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WORTH A SECOND LOOK

Nonprofits reveal urban opportunities missed by the U.S. census

By Steve McLinden

There’s a bold new real estate model for the nation’s backstreets. Its objective: to clean up the neighborhood, spur economic development and make a tidy little profit in the process.

For years retail site selectors disregarded urban neighborhoods, citing census figures, credit card stats and other data that pointed to poverty, crime and other social deficiencies. Now a handful of specialty organizations are looking beyond the worn facades and rudimentary numbers to find hidden sufficiencies, prompting many deal makers to take that all-important second look.

Leading the charge are the Washington, D.C.-based Social Compact and the New York City-based Local Initiatives Support Corp., both of which Federal Reserve Board Chairman Ben S. Bernanke lauded in April in a speech to the Greenlining Institute’s Economic Development Summit, in Los Angeles.

Social Compact, a nonprofit research group funded by real estate and financial firms, has executed economic assessments of some 100 inner-city U.S. neighborhoods, unearthing data that reveal true consumption patterns. Instead of looking at the standard demographics, Social Compact distills information from municipalities, tax and police records, credit and utility companies and similar unconventional sources. This supplies what the group says is a more accurate representation of a neighborhood, based on per acre household income and population figures, and of the size of its informal cash economy (a reference to income from off-the-books, part-time income).

Indeed, when the drilling is done, a gold mine is sometimes unearthed. A case in point is the old Gulfgate Mall area at the busy intersection of Loop 610 and Interstate 45 in Houston. A decade ago real estate decision makers began writing off this sparsely patronized, mostly vacant, 1950s-era open-air center. But developer Ed Wulfe, president of the locally based Wulfe & Co., saw opportunity. He purchased the property in 1998, razed it and proposed replacing it with the open-air Gulfgate Center.

Retailers, however, said their demographic data did not support Wulfe’s vision for the heavily Hispanic moderate-income area, and they passed on the project. “They have a tendency to go by the book on whatever the demographics say,” Wulfe said.

Still, Wulfe was convinced that there was abundant spending power in this under-retailed area, so he enlisted Social Compact to do a more substantive study. The organization found that census figures had undercounted the number of people living in the area by about 16 percent. It also turned up some $758 million in combined household income, roughly $121 million more than the conventional surveys had reported. In many cases Social Compact found that there were two families living in some homes and uncounted family members in others.

“We really had to dig down to show there was a market,” said Wulfe. “And when we did, we found a larger population and a hidden economy that the conventional numbers weren’t reflecting. It became obvious the market was underserved, and the retailers’ perspective changed when they could clearly see what was there.”

Wulfe completed the center in 2002. Today it is 99 percent occupied and boasts such tenants as grocery chain HEB (this 85,000-square-foot unit is among the chain’s highest-volume stores in the Houston area), home improvement chain Lowe’s and apparel seller Old Navy. The Washington Mutual branch here is the Seattle-based bank’s busiest in Texas.

Wulfe says the center has become a catalyst for other southeast Houston commercial revitalization and redevelopment projects, and he plans to expand Gulfgate to about 700,000 square feet from the current 450,000 square feet.

Since Gulfgate opened, Wulfe has fielded offers to buy the center, says John Talmage, deputy director of Social Compact. “And I can’t begin to tell you how many multiples he has earned.”

Social Compact’s latest analyses were done in two adjacent areas of Santa Ana, Calif., with a combined population of about 100,000, some 92 percent of whom are Hispanic. The organization found undercounts of about 10 percent in population and 32 percent in household income versus what the census has projected for the area for 2006 — and a woefully underserved market for some of the most basic services, Talmage says. At press time retailers and Santa Ana economic development officials were making inquiries about retail development there, he says.

“Gas, food and banking in these areas are critical services, not luxuries,” he said. “Having to travel up to an hour [by mass transit] to buy groceries is an unnecessary hardship. But we are not asking businesses to come together for philanthropic causes. … [T]here is a legitimate profit incentive here.”

It seems so. The Washington, D.C.-based Food Marketing Institute found in a 2005 study that a Latino shopper will hit the grocery store some 26 times a month more often than the norm — driven by a desire for freshness versus the instinct to stockpile.

Though Local Initiatives Support Corp., a lender and broker of funds from government sources, has focused more on housing than retail during its 25-year history, it has helped bring major grocery stores to underserved areas in recent years, including New York City’s Harlem and the inner-city Washington, D.C., area. “These markets are being rebuilt to the point where retailers are starting to look at them in a serious way,” said Michael Rubinger, LISC’s president and CEO.

In Harlem a 50,000-square-foot Pathmark that LISC helped finance at 125th Street and Lexington Avenue six years ago was the first to be built in Harlem in 30 years and is now the chain’s highest-volume store, says Rubinger. Blockbuster, The Body Shop, CVS, Footlocker, Marshalls, Staples and Starbucks have all built stores on 125th Street since. Last year Pathmark opened a second Harlem store, on 145th Street.

A Social Compact analysis of Harlem has found about $1 billion of income that had not been captured in any standard analyses.

In the early days of urban redevelopment, community groups tried to operate such food stores, Rubinger says. “And it didn’t take much shrinkage to do them in,” he said. “Now we have chains coming in who know their business.”

Rubinger acknowledges that fears of crime linger on the minds of developers and retailers otherwise eyeing urban venues. “In fact, that may be their number-one consideration,” he said. But more and more businesses are adding streetlights and making similar improvements to these urban areas, while business-improvement districts further address security concerns. “In many areas crime rates have gone way down,” he said. “They literally have people patrolling their own streets.”

LISC, which recently acquired the Chicago-based MetroEdge market research firm to better address the retail data needs of clients, says its urban retail and mixed-use programs in Boston, Los Angeles, New York and San Francisco have been the most successful. But projects in Cleveland, Detroit and Philadelphia are close behind. “I think the reason grocers and retailers are coming to these areas and staying is because they recognize these are viable markets,” Rubinger said.

Social Compact and LISC have company as they ferret out these inner-city retail opportunities and incentives. Earvin (Magic) Johnson’s Johnson Development Corp., known for its partnerships with Starbucks, TGI Fridays and movie theater companies; and Michael Porter’s Initiative for a Competitive Inner City (ICIC), Boston, are among those involved in stimulating inner-city commercial redevelopment.

Even with such strides in research and the wide variety of development incentives, urban deals are seldom a slam dunk. Real estate pros asked to put together a handful of deals for company review will often skip the inner-city ones because of the stigma and complexity, ignoring such incentives as below-market-rate loans, federal tax credits and local and state financing vehicles, say LISC and Social Compact officials.

It took five years to find a developer for a greatly desired grocery store in the inner-city neighborhood of Congress Heights, in Washington D.C., says Oramenta Newsome, director of the LISC Washington office. Residents had been forced to cross the state line into Maryland for over a decade just to find a full-service grocer. “You can imagine how this can disenfranchise the population and add to a poor level of nutrition.”

The William C. Smith Co., which had been busy renovating and replacing Washington’s neighborhood housing stock and building a recreation center, joined the effort and enlisted Landover, Md.-based Giant Foods to build a 65,000-square-foot grocery, its largest in the D.C. area. The project, jump-started by some $18.6 million in tax credits from LISC and additional assistance from the East of the River Community Development Corp., was a focal point of a recent tour Newsome gave Fed Chairman Bernanke.

The Giant store created 300 full- and part-time jobs and helped bring in other retail, including Staples and Starbucks, Newsome says. There was one negative: Area homes are rising in value, and Newsome is concerned this will price out lower-income residents.

The future seems to hold much more inner-city redevelopment. Over the next decade, some $3 trillion in public and private funds will be invested in U.S. urban communities, according to the Brookings Institution, a Washington-based nonprofit research organization.

As part of its Urban Markets Initiative program, Brookings is assembling a partnership that includes Social Compact, some half dozen lenders and about 25 retailers committed to creating a better data tool for gauging market potential in such areas.

“We are trying to create a national scale so we can do something profound, not piecemeal, and so that developers and retailers won’t have to find a way to crack the code every time they look at an inner-city area,” said Pari Sabety, a Brookings fellow and director. “It’s an answer to the question of how we can give developers the tool they need to accelerate that investment and a tool to make sure that it’s good investment — without everyone involved incurring brain damage in the process.”

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