Investments in inner cities are paying off, especially in real estate, and there are plenty of other growing opportunities and competitive advantages, panelists said at the H. Naylor Fitzhugh Conference.
With 40 percent of African-Americans living in the inner city, the promise of urban development includes social benefits and the possibility for greater economic equality. But the inner city also offers solid business opportunities, panel members said.
Maxine Johnson, vice president of the Initiative for a Competitive Inner City, moderated the discussion on this new frontier of growth at the Harvard Business School conference held in Boston February 21.
Much of the discussion focused on opportunities in real estate, both residential and commercial.
The return of empty nesters to the inner city and the push for anti-sprawl, "smart growth" policies have created unique opportunities in real estate, said Richard T. Roberts, who directs the Urban Investment Group at Goldman Sachs. The $130 million private equity effort focuses on minority businesses and urban development.
| Real estate is a $24 trillion industry—there's no bubble there. |
| — Yvonne B. Haskins, Fannie Mae |
There's money to be made in low- and middle-income housing, too, added Yvonne B. Haskins, a senior manager and underwriter at Fannie Mae, who successfully invested over $70 million from 2001 to 2003 in Harlem and Brooklyn.
"Real estate is a $24 trillion industry—there's no bubble there," she said. But you have to pay your dues to play the game. "The four Cs we look for in a developer are character, capacity, the condition of the property, and capital."
Real estate realities
Businesses of scale in the inner city can take advantage of proximity to distribution, low rents, and a large labor pool. But it's not clear how long those conditions will last, said Lloyd M. Metz (HBS MBA '96) of ICV Capital Partners, a $130 million private equity fund focused on investing in middle market companies that do business in American cities.
In terms of urban real estate, he said, it's important to consider the target market: Is it the residents who are already there, or the first-time homebuyers and older suburbanites who are beginning to see the inner city as their new home?
"There are opportunities to aim for both," said Haskins. "You have to manage gentrification. You can't displace the people who live in the inner city or you will run into a political stonewall." The balance is to create mixed-income communities of the sort that existed before suburban development, she said.
"Real estate is risky. We don't get out of bed for anything less than a 20 percent return," said Roberts of Goldman Sachs.
There are several concessions Goldman Sachs makes in its Urban Investment Group, he continued: Capital is targeted to a specific population, smaller investments are considered, and the fund is purely proprietary.
"We don't promote a third party or charge a management fee," he said. Otherwise, it's very much business as usual. "On the front door it says 'Socially Responsible Private Equity," Roberts said. "Once we get in the room, all we're concerned about is the money."
Breaking with the status quo
For those looking for inner city opportunities outside of real estate, Metz made a few recommendations including:
- Businesses based on intellect rather than physical capital, such as healthcare and software.
- A business model that is scalable independent of real estate and people. "Think about transaction processing," he said. "That's measured in bits and bytes, not square footage."
- Ventures that have a low cost of distribution. A logistics business in freight forwarding, for example, doesn't own the boats, trucks, and trains that carry its goods, so it is highly scalable.
There are also opportunities for people who want to build businesses of size, said James H. Lowry, a vice president and director at BCG who led his own consulting firm and has had forty years of involvement in inner city development. His advice? Identify high growth areas (such as pharmas) where there are few minorities, take advantage of government programs, and leverage local government to support your efforts.
Other points to take into account, Lowry said:
- Communities are built through entrepreneurship, not intermediaries.
- The inner city won't be built on the backs of mom and pop stores. "We need to create national plays that bring in a lot of money," he said, noting that few chains are owned by African Americans.
- Growth won't occur unless entrepreneurs achieve the same returns in the inner city that they'd realize elsewhere.
- Money is available. People are willing to do deals, but they have to make sense.
Whatever the opportunity, panelists agreed on the importance of taking risks and breaking with the status quo to realize economic growth in the inner city.
"We have to change our mindset in order to start new ventures that will make a mark not just on our community, but on our society," said Lowry. "The new paradigm is for major businesses that can employ a number of people and create significant wealth."
Partnering within race, community, and with institutions is key to success, he added. "Leadership will have to come from you," he told the audience of young MBAs.