Winning the First Mile in Real Estate
I only see one way to maintain the Sweet Spot of real estate ownership across local markets — Winning the First Mile. Winning the First Mile is about controlling and owning strategically important properties to ensure building owners have a long term-mindset and champion job creation, building local supply chains, and providing the residents what they need to live healthy, happy lives.
(If you have not read the previous essay The Sweet Spot of Real Estate Ownership — the Sweet Spot is a time in a market cycle when mission-driven, intentional real estate investment and development can happen without sacrificing financial returns. In other words, where it makes business sense for the private sector to focus on improving the surrounding neighborhood rather than maximizing profits at the buildings they own).
Communities must get out in front of where the growth is happening in a local market and acquire or control property before the general market sees value in them. These properties can then be resold piece by piece to owners based on the needs of the neighborhood. In the economic development world, this is referred to as land banking. It is critical that local economic development agencies become more active in land banking and get out in front of the private sector. The optimal time to buy these properties is before the market is fully functioning as once market forces take over, buildings become largely owned by those seeking short-term profits and often have no connection to the local markets where they are investing. With technology changing the face of real estate today, and market forces taking over sooner, local governments and economic development agencies must become more involved in land banking to provide more opportunity for local, small-property owners to be involved in the market.
This land-banking strategy combined with shifts in the private sector can create profound change. It is critical that the private sector pivot toward more long-term thinking — thirty or forty years down the line rather than seven to ten. They need to invest in real estate with a value-set that looks far enough into the future that they aren’t incentivized to flip property. This long-term thinking is the single most effective way to address the affordability crisis that is facing communities across America.
Role of Local Government and Economic Development Agencies
I saw the power of land banking in Detroit where local economic development agencies responsible for specific neighborhoods successfully land banked small portfolios of properties along a major light rail project. The key part of this was that these agencies purchased the property a few years before the light rail was operational. It proved to be a successful way to curate parts of the neighborhood and attract a wide range of real estate owners with a strong focus on the Entrepreneurs and Small Business Owner/Operators.
Now, it is not realistic for us to think that local governments or non-profits are going to become super active in land banking at scale. They are typically not structured to do this nor do they have the knowledge and expertise from a real estate perspective. I also do not think it is wise to completely suppress the free market. But, what local governments and agencies do have are the following:
- Deep local knowledge of their neighborhoods.
- They are the first to know where tax dollars will be invested to improve infrastructure.
This puts them in a perfect position to get out in front of the growth. They must become more active. They also need to bring in the private sector so they can work alongside one another on these strategies to be able to reign in some of the out-of-control market forces that are wreaking havoc on our neighborhoods and communities.
Role of the Private Sector
The private sector is a critical piece of the solution. But in today’s system the Sweet Spot is the only time the private sector can create long term stability for local markets. It is critical that the private sector become more long-term in their approach to real estate investment. The only way to realistically do this is by creating a system that incentivizes long-term ownership and investment from private property owners along the entire food chain. I am not saying you have to hold the properties across generations, but that if there is a decision to sell a property there is also an obligation to the community and neighborhood to try and leave it in good hands. I am not saying to sell a property for 50% less, but that if prices are equal or just a bit less, you have an obligation to your neighbors, residents, and businesses to leave the property in a better situation than when you purchased it.
With my business partner I was able to do such things in Detroit in the neighborhoods where we assembled the majority of our properties. In one neighborhood we assembled more than three acres and became joint venture partners with a local non-profit real estate development company to build a 200+ unit mixed-income residential development on the site. In another neighborhood, we owned 15 properties across three continuous blocks and became a pseudo economic development agency for the community. We strategically sold multiple properties to small business owners who now run their businesses within the walls of the properties they own.
The private sector plays a critical role in creating the infrastructure of our lives. A healthy mix of private property owners with the incentive to invest and hold properties over a longer period of time creates a stable foundation for a community. Establishing a stable environmental allows for all stakeholders in a neighborhood to then advocate and promote new policies to create true systemic change.
The Role of Policy
Another way to incentivize private property owners is with tax incentives to encourage investment and long-term ownership. There was recent legislation passed for what are called Opportunity Zones. This legislation essentially provides tax benefits for people and companies that invest in designated neighborhoods that are distressed and/or where the median income of the population is extremely low. Building owners are required to hold the investment for more than 10 years and substantially improve the property, these are both wins. This is a step in the right direction, but far from what we need. The main issue is that the program is really designed for people and or companies that already have large investment gains that they can roll into real estate investments. The opportunity zones have attracted investment funds run by fund managers looking to invest large amounts of capital on behalf of high-net-worth individuals and other corporations rather than by smaller, local investors and business owners. I believe these large funds would invest in many of these projects regardless of any tax benefits. I do not see it resulting in any type of system-level change that will allow us to maintain the Sweet Spot of real estate ownership in our neighborhoods. The Opportunity Zone fund thinking needs to be applied downstream so smaller investors and individuals have more incentive to invest in real estate in their own neighborhoods and communities. This will provide a better chance for us to increase and maintain the real estate ownership Sweet Spot. Examples can include:
- Providing meaningful tax benefits for real estate investment made available only to owners whose principal residence is located in the same neighborhood, zip code, or city where the investment property is located.
- Running property auctions for city owned property for local residents and businesses.
- Creating incentives and subsidies for property owners to develop property for uses most needed by the local community.
Once all stakeholders realize the importance of Winning the First Mile, there are many avenues and ways to extend the Sweet Spot of real estate ownership. If attention, policy, and dollars are not designed and deployed around Winning the First Mile, market forces will continue to shrink the Sweet Spot in communities and neighborhoods throughout the country.
Expanding the Sweet Spot
Once the Sweet Spot of real estate ownership is over, it’s nearly impossible for conscientious local investors and developers to beat out investment fund managers with much deeper pockets.
In order to help local developers take advantage of the Sweet Spot and drive positive social change through responsible property ownership, local public and philanthropic organizations must be more proactive working alongside the private sector. Here are a few strategies to consider:
- Allocate funds to acquire properties in transitional and emerging neighborhoods (rather than established neighborhoods).
- Provide meaningful rent subsidies for small businesses and local landowners.
- Encourage long-term equity investments by local pension funds and endowments to invest in their own backyards.
In other words, we must make capital available to the right people at the right times. That capital must be structured appropriately for the long-term. Encouraging locals with a stake in their community to invest in real estate, plan for the future, and promote local business early in a neighborhood’s transition is the key to upholding dynamic and stable communities over the long term.
All of these solutions have been done before, but never on a large scale. I believe that applying these strategies en masse is crucial for saving American neighborhoods and communities from unaffordable rents and cultural dilution. But it is up to us. Implementing forward thinking policies and programs that encourage long-term investment is just the beginning. We will only be able to reclaim our neighborhoods and communities once private investors and developers can do mission driven, intentional work without sacrificing financial returns. We need to build a world where this idea of impact investing simply becomes investing.
Be great,
Jordan
