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DEVELOPER SEES OPPORTUNITIES IN INNER CITIES

By Edmund Mander

Whatever reasons retail developers have for staying out of inner-city neighborhoods, sound business judgment isn’t one of them, at least according to one entrepreneur. Richmond S. McCoy, CEO of New York City-based UrbanAmerica L.P., focuses exclusively on buying and improving inner-city commercial real estate. His fund had acquired $200 million in property by last December — half of it retail — and is set to buy another $200 million by the third quarter of this year. The investment is already paying off, and it is not unusual to see some of the supermarkets in his centers achieve sales of between $400 and $800 a square foot, McCoy said.

To McCoy, a native of New York City’s Harlem, this isn’t rocket science. Inner cities in the United States are rich in customers but starving from a lack of good retail. At the same time, the country’s leading banking institutions, which are required by the Federal Community Reinvestment Act to earmark a certain amount of money for low-income areas, are looking for places to do just that. What he is doing, McCoy explained, is solving two different problems with the same solution — and making his investors money in the process. The lending institutions investing in UrbanAmerica’s projects include such names as Deutsche Bank, J.P. Morgan, Prudential Insurance Co. of America, Citibank, Summit Bank and General Mills. "We saw a need and an opportunity come together," explained McCoy. "There’s hundreds of billions of dollars in pent-up Community Reinvestment Act money waiting to be invested."

Within the first 10 months of last year, UrbanAmerica had closed on 14 retail and mixed-use properties in six states, amounting to about 1.2 million square feet and worth more than $97 million, and five office buildings, totaling 200,000 square feet and valued at more than $23 million. The company also is building retail mixed-use properties from scratch; for instance, it is constructing a 129,000-square-foot retail and office complex in the Frenchtown community in Tallahassee, Fla.

Into those centers UrbanAmerica is installing the kinds of tenants shoppers are accustomed to finding in suburban locations, including The Athlete’s Foot, Ashley Stewart, Little Caesars and Magic Johnson Theaters.

And in January, the firm purchased College Park Commons, a 254,00-square-foot mixed-used commercial property in northwest Detroit.

But UrbanAmerica’s centers also seek nonretail tenants that are heavily used by their customers, including government offices, medical and education services, and banks. The company even built a 22,000-square-foot police station next to its Eastover Shopping Center in Oxon Hill, Md., making both the center and its surrounding neighborhood safer.

"We think it’s a very good mixture for these communities," he said, and added that mixed-use projects also benefit the retailers: "There’s constant traffic in the shopping center."

However, shoppers and bankers are not the only ones profiting from UrbanAmerica’s approach to retail development. The company employs local contractors to build and maintain the centers and, once built, the centers themselves provide hundreds of jobs in their neighborhoods.

"Our strategy is to serve our investors with strong returns on quality investments and, at the same time, help create new jobs and economic growth in these neighborhoods," McCoy noted in the company prospectus.

The demand for decent retail alone justifies the focus on inner-city shopping centers, but there are other factors that make the investment even more compelling, McCoy said. One of them is the lack of competition they face once built, in contrast to out-of-town centers, which often see competitors spring up across the street.

"Once you acquire these properties, it’s very difficult for people to come in and build a competing asset," he said. "You’re dealing with a very finite amount of available land in these built-up communities."

Another advantage inner-city centers enjoy over their suburban counterparts is a large labor pool, he noted.

UrbanAmerica’s properties include South Capital Shopping Center, Ft. Davis Shopping Center and East River Center, all in Washington, D.C.; The Tampa Festival Center (Tampa), Dolphin Center (Opa Locka) and Lakes Mall (Lauderdale Lakes), all in Florida; College Park Commons, Detroit; and Nucleus Plaza, Las Vegas.

McCoy’s mixing of business with public spiritedness began when he ran McCoy Realty Group, on New York City’s Park Avenue, which at the time was the largest real estate management firm controlled by an African-American. The firm catered to Wall Street’s biggest firms, including Teachers Insurance and Annuity Association, Chase Bank, The Disney Co. and Bank of America.

One day McCoy was contacted by a Washington, D.C., minister who asked him to take on an office retail project his church owned in Harlem.

"We took on the assets and really introduced them to a professional real estate strategy and turned them around quickly," he recalled. The call from the minister proved to be an important crossroads in his career. As McCoy put it to a Time magazine reporter last year, "I felt God was nudging me in a different direction."

UrbanAmerica was founded in the fall of 1998 with the backing of John O. Utendahl of the Utendahl Capital Partners minority investment bank and brokerage firm, and Joseph Flom, a New York City lawyer.

Sprucing up the commercial real estate in low-income areas not only provides people with places to shop and work, it also makes the area look more presentable, raising local morale, McCoy argued. "People react to what’s in front of them."

To further protect and maintain its assets, the company plans to bring the management of its properties in-house, under the principle that "if you really want something done well, do it yourself.’’

"All owners get to that place, no matter where you operate," he said. "We really need the highest level of execution and focus."

UrbanAmerica’s inner-city development strategy ultimately will be emulated by other development companies, opined John Edmond, who sold Nucleus Business Plaza, a 110,000-square-foot Las Vegas community center, to the company in November. "Urban real estate is becoming a lot more desirable in today’s marketplace," he said. "It’s probably going to take four or five years to really see the impact of UrbanAmerica, but McCoy and his partners have come up with a unique approach." To grasp this opportunity, development companies need to overcome a psychological barrier that is holding them back from investing in America’s poorer neighborhoods, according to McCoy, whose company estimates that commercial real estate in such areas nationwide is worth about $100 billion.

"A lot of people are not comfortable operating in ethnic markets," he said. "They have built-in market prejudices; not racial, but market prejudices."

Yet the demand for development is clear, he said. Inner-city areas not only need grocery stores, but also a range of other retail and business services that are ubiquitous to the point of saturation in many suburban areas. "There’s a tremendous need for banking services that isn’t there — restaurants beyond fast food, quality bookstores," McCoy said.

Although in the future not all UrbanAmerica’s projects will be right in the heart of inner cities — executives are looking for regional malls to buy, too — the company will nevertheless confine itself to low- to middle-income areas, McCoy said. It’s a strategy that, apart from anything else, makes good business sense, executives argue. UrbanAmerica’s centers will continue to thrive, even in a recession, they say, because people always need groceries, government offices and the kinds of educational services offered by its tenants. As such, UrbanAmerica will keep a lot of people happy — investors, neighbors, shoppers, vendors and employees. "We think that we’re a different company," McCoy said, "but we’re making money and we’re doing good along the way."

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