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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   February 2014

Exploring Opportunities in Urban Cores

The rise of cities brings new development and funding possibilities

Homeowners once dreamed of fleeing each night from the hustle and bustle of the downtown core and driving to a sleepy bedroom community with homes surrounded by white-picket fences.

Now residents of major cities want to walk from their condos to their offices and later meet up with friends at a show, restaurant or school, all a short stroll from their apartments. They want to live, work, play and get an education near their homes. People are paying a premium to live in the urban cores of cities like New York, Washington, D.C., and Miami to avoid traffic jams and long commutes.

There are several reasons why downtown and urban-core properties are hot commodities. Trends in zoning that once designated one zone of a city exclusively for residential use while another zone exclusively the domain of urban office towers are giving way to a new idea that cities should encourage a mix of land uses within zoning districts. Foreign investors pour money into America’s cities, looking to buy into the United States because of its strong property rights and laws, the stability of the dollar and the convenience of living in an urban city with mixed uses.

Some cities, like Miami, are taking it a step further by enacting zoning codes that allow and encourage developers to construct buildings that are home to mixed uses as long the building’s exterior fits in with the architecture and design of the surrounding neighborhood.

Commercial mortgage brokers and originators should pay attention as cities rise again. Opportunities will arise in unexpected places. Developers will find innovative ways to use property in the cities as more people return to live in them.

Past history

A nearly 90-year-old trend in cities to keep residential areas purely residential is giving way to the idea of allowing a mix of uses in a neighborhood. While times are changing, it is important to know some background on why American cities developed in the way they did.

The most common form of zoning in the United States is called Euclidean Zoning. Its name comes from the city of Euclid, Ohio, which adopted a new zoning code designating certain areas (zones) of the city for specific separate purposes; for example, keeping homes in one area and factories and shopping centers in another. A 1926 U.S. Supreme Court decision upheld the city’s right to designate land zones exclusively for one purpose to the exclusion of another.

For nearly a century after that decision, a philosophy took root to separate residential areas from the commercial core of the city. Simply put, the prevailing attitude was that people should go to sleep in one area, work in another and shop, play and go to school in another. The car became a necessity.

This idea, however, is giving way to a new zoning philosophy to allow for stores, offices, cafes, restaurants and homes on the same block. Some cities are adopting a form-based zoning code, encouraging mixed uses to create a walkable urban city and providing design guidelines of how a building should fit into the neighborhood, rather than conform to a predetermined permitted use on a zoning map. This has made living in the urban core the new American dream because it’s a very convenient way of life to have everything — home, work, shopping, play and entertainment — all in one place.

Miami provides a good example of form-based zoning. The Miami 21 zoning code enacted in 2010 encourages several uses within the same building. A new building’s facade must conform to fit within the context of surrounding buildings, and the new building may have shops occupying the first floor, offices on the middle floors and apartments up top. Prices for downtown Miami commercial and residential real estate are skyrocketing as Miami’s new zoning code is bolstering demand for real estate, making the city an even more desirable place to live, work and play.

New opportunities

With more people moving back to cities, mortgage professionals and lenders will have new opportunities. As residential demand increases and prices for properties rise, owners of commercial properties, shopping centers and offices in urban cores will see the demand for their properties rise and cap rates decline.

Shrinking cap rates and increased prices will force new buyers of urban property and developers to seek financing for these steep purchase prices and to be creative in their use of the property to maximize value, such as building vertical retail shopping centers with parking lots inside, or installing a soccer field or satellite antennas on a roof to generate income.

Commercial mortgage brokers who have a thorough understanding of the significance of these new trends will understand and meet their clients’ needs, whether financing residential condominiums or commercial developments.

By offering sincere guidance and balanced advice to clients, brokers may find themselves with a wealth of repeat-and-referral business. 


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