Since 1992, the beginning of the current economic expansion, residential real estate has performed very well across much of the U.S., however the evidence suggests that much of this appreciation has occurred either in the suburbs or in the major cities (e.g., New York, Boston, San Francisco). For example, in Massachusetts median housing values for the entire state increased by 10.8 percent for the period from 1990 to 1998, whereas in Boston they increased by 41.7 percent. In contrast, smaller cities in Massachusetts with populations between 50,000 and 100,000 people experienced an overall 2.8 percent decline in residential property values during the same time frame. The purpose of this manuscript is to both explore the question of whether or not these smaller, older urban areas represent an investment opportunity in this new millennium, and to identify what criteria an investor should utilize in helping to evaluate future investment potential in these areas. A case study approach is used to help address this question, and eight cities in Massachusetts form the basis for this analysis. These cities, and their estimated 1998 population, are listed in Table 1.
WHY IS THIS ISSUE RELEVANT?
One school of thought regarding the investment potential in an older urban area might be to simply avoid it; too much risk and uncertainty. However one only has to think back 30 years to realize that some of our major cities (e.g., Boston) were once questionable locations for residential investment, and today they represent some of the highest residential values in the U.S. Do the smaller cities represent a similar growth opportunity when viewed from an investment perspective? The authors believe they do, under certain circumstances.
Several overall trends suggest that the smaller, older urban areas will see improved performance of their residential real estate, and each of these trends are discussed briefly:
Smart Growth: Most of the politicians want to place more emphasis on good planning and mass transit and place less emphasis on suburban sprawl. This should translate into more funding for urban redevelopment, which would directly benefit the small- to medium-sized cities which have the available infrastructure to accommodate growth. Equally important, many suburban areas throughout the U.S., and particularly in the Northeast, are seeking to slow growth.
Lifestyle and Demographics: Two age cohorts, the 20 to 29 year-olds, and the 55 and over groups, have the potential to be attracted into older urban areas if the cultural amenities can be sufficiently enhanced to appeal to the lifestyle interests of these groups. Many smaller cities, such as Portsmouth, NH; Burlington, VT; and Portland, ME, have already demonstrated this potential by focusing on culture, restaurants, and specialty retail, taking advantage of their waterfront selling. The potential for this trend to continue is substantial, and the opportunity to link this initiative together with colleges located in older urban areas will become increasingly important. Likewise, many smaller cities are becoming more sophisticated, developing urban entertainment centers and sports and cultural attractions, again directed to these targeted markets.
Growth in Downtown Employment in the Major Cities: Many of the major cities in the U.S. have experienced a tremendous resurgence in their downtowns as a result of concerted planning efforts over the last 20 years. For example, Boston has created over 50,000 new jobs in the past decade, many in the financial and legal services and technology sectors. This factor, coupled with the related development of cultural/restaurant venues, has lured workers to the major metropolitan areas, and in turn these people need a place to live. With residential prices escalating in the major cities, close-in urban locations with relatively more affordable housing would be likely beneficiaries. As the following analysis will indicate, this fact is starting to happen in Massachusetts, and is likely to occur elsewhere in the U. …