities is a struggle at best and can be made more challenging when national stories of social unrest are replicated locally on streets within those communities. Despite these difficulties, the ability to demonstrate a track record of success, enlist the support of local officials and provide economic/financial incentives goes a long way in helping developers, investors and tenants.
In a session of the Harold E. Eisenberg Foundation’s virtual Roundtable Summer Series – “Insights & Predictions for the Future of Real Estate Investment in Economically Challenged Communities – the foundation welcomed panelists James Matanky, Chief Executive Officer of Matanky Realty Group; Craig Huffman, Co-Founder & CEO of Metro Edge Development Partners; and Mike Mallon, Senior Vice President of Draper and Kramer.
Panelists led conversations with industry-interested students about their professional experience in making investments and managing properties in Chicagoland’s underserved communities. All the panelists, and their firms, have years of experience investing in and serving underserved markets in the Chicago metropolitan area.
When seeking development in these communities, Huffman suggests that a useful starting point is to look at trend data that reflects where people are moving and to gather a comprehensive understanding of the communities adjacent to neighborhoods that individuals may be being priced out of.
For example, the long-term investment prospects for the Chicago neighborhood of Englewood are dependent on the success of the communities that surround it such as Bronzeville and Back of the Yard. Huffman adds, “Development tends to spill over from areas that become less economically challenged over time.”
Mallon adds that it’s important to sit in on neighborhood meetings and meet with local constituents and community leaders to understand how people will interact with your project and how your project will affect the community.
“Development is tough to begin with,” Mallon says. “Developing in the city of Chicago is tougher but can be extremely rewarding for those who can figure it out and develop a project that will stand on its own merits.”
For some, investing in economically challenged communities is personal.
“It’s part of my being. I grew up that way,” says Matanky. His family-owned and operated firm Matanky Realty Group has been in business for more than 100 years and has roots throughout the city of Chicago and its neighborhoods.
Like all types of investments, there are risks to entry. Recent events in America’s major cities are causing consequences, especially for national retailers who are facing decisions on whether to close operations in an area because of these challenges, even after making tremendous inroads into a market.
Whenever there is an incident reported in the news, tenants grow fearful of increased operating costs associated with security or theft. The current recession and pending unrest in both economically stable and challenged areas is creating a challenging dynamic for the commercial real estate industry.
“The challenges are both perceived and real,” Huffman said. “Prospective tenants tend to question safety in economically challenged areas, which often makes it challenging to negotiate lease rates that are profitable for a landlord.”
Incentives such as discounted rent in the first year or two or tax incentives that can lower operating costs were identified by the panelists as factors prospective tenants will take into consideration before committing to a lease. Investorstend to want to know that the sponsor has the experience and knows how to manage the operational challenges of investment in underserved communities.
Programs such as Opportunity Zones represent strategies rooted in good intentions, but very susceptible to criticism.
As a developer for multiple properties in challenging areas, Matanky finds himself among other industry leaders questioning the execution of this incentive program. He notes there are a number of areas within the city of Chicago, including areas where his firm holds property, that could have benefited from the intent of Opportunity Zone investing. He believes if program officials had talked to developers from various backgrounds when they were setting up Opportunity Zones, the maps would look a bit different.
“The program is great in concept. However, when they identified the Opportunity Zones, there were a lot of areas that really needed to be able to benefit from the intent of the program that were not selected,” Matanky says. “Opportunity Zones are a tool in the toolbox, but not the single answer.”
Attracting tenants and investors to areas outside their comfort zone requires the art of standing in another person’s shoes, persistence and some solid story-telling skills.
If there is a genuine success story attributed to the area you’re proposing, Huffman encourages sharing it. “A straightforward way to attract new tenants is to show them that other firms in the area are successfully operating.”
Mallon agrees, adding, “Be sure that local politicians and city staff are also on board.”
Success breeds success; tenants and investors appreciate evidence of conditions that grow successful occupancies, and it’s mutually beneficial to gain support from community leaders.
In the face of situations that make it as challenging as ever, Matanky remains resolute and looks to encourage the industry’s next generation when he says, “It is at times more difficult and time-consuming, but it is crucial that we continually invest in economically challenged areas.”
Olivia Simmons is program and events associate with the Harold E. Eisenberg Foundation in Northfield, Illinois. The foundation is dedicated to raising funds that support gastrointestinal cancer research, offering scholarship opportunities for college students and mentoring young people by providing unique opportunities in the business world. For more information, visit www.eisenbergfoundation.org.