Who will invest in new neighborhoods?

Even as recent estimates indicate a rise in the amount of money going to TNDs, the conservative financial market still hedges its bets on the New Urbanism. More than 125 traditional neighborhood developments (TNDs) are under construction, as are at least 100 new urbanist infill projects. But in the overall real estate picture that’s a mere blip on the screen. Despite the social and financial success of several well-established projects, bankers and other investors still complain that there aren’t enough comparables to help them assess financial risk. The suggestion that a compact, mixed-use development can create a higher dollar value than can a conventional subdivision (see article on page 11) has yet to impress a large number of financiers. They focus on the project’s perceived risk in the short term and most are concerned about recouping their investment as quickly as possible. A 1999 study from the Wharton School at the University of Pennsylvania, sponsored by the Congress for the New Urbanism (CNU), recommended that new urbanists begin an in-depth and comprehensive education program for lenders and investors. But such an effort is hampered by the continued lack of hard numbers on both investments in and returns from new urbanist projects. Another obstacle is the fact that a majority of these developments are clustered in the Southeast or on the West Coast, leaving many regions with very few models for lenders to study. “I’m afraid only examples will educate lenders,” says Todd Zimmerman of Zimmerman/Volk Associates, a market research firm specializing in the New Urbanism. “I think what is going to help is the next downturn. It’s quite clear that the properties that are in a neighborhood context will perform better, will weather economic downturn better. Particularly where you don’t have all your returns in one asset class.” A mix of uses and building types may be beneficial to the long-term survival of a development, but until a recession shakes up the industry — something few TND developers wish for — investors expect pedestrian-oriented projects to carry a higher risk premium than conventional ones. The latter can be broken into individual, single-use real estate assets: entities with long track records and known risk factors. The Wharton study found that banks are willing to accept innovative infill projects in areas where mixed use has a history, but new urbanist greenfield neighborhoods or towns still scare lenders more than any other form of development. At the moment, financing is readily available for developers of lifestyle centers, open-air retail and entertainment centers built along a main street or on a street grid and sometimes with a residential component. Many of these projects borrow features from the New Urbanism, but they interest investors because people are hungry for an alternative to shopping at the conventional mall or strip center. Investors are less sure that people are willing to give up the dream of suburban privacy and home ownership. A measure of TND investment So far, the only comprehensive look at who has invested in the New Urbanism comes from the TND Fund, a new urbanist equity investment group. For the last three years, Director Bob Chapman has estimated the amount of money allocated to TNDs and compared it with the aggregate real estate investment. In 1999, the aggregate investment amounted to nearly $2 trillion, with $4.3 billion going to TNDs, a ratio of approximately 465 to 1. The amount for TNDs, however, represents a substantial increase over Chapman’s estimate of $2.1 billion for 1998. The basis for the TND Fund’s estimates is a list of 220 TNDs and infill projects culled from the pages of New Urban News and quarterly balance sheets filed by real estate investment trusts (REIT) with the Securities and Exchange Commission. Chapman and collaborator Britt Palmberg assigns a total evaluation to each project based on acreage, square footage of buildings, and regional location and then divides this evaluation between “the four quadrants of real estate investment”: public and private debt and public and private equity. Chapman calls some developers to test if his assumptions are on target, but acknowledges that a lot of guesswork is involved. “We may be way off in one direction on one project and off in another direction on another project, but I think the sum is pretty close to right,” Chapman says. “I’m shocked how close we’ve come in most instances.” Institutions still on the sidelines The biggest single estimated increase from 1998 to 1999 came in the contributions from government credit agencies which rose from $100 million to $800 million. Chapman notes that this is primarily because he cast a wider net this year and included many more Hope VI projects on the list. More than half the estimated contributions to TNDs, $1.2 billion, comes from private investors, whereas such investors contribute only 17 percent of the total in the conventional real estate market. Much of this money comes from corporate owners of large properties such as Celebration (Orlando, Florida) and Northwest Landing (Dupont, Washington). The New Urbanism also relies on money from individual developers or backers who are firmly committed to the movement’s principles and who are willing to go against conventional wisdom to get a project built. They often have enough wealth to be able to wait for long-term returns. The challenge is to get those developers involved who are not “true believers” but who might try innovative projects if they believe they can make a profit. The New Urbanism also needs help from the top down, from the big institutional investors who can push the market in a new direction but hesitate to do so. “Our greatest concern is that there is still very little, if any, investment from pension funds, life insurance companies and university endowments,” Chapman says. “The money from big investment banks has pretty much been limited to Playa Vista. I have seen no signs that any institutional investors intentionally have figured out a way to invest in TND.” Chapman estimated annual returns from a selected group of TNDs in the Southeast in 1998 and found them to range from 25 to 45 percent, based on the increase in market value of the developed property. He now says getting reliable numbers from a greater sample is difficult, mostly because the measuring of returns is not consistent. “Some people talk about yield in terms of house to house or lot to lot appreciation,” he says. “That’s great if you have any houses left to sell, but otherwise the developer does not participate when houses are resold. It may be good for the next guy building a TND,” Chapman says. His general assessment of returns in TNDs is that they are still not as high as they need to be.