ForumPLUS Neighborhoods: Emerging Neighborhoods Poised to Break Out

With the Lewis & Clark National Historic Trail headquartered in Omaha, NE, the city is an icon of our nation’s storied past. But its pioneering spirit continues today with developers and community members still committed to its growth. Jay Noddle, the president and CEO of Noddle Cos., a real estate firm based in Omaha, has been a major part of the city’s economic growth, with developments including the Omaha Riverfront Redevelopment, the First National Bank Tower, Aksarben Village and the First National Business Park, to name a few.

Thinking about a change? He might very well say, then you might want to move to Omaha.

To be sure, the unbiased observer might have a few more questions about the viability of such an action. But Noddle has the stats on his side.

Using 2010 total population numbers from the US Census Bureau, Omaha’s population is 408,958. Its metro area includes Council Bluffs, IA, whose population is 62,230. The city is 130 miles from Des Moines, whose city and county population totals 243,761. It’s also just about 55 miles from Lincoln, NE, with 294,667 residents, counting the city and county. In total, these areas exceed a million residents.

“So there’s a critical mass, which starts to get the area on a few radar screens,” Noddle says. “Omaha is an emerging market. We’ve moved from a third tier city to a second tier city and everybody’s working hard for Omaha to become a first choice city.”

A common thread with all emerging cities—and one stressed also by Omaha—is that jobs are critical for growth. Similar to other cities, Omaha is looking to tech jobs to attract millennials. Google is building a data center in the Omaha-area. Facebook is expanding its data center in the nearby city of Papillion to 2.6 million square feet. LinkedIn recently revealed plans to move into a 200,000-square-foot facility potentially increasing its workforce to 1,000 by 2021. “Omaha is kind of known as the Silicon Prairie,” says Noddle.

As it’s a market that’s still emerging, housing is affordable. Noddle says the best apartments for rent are about $2 per square foot a month. To buy a home, the median price per square foot is $145, according to Zillow. The median price of Omaha’s currently listed homes is $239,900 while the median price of homes that sold is $183,400.

“People can live here in a really nice house, make a very nice living and be able to put some money away every month,” adds Noddle.

Not everything is perfect. For instance, The Washington Post has reported that Nebraska has a bit of a housing shortage. Although in the state employers are willing to pay more to lure talent, only one in every 184 or so housing units in the state were for sale in any given month, according to Zillow. The paper noted this makes available homes about 1.7 times more scarce than the national average.

 

That Hipness Factor

Does Omaha have what it takes to be the next emerging market, similar to what, say Denver or Nashville were 10 years ago? Indeed, trying to determine which city is most likely to be the next Austin or the next Charlotte requires an analysis of many moving parts. Omaha, it would appear, is checking off many of the boxes and could well be added to that list one day. But as experts will tell you, it is more about the numbers, and, in Omaha’s case, some elements are still not in place.

Noddle acknowledges that “the community has had a reputation, a stigma if you will, for being a sleepy Midwestern city; that the rug gets rolled up at nine o’clock, and that’s just not the case.”

But even that may be subject to change. Although everyone might not know it, Noddle reports there’s an exciting music and food scene—He’s even working on a food hall with a Brooklyn hospitality group “and they see tremendous opportunities here.”

The issue of stigma or a geography’s reputation doesn’t just apply to more rural areas or those unfairly imagined as “out in the sticks.”

For certain emerging neighborhoods to be successful they need a “hipness factor that’s already bred into the neighborhood,” says Susan Tjarksen, managing director in the Chicago office of Cushman & Wakefield. Similar to some Chicago areas, for example, the Bushwick neighborhood of Brooklyn already had a hip image with a historical, gritty, industrial past. That contrasts to Staten Island, which has a deeply embedded, long, suburban history. Although on the water and close to Manhattan with seemingly desirable real estate lacking the X Factor, that borough will take a much longer time to emerge.

In addition, neighborhoods can get stigmatized by crime. “There are crimes such as gun violence, reported rapes, your house gets broken into on a regular basis,” says Tjarksen. “And then there are crimes like your car gets broken into. You have to differentiate between them.” The graffiti, litter, vandalism, annoyance crimes differ from those that will actually keep people from moving to a neighborhood and will slow down gentrification.

Alan Schactman, director of the residential division of Clayco, a Chicago real estate and construction firm, is involved with two emerging neighborhood projects, both of which have access to public transit. Transit, he says, is critical for a neighborhood to emerge.

One of the projects is 1980 N. Milwaukee in Logan Square, walking distance to Chicago Transit Authority’s blue line. The other is 4555 N. Sheridan in Uptown Chicago, right off CTA’s red line. “Those are literally the two most active and traveled lines in the city,” he says.

 

The Tipping Point

Schactman defines “emerging” as areas where people want to invest. That can mean multifamily residential properties attracting the younger, single, recent college graduates who want to live in the city, paying rents they can afford. Those tend to be the edgier neighborhoods.

But emerging can also mean where the affordability allows for an uptick in single-family homes, where he sees movement in Chicago’s Uptown.

Tjarksen specifies what signals the “tipping point” for gentrification: “When you see the number of bachelor’s degrees climb in a submarket that’s one indication. The second indication is home ownership. People who are buying two flats and converting them to single-family homes or renovating them and living there as well, and renting out the upstairs.”

She says an emerging neighborhood’s timeline generally starts 10 years before the tipping point, and then takes another 10 years for the market to reach maturity.

Although people describe gentrification as making areas more livable, downsides can include what Jane Jacobs describes in The Death and Life of Great American Cities. The neighborhoods can become the victim of their own success, getting too popular, pushing up the rents so high that the quirky independent shops can no longer afford to stay. Chain stores fill the area and long-term residents get pushed out by the higher rents and cost of living.

“That’s a tough one,” says Clayco’s Schactman. He notes some developers are “really trying to retain as much authenticity of the neighborhood as possible.” However, with candor he says, “But I don’t know a developer anywhere in Chicago that performs less than $30 or $35 [per square foot] on retail rents which a Mom and Pop probably isn’t going to be able to do.”

He says, “There’s a real push pull between gentrification and affordable housing. There may be elderly people who have lived in areas for 30, 40 years and may not be able to afford to live there,” when neighborhoods change. But with the high costs of construction he adds, “Unless we get subsidies from various groups, we can’t build workforce housing.”

Tjarksen adds, “Every developer in the city believes that inclusionary housing is important to the stability of neighborhoods and that workforce housing in place needs to be maintained.” However, whether that gets delivered through rent control or affordable housing ordinances is still up for discussion.

She states mandates for rent control or affordable housing can have unintended consequences of making the cost of building no longer penciling out, which will result in less construction. She cites a Cushman & Wakefield report finding inclusionary housing is predicated on the continued development of market-rate housing.

 

The Crucial Role Government Plays

Scott Metzner, the founder and principal of Janus Property Co., the developer frequently cited in the media as “changing the face of West Harlem” has been building in that area since his company was founded in 1989. Metzner describes the neighborhood as emerging—for the last 30 years.

Janus is actively developing in the Manhattanville Factory District between W. 125th and W. 128th streets. It comprises three acres of old industrial buildings and vacant lots within a special mixed-use rezoning district. Within the expansive commercial and residential area, the New York City Economic Development Corp. selected Janus along with Monadnock Construction to develop the Taystee Bakery complex. It stretches from W. 125th Street to W. 126th Street, east of Amsterdam. Janus has already completed renovations of the Mink Building and the Sweets Building.

In the early 2000s, the firm completed a gut rehab of 13 buildings from 111th Street to 116th Street in Central Harlem. The New York City Department of Housing Preservation and Development noted this track record so worked with Janus on a project at 132 W. 112th Street. They combined an abandoned vacant structure with ground-up construction on an adjacent lot, creating 41 units of affordable rental housing.

Metzner states the government plays a critical role in urban renewal. In West Harlem, the City of New York took ownership of a substantial amount of land and buildings and rolled out redevelopment projects.

“Over time between the city and state efforts, federal programs, the Reinvestment Act, low income housing tax credits, new market tax credits and now Opportunity Zones, the projects have become more attractive for private investment and as places where people have different means to live and to socialize and to recreate,” he says.

In the Factory District, their buildings have served multiple uses for artists, architects, medical services, retail, art galleries, non-profits and life science research. He says the city and community were looking to convert the area previously zoned for manufacturing, into “almost an uptown downtown, a master-planned, smaller district, inside West Harlem including the first purpose-built life science building under Mayor Bill de Blasio’s life science initiative.”

Although much of Janus developments occurred in vacant areas, largely without residential displacement, Metzner acknowledges displacement of residents can occur when neighborhood values increase in rent.

However, market forces can address some of those issues. “At least temporarily, the multifamily market that we see Uptown is extremely soft and so I see rents the last couple of years going down, not going up.” He also adds there are programs, tax credits, HPD projects subject to regulatory agreements that guarantee rent stabilization and rent control.

“At the same time, walking up the street here 32 years ago, I can’t believe anyone with a straight face can say that these neighborhoods are not more vibrant and better neighborhoods today than they were 32 years ago,” he says.

Frontier Versus Emerging Neighborhoods

“Frontier is a little bit more of the Wild West with greater uncertainty. Emerging is one where institutional equity has arrived, using Oakland as an example,” says Ric Russell, executive managing director at Cushman & Wakefield’s Oakland, CA office. “Five or six years ago, institutional equity would not invest in Oakland, now everybody wants to be here.”

He describes frontier neighborhoods as locations where people are taking more of a risk and which are farther from neighborhoods that have “arrived.” Russell listed Castro Valley, which is north of Fremont but south of Oakland, just south of San Leandro. He also identified Emeryville, traditionally a commercial city, but also considered somewhat of a frontier.

With frontiers, Russell advises people to make sure they know the submarkets. Just because values are rising in a nearby urban core, investors can’t assume the same for another submarket—even a neighboring one.

“The growth we’ve experienced over the last five, six, seven years will not continue as far as rent growth is concerned. Occupancy will remain very strong, but rent growth is going to slow,” he predicts. “And if you jump into an area where you’re the first guy and you think it’s going to be the next area, I’d be careful.”

Russell’s advice? “I wouldn’t want to be investing in a frontier area. I would want to stick to early emerging areas,” he says.

Although Berkeley is traditionally a strong area dominated by the student market, Russell still categorizes it as emerging with extensive construction still being built. Over 600 units were built last year and there are over 600 more that are planned to be built. “It’s a traditional market, that has an emerging component.”

Russell points to Alameda as a solidly emerging neighborhood. Adjacent to and south of Oakland, it’s across from the San Francisco Bay. Trammell Crow Residential formed a joint venture, Alameda Point Partners, to construct a $1-billion waterfront development on property that was a vacant, former naval air station. The developers are building 673 units, which are scheduled to open in 2021.

Russell says the brand new product with significant retail and commercial development will attract tenants. As an island it has geographical, waterside appeal. It’s a mile from Oakland and with the ferry service, San Francisco’s financial district is a short distance. Plus, Alameda enjoys a very low crime rate.

Gentrification Versus Affordable Housing

Miguel Robles-Durán, associate professor of urbanism at the New School, says there will be larger problem if rents continue to escalate and become more unaffordable. This will lead to not only people having trouble finding places to live but property owners unable to rent their buildings. He says it is already happening, particularly in the retail sector.

Tax payer funded, government affordable housing has its limitations. For example, New York’s 80 (market rate)/20 (affordable) requirements with new construction have not significantly lowered the statistics of the city’s rent-burdened tenants. And developers say they are making it too expensive to build.

The New School expert also opines large deep pockets—such as institutional investors—cannot be relied upon to buoy the real estate market. The bottom line is residents ultimately have to be able to afford housing to avoid homelessness and building vacancies.

“Real estate investors can move their money somewhere else, where they can make more money,” says Robles-Durán. Unlike the individual homeowners who live in their homes and have to pack up their belongings and find another place to live, institutional investors and private equity can pull out their investments, and invest in real estate elsewhere, in another country, or invest in another sector.

Robles-Durán sees newer developers address affordable housing with more innovative approaches including participatory developments, which are more community-centered. With shared ownership, residents would be invested in the property and it would help ensure affordability. Other developers are also looking into different pricing schemes, charging market rate for large commercial tenants but a more affordable rate for tenants with more limited financial means.

Younger developers are more accustomed to sharing economies or industry disruption. “They understand in order to continue to make New York City a livable, lively, great place, we need to keep its population density as exciting as its people.” he says.