Rethinking Capital and Geography
The enactment of the Investing in Opportunity Act and the designation of Opportunity Zones across the United States compels cities and investors to rethink the interplay between sub-city geographies and private capital.
Consider this: US cities have evolved along distinct demographic, economic and cultural lines but have followed similar development patterns over the past 100 to 150 years. As Chris Leinberger and others have shown, a familiar set of urban archetypes have emerged across cities.
Central business districts or downtowns grew up along waterfronts. These places housed large public and private sector employers and, over time, added sports, entertainment venues, convention centers and a tourism sector (e.g., hotels, restaurants). The employment mix in CBDs has changed over time, with the demise of large department stores and the rise of entrepreneurial communities. Office space is the dominant land use form in CBDs, though for-sale and rental residential are the fastest growing uses in recent years and are expected to expand.
Anchor districts generally emerged in midtown areas of the city, or areas adjacent to downtowns. In these places, universities and other institutions, such as hospitals, other medical facilities and research centers, are the dominant landowners. In cities with advanced research institutions, these anchor districts have evolved into innovation districts, characterized by tech transfer, commercialization, specialization, start ups and scale ups, and supportive institutions like co-working spaces, incubators and accelerators.
Industrial districts also developed on the periphery of downtowns, with (depending on the city), production/manufacturing facilities, warehouses, and car dealerships. In recent years, they have been converted to a range of residential/entrepreneurial/restaurant/ boutique hotel/food manufacturing (e.g., craft brewing) uses and now are considered “go-to” destination areas in cities (e.g., NULU in Louisville, Automobile Alley in OKC).
Airport districts or seaport districts also initially developed on the periphery of downtowns to support the movement of goods and people. In recent decades, many airports moved further out, where they developed large nodes of logistic activities buttressed by office and even residential.
And, finally, residential areas occupy the largest share of the urban land mass, differentiated by housing type/value, income/education/racial/ethnic profiles of residents, retail and amenity (e.g., parks) offerings.
For urban officials, practitioners, researchers or residents themselves, these archetypes are so settled that they rarely elicit discussion or debate. Yet the Opportunity Zone tax incentive enables us to think about each of these distinct areas as possible asset classes or investment sectors. A group of Opportunity Funds, for example, might aggregate around Opportunity Zones with similar economic and social characteristics and competitive assets (e.g., downtowns vs medical districts vs industrial districts vs residential areas) rather than discrete products (multifamily housing, commercial real estate, business startups). Imagine a Midwest downtown fund or innovation district fund or industrial district fund. Or imagine a fund focused on low-income residential communities.
in our view, the creation of such Funds would enable capital to flow to disadvantaged places that have been long undervalued and under-resourced, the prime motivation behind the Investing in Opportunity Act. For investors, it represents a vehicle for expanding deal flow, diversifying risk, and enhancing the performance of Funds.
The creation of such Funds would recognize the synergistic effect of disparate investments that strengthen and reinforce each other’s value, rather than as a collection of separate and unrelated investments. This is a major departure from the status quo where large commercial banks and governmental agencies compartmentalize all aspects of financing (equity investments, debt lending and grant making just to name a few) even though the focus of these investments (e.g., housing, infrastructure, small business) are physically located in small geographies and interact in a way that enhances values for each of the disparate elements.
In other words, financial and government institutions have focused on separate products rather than holistic places. Opportunity Zones could change that.
At a minimum, the creation of Zone typologies could help motivate major institutions within different kinds of Opportunity Zones to consider how to realize their full economic impact. Universities, for example, should explore initiatives to take full advantage of their real estate holdings, endowment investments, alumni networks and purchasing and hiring strategies.
The creation of Zone typologies could also help Opportunity Funds that focus on discrete products (say commercial real estate or multifamily housing) provide a geographic overlay of their investments. That could engender deeper data analysis about market trends and performance.
To start moving the market, Jeremy Nowak, Ken Gross and I developed a simple methodology. Using the Longitudinal Employer-Households Dynamics (LEHD) data, we calculated the ratio of jobs in each census tract to residents in the census tract. We then proceeded to categorize census tracts along the following lines:
Tier 1 Job Centers are tracts where the jobs-to-residents ratio exceeds 10:1.
Tier 2 Job Centers are tracts where the jobs-to-residents ratio is between 2:1 and 10:1.
Mixed Jobs/Residential are tracts where the jobs-to-residents ratio is between .8:1 and 2:1.
Residential Areas are tracts where the jobs-to-residents ratio is less than .8:1.
We then went further and determined whether a particular census tract had an anchor presence or an industrial profile. For anchors, we used a national dataset of hospitals and colleges/universities and designated “anchor tracts” that have hospitals with 300+ beds and/or colleges/universities with 5000+ students. Similarly, census tracts with more than 20 percent of their jobs construction, manufacturing, transportation and warehouse were designated “industrial tracts.”
So how does this methodology play out on the ground? Here is a map of Louisville’s Opportunity Zones.
As you can tell, the designated Opportunity Zones in Louisville conform very well with our Zone typologies. The two Tier I Jobs Centers, for example, are in tracts with major anchor institutions: the downtown (where the Jefferson Community and Technical College is located) and the area around the University of Louisville. The five Tier 2 Job Centers are in tracts that either have anchor institutions (hospitals in East Louisville), industrial facilities or are located near the airport.
What now? The ultimate goal is to move from Zone typologies to investable projects. As many of you know, Jeremy and I were engaged by Accelerator for America to design Investment Prospectuses for Louisville, Oklahoma City and South Bend. Each Prospectus will provide detailed analysis on each Opportunity Zone in these cities, providing uniform data on employment density (a good proxy for market dynamism), recent demographic, business and real estate trends and, where appropriate and accessible, investment flows and anchor institution (e.g., university, hospital, mature company) strategies. The unifying theme is that capital follows capital and that capital generally will align with special market advantages and purpose.
As we finalize the Prospectuses for Louisville, OKC and South Bend, we will simultaneously conduct research to show how our Zone typology plays out across the top 100-150 cities. We hope to unveil how many downtowns have been designated, how many medical districts, how many university districts and so on. We believe this analysis could guide the market and spur financial institutions, local economic development organizations and other intermediaries to do the kind of deeper data collection and analysis that matches capital to investable projects.
The creation of Funds that operate across multiple cities around multiple products in common parts of the urban landscape could be a Very Big Deal. This could be the kind of innovative finance that the country has been waiting for to move capital off the sidelines into productive use for inclusive purposes. Let’s start doing the math.