News Roundup

Are Downtowns in Danger of Going Downhill Again?

Many ambitious programs to revitalize downtowns of cities across the U.S. are stalling as the economy slows.

BusinessWeek
By Chermelle D. Edwards and Prashant Gopal

In 2003, Tampa Mayor Pam Iorio launched a campaign to turn the city’s small, sleepy downtown into a thriving core of offices, condos, stores, restaurants and bars. The city’s 760-acre downtown would be transformed into a 24-hour hub of activity where residents could work, shop, play and wake up each morning without dreading another traffic-clogged commute.

The downtown area would come to life with 11,000 new condos, a 19-story office building (the first new downtown office tower in two decades) and new shops and restaurants. And the downtown population, which is now about 2,000, would swell to about 20,000.

City planners had every reason to believe they would be successful. The housing boom was in full swing, and young professionals and empty nesters across the nation were coming back to city centers, which, starting in the 1960s, the middle class and affluent had all but abandoned in favor of suburbs where the crime rate was lower, houses were larger and schools were better. But in the previous decade, cities from Miami and West Palm Beach to Philadelphia, Atlanta, Houston and San Diego had suddenly become hot again. (See the slide show for downtowns that could see their revitalization hurt by the economic downturn.)

But everything has changed for Tampa and for many other cities because of the housing slump and foreclosure crisis, which were intensified by the year-old credit crunch. Only about 3,500 of the planned condo units have been built or are under construction in Tampa’s downtown area, and many remain vacant. Office construction has been delayed.

Optimism for cities
”It was a false start, you might say,” said Patrick Berman, senior director of retail brokerage for Cushman & Wakefield Florida, a real-estate advisory group. “The market really slowed down. It was difficult to finance deals. People made deposits on condos and didn’t close.”

Berman, who lives two miles from downtown, said he’s certain Tampa will finish what it started as soon as the housing market revives. He said cities haven’t lost their luster; it’s just that homebuyers have become scarce. In fact, there is evidence that real estate in cities around the nation is doing better than in suburbs, especially those distant suburbs where land was cheap and builders created an oversupply of houses.

And prices in many urban centers went up much more during the boom than they’ve fallen since. In Miami, for example, home prices nearly tripled from March 1999 to March 2006, when prices finally began to flatten, according to the S&P/Case-Shiller Home Price Index. By comparison, prices were down 24% in March 2008 compared to March 2006.

Cities have plenty of reasons to be hopeful. Rising energy prices have made it expensive to commute from the suburbs and to heat large suburban homes. And the weak dollar has attracted foreign tourists to cities and persuaded many of them to invest in urban lofts and condos.

Risks remain


Still, since the end of last year, as property values across the country continue to soften and credit markets tighten, downtown development is slowing. “There is no more ‘build it and they will come’ mentality. Retail development follows population growth,” said Scott McIntosh, senior economist with the National Association of Realtors.

Already this year, many of the more prominent development deals, such as Bruce Ratner’s $4 billion Brooklyn Atlantic Yards project, anchored by a new arena for the New Jersey Nets and 8 million square feet of apartments, are being scaled back.

“Ambitious projects will be put on hold, but I don’t think they’ll throw away the blueprints,” said Mark Zandi, chief economist at Moody’s Economy.com. “A lot of inner cities are going through a bit of a renaissance for broader demographic reasons that will remain in place for a while. Aging baby boomers are becoming empty nesters and they’re thinking of moving back to the urban core.”

But cities also face risks, especially when it comes to crime rates, which fell significantly in many major cities before the housing boom began almost a decade ago. Crime increased during the 1980s with the rise in the population of 20-somethings, Zandi said. As another wave of Americans enter their late teens and 20s, cities need to work hard to keep crime in check, he said.

Violent crime rates began to tick up in 2005 and 2006 after years of declines. But that trend reversed itself in 2007, when property and violent crime rates fell for the first time in three years, according to statistics released in June by the FBI. Murders fell 9.8% in cities of 1 million or more, and violent crime rose slightly in distant suburbs and rural areas.

Urban planners adjust


Moody’s Zandi said urban centers will continue to flourish in coming years despite the slumping economy and real-estate market. “I don’t think this is the beginning of a trend, an inflection point,” he said. “It’s a step back in a process that has had many steps forward.”

Still, urban economic development planners are having to adjust to the changing economy. When Jim Cloar accepted the job to head St. Louis’ downtown revitalization effort in 2001, the timing seemed right. As in Philadelphia, Cleveland, Denver, Los Angeles and other struggling downtowns, there were now powerful political and economic interests backing revitalization. The real-estate market was booming and many developers saw a chance to turn former commercial buildings into hip, loftlike spaces, shops and trendy hotels for young professionals not yet ready for the move to the suburbs.

Like many once-thriving downtowns, St. Louis’ had gone into a steady decline after World War II. By the 1980s, many of its historic buildings had fallen into disrepair, as jobs, retailers and residences relocated to the more affluent suburbs. It was Cloar’s job to help bring them back.

“We’re experiencing the ricochet impact of the economy,” says Cloar, CEO and president of the St. Louis Downtown Partnership.

Between 1999 and 2007, St. Louis saw more than $4 billion worth of investment pour into its downtown, where more than 96 of its historic buildings were restored. “In 2006 and 2007, we added significantly more inventory than what we had been adding on a historical basis,” Cloar said. “In 2008, our occupancy rates are going to drop, and it will take time to burn off the oversupply.”