Half of the U.S. population lives in the nation’s top 50 urban centers. And the purchasing power of this inner-city populace is enormous. Largely African Americans and Latinos, this group accounts for $4 trillion of the $7 trillion spent on consumer goods and services last year alone.
Despite this enormous buying power, it’s a market often overlooked by members of the commercial real estate industry. But investments in the inner city can be profitable — as much, if not more so, than suburban investments, concludes a panel of experts speaking at the Pension Real Estate Association (PREA) Spring Conference 2004, held March 4 and 5 in San Francisco.
Michael McCook, senior investment officer of real estate for the $167 billionPublic Employees’ Retirement System, says his firm has set aside $1.52 billion to invest in domestic emerging markets within the Golden State. Of that amount, $1.37 billion has already been invested in successful projects. Case in point: the firm’s Arbor Walk project in Santa Maria, Calif., a 149-unit single-family residential project, generated a 23% return.
"It is not a social service," McCook says of CalPERS’ program. "It is a money-maker. We can make money on social services."
Richmond McCoy, president and CEO of UrbanAmerica LP, notes the wide range of projects that his $325 million real estate investment company has undertaken in recent years.
Most of UrbanAmerica’s projects are very profitable, according to McCoy. For example, the firm redeveloped the $53.6 million, 489,000 sq. ft. Northwood Centre in Tallahassee, Fla., which features state offices as well as retail space. Cap rates for the regional mall were 11%, and Wal-Mart recently signed a lease with the center, according to McCoy.
In addition, UrbanAmerica’s $19.5 million Eastover Shopping Center in Oxon Hill, Md., has a cap rate of 10.7%, which is as good as any comparable suburban retail complex. The shopping complex features a Giant food store and a Footlocker shoe store.
Victor MacFarlane, managing principal of MacFarlane Partners, says he expects to see more inner-cityover the next few years. "Urbanization is under way — it’s here and it’s not going to go away," he explains.
MacFarlane says investments in urban areas make sense because development costs can be lower in terms of existing roads and utilities, such as electric power and telephone services. "We have to be creative and utilize the infrastructure that already exists," says MacFarlane. "That’s one of the major cases for investing in it."