Profitable to the Core
The interior of Shorenstein’s Seaport Center in Boston. The building was built in 1909 as a wool warehouse.
By Sharon H. Fitzgerald
While some American metropolitan areas continue their sprawl as their inner cities die, others are realizing what personal trainers have been preaching for years: You’ll be more fit if you strengthen your core. For cities following that mantra, experts say the result will be a healthier economy.
Across the nation are examples of inner cities making a comeback as residents and businesses reacquaint themselves with downtown amenities such as public transportation, cultural facilities, parks and sports venues. Young professionals in particular are eyeing urban life, while simultaneously, forward-thinking enterprises such as technology firms are making the competitive decision to move downtown. Yammer in San Francisco is just such a company, which in January completed its move to the newly redeveloped Market Square.
“We needed larger space because we were growing so fast, and in looking at all the options, Market Square was really attractive because it was a very unique property,” says Mark Woolway, Yammer vice president of corporate affairs. “You just don’t find old buildings like that anymore, and it was right in the middle of San Francisco.” Founded in 2008, Yammer launched a private social-media network designed for business. Yammer has 450 employees today and was bought by Microsoft last June for $1.2 billion.
“I think the whole zeitgeist of tech companies has been gravitating more toward urban centers,” Woolway continues. “Ten or 12 years ago, I was an early employee at PayPal, and back then, the epicenter of the startup world was really Palo Alto. Every startup had to be in Palo Alto. That is just so not the case anymore. Young people just like to be in cities, and cities are becoming more gentrified as a result.”
San Francisco-based Shorenstein Properties is the developer of Market Square, a two-building restoration that includes $80 million in renovations to the former Western Furniture Exchange and Merchandise Mart, which is Yammer’s new address. The Art Deco beauty, built in 1937, boasts a stunning marble lobby, 775,000 square feet and 11 stories. Coupled with an adjacent 335,000-square-foot building constructed in 1974, the resulting urban campus features a common plaza and a wealth of Class A office space.
Market Square has attracted a host of high-tech companies to the address, including social-media giant Twitter, which relocated its headquarters there in 2012. City officials in 2011 enacted what’s been called the “Twitter tax break,” a six-year exemption from San Francisco’s 1.5 percent payroll tax for firms locating in the distressed urban regions traditionally known as the Tenderloin and Central Market Street.
“We have a philosophy that many young companies want to be located in a downtown setting, especially with proximity to housing, good public transportation and an amenity base,” says Charlie Malet, Shorenstein’s chief investment officer. “What we’re seeing these companies want is wide-open, high-ceilinged, flexible space that, as their needs change, it doesn’t require a lot of construction. The more flexibility, the more desirable it is.”
Market Square is just one of many redevelopment initiatives spearheaded by Shorenstein. The company’s portfolio includes redevelopments in 11 American metropolitan areas, with several projects in some metros. In Chicago, Shorenstein’s River Point North was the redevelopment of an apparel mart; in West Los Angeles, The Reserve was once a U.S. Postal Service distribution facility; in Bellevue, Wash., The Spring District is the redevelopment of a Safeway distribution site; Shorenstein’s Seaport Center in Boston was built in 1909 as a wool warehouse.
Such developments are the marriage of history and progress, of the old and young, and that dichotomy isn’t lost on Malet. “A lot of these companies are dependent upon a younger workforce,” he says. “They’re trying to differentiate themselves as an employer, and one differentiation could be location. A second would be what type of office space they choose. That’s where our redevelopment projects have had success, because once redeveloped or repurposed, these older buildings create a pretty cool space.”
While technology enterprises seem innately drawn to these redevelopments, firms specializing in advertising, trading and accounting are popular tenants, too, Malet says. “I would say the common denominator is firms that have a younger demographic of employee,” he explains.
Shorenstein’s urban-core investments are one way to boost a city’s urban core, and there are others, according to Steven Pedigo, senior vice president of communications for the Initiative for a Competitive Inner City. Founded in 1994 by Harvard Business Professor Michael Porter, ICIC isn’t a think tank; it’s an “action tank,” Pedigo says, that battles inner-city economic problems such as underemployed or unemployed residents, high poverty and crime on two fronts:
- examining the assets of urban cores and how to put them in play, encouraging “anchor” institutions to shift procurement strategies to help local business grow, cataloging best practices that cities can use and
- working with entrepreneurs and small business owners in distressed communities to augment their business models and identify sources of capital. ICIC’s Inner City Capital Connections program, which works with up-and-coming businesses with at least $2 million in revenue, does just that. Since 2005, 375 businesses have participated in the initiative and raised about $703 million in capital.
“Our mission is to drive private-sector investment into inner cities, which are essentially distressed urban cores, to create jobs, wealth and income for inner-city residents,” Pedigo says.
How did urban cores get in such a state? Pedigo acknowledges that so-called “white flight” was a problem. But it wasn’t just residents who fled the inner cities, it was businesses, too. Yet, data now show that there’s a migration back downtown. “The real challenge, though, is how to do it in an equitable way,” Pedigo says. “We don’t want to over-gentrify and push people out. We want to build up inner-city assets and build up the workforce that’s there and create economic opportunity for all.”
The top asset for inner cities is that they are three times denser in population than the suburbs, he says. For manufacturing facilities, industrial assets such as highways, ports and warehousing already exist, and real estate costs are generally lower than city outskirts. In 66 of America’s 100 largest cities, another asset is an anchor institution. It may be a private redevelopment or, more likely, a hospital or college. Pedigo says these anchors create an “ecosystem” that fuels economic growth. “You create a swarming effect that really helps lift all boats,” he says.
That tactic is making news in Covington, Ky., where Gateway Community and Technical College in November 2012 launched construction of its Urban Campus. At a cost of about $80 million over the next decade, the downtown “adaptive re-use” will result in a reinvigorated six-block area focused on education, community service and economic development. “While it may be easier to locate a campus at the southern end of the county with 50 acres to build on, that’s 20 miles away from the population that has serious barriers when it comes to transportation and childcare,” says Ed Hughes, Gateway’s president and CEO. “Those barriers prevent them from going to school – or even thinking about going to school.”
In a nutshell, that’s the mission behind Gateway’s new campus – to enhance opportunities for more Covington citizens to attend college. Hughes says he expects the urban redevelopment also to be “an economic boom for catalytic activity.” Gateway is in the process of purchasing nine properties that will be the nucleus of the campus, and some new construction is slated to begin in 2014, including a new science and allied health center. Plans include the repurposing of an old YMCA as a student services and child development center and a former furniture store as a technology and design center. Already under way by private developers is a boutique hotel in a former department store. Gateway plans partnerships with other existing downtown facilities, including a library, an arts and cultural center, a convention center and a performing arts center.
“When we talk about embedded into the community, that’s really what we’re talking about,” Hughes says. “We really believe that in the future this will be a kind of model – a public, private, education, economic development, community development partnership.”
ICIC’s Pedigo says the future of many American inner cities will certainly look different: “There’s a huge shift going on in economic development today. For a long time, economic development was just real-estate driven – you build it and they will come. What has happened with the collapse of the housing industry and the real estate industry in general is that economic development has started to think about assets. What are the strengths of the community? What are the strengths of their workforce? What types of businesses thrive there? What do their zoning plans look like? How does it all come together?”