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Downtowns in danger of going downhill again?

Since the end of last year, as property values across the country continue to soften and credit markets tighten, downtown development of major U.S. cities is slowing.
/ Source: Business Week

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 about 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 the middle class and affluent had all but abandoned starting in the 1960s in favor of suburbs where crime was lower, houses were larger, and schools were better. But during the last decade, cities from Miami and West Palm Beach to Philadelphia, Atlanta, Houston, and San Diego suddenly were hot again.

But everything changed for Tampa and for many other cities with the housing slump and foreclosure crisis, which was intensified by the year-old credit crunch. Now only about 3,500 of the planned condo units have either been built or are under construction in the downtown area, and many remain vacant. The office building also has been delayed.

Optimism for cities
"It was a false start you might say," said Patrick Berman, senior director, 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 the downtown, said that he's certain that Tampa will finish what it started as soon as the housing market returns. He said cities haven't lost their luster—it's just that home buyers have become scarce. In fact, there is evidence that real estate in cities around the nation is doing better than in suburbs, especially in more 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. High 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 convinced 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 stadium 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 (MCO). "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 twentysomethings, Zandi said. As another wave of Americans enters 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 this month by the FBI. Murders fell 9.8% in cities of 1 million or more people, 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 loft-like 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 following 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. In 2008 our occupancy rates are going to drop and it will take time to burn off the oversupply."