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ICIC Reseach

The Construction, Housing and Real Estate Cluster in Inner Cities

Construction, Housing and Real Estate(CHRE) long suspected to be a strong foundation of economic revitalization for inner city economies now emerges as one of the single largest economic drivers for urban revitalization. In a seminal Initiative for a Competitive Inner City study, which for the first time scopes out the CHRE cluster in inner city economies, preliminary data shows that for every $1 invested in this cluster, the benefits multiply exponentially. Not only does this cluster bring real, tangible infrastructure to inner city economies, it creates, jobs, income and wealth for inner city residents. ICIC has learned that while overall job growth in the inner cities decreased by -1% over the period from 1998-2005, employment in the CHRE cluster increased by a full 9%. Among the 25 largest Inner Cities during that same period, the cluster grew by an astounding 39%. Clearly, understanding the sector is of utmost importance for the nation’s economic stability and represents an enormous opportunity for revenue creation.  

The CHRE cluster is comprised of two sections: heavy construction and local real estate and construction. The former—heavy construction—includes the major infrastructure work of bridge, highway and pipeline construction, as well as traded portions of residential and commercial buildings. The latter—local real estate and construction—serves demand for construction, financing, maintenance, sale, and leasing of residential and commercial buildings.  

The recent collapse of the sub-prime market and the subsequent market scramble show in vibrant color the scope and importance of the cluster for the nation’s overall economic health. ICIC’s proprietary State of the Inner City (SICE) database has demonstrated for years that local real estate and construction are strong economic drivers in inner cities. Now, this research relates the two by studying the affordable housing boom of the 1990s and into the 21^st century. The CHRE cluster is of vast importance to the social and economic health of urban neighborhoods, both for its benefits to residents, but also as a major economic engine. By 2005, it was the third largest employment cluster in the inner city (760,000 jobs), lagging only behind health services and commercial services. Its many constituent activities—which span the construction, manufacturing, wholesale trade, retail trade, finance and insurance, real estate, and professional services sectors—can generate opportunities for employment and entrepreneurship in a diverse group of occupations and industries. This CHRE study delineates, for the first time, the size and scope of this cluster and its impact on inner city economies. In particular, the research (hopes) helps clarify the link between real-estate and housing investment, and the creation of jobs, income, and wealth for inner cities.

The urban renaissance of the past decade missed much of the U.S.’s urban core. Despite strong employment growth in central cities and metropolitan statistical areas, 60 of the 100 largest U.S. inner cities have suffered net job loss since the late 1990s.[1] Some of these areas are starting to lose population as well, putting them at risk for a cycle of disinvestment, continued population loss, and further disinvestment. Housing construction is a critical leverage point in breaking these trends. This study examines the potential for CHRE cluster activity to serve as the cornerstone for revitalization of these neighborhoods. In the future, this cluster could be the single most important factor in inner city development, in spite of the recent disruptions in real estate. The long view looks promising; demographic and social factors will drive population back into the cities.  Upward trends in energy costs will accelerate the migration. And the repopulation of the inner city will serve to create unprecedented demand for real estate, construction, retail, and personal services. Additionally, the CHRE study hypothesizes that an increase in residential quantity and quality will lead to further development, and perpetuate growth in the commercial sector. 

As recent events in Minneapolis and New York have shown us, inner cities must also begin to undertake a massive overhaul of municipal infrastructure. Bridges, highways, and sewer systems are all aged and in desperate need of rehabilitation. Billions of dollars in government contracts will be up for grabs over the next decade, and employment in the CHRE cluster is bound to skyrocket – it is important that inner cities participate in this growth.

ICIC’s CHRE study contains two distinct parts. The first section provides a descriptive, empirical, and analytical treatment of the CHRE cluster, including an examination of current and historical employment and income generation in inner city, center city, and metropolitan area economies; a dissection of the inter-industry relationships that constitute the cluster; a profile of CHRE market trends in inner and central city economies; and an accounting of the linkages between CHRE and other economic clusters, such as retail and personal services. This section also contains a parallel analysis to examine only that portion of the CHRE cluster driven by residential construction.

The second section of the study examines the relationship between urban CHRE activity and local economic development outcomes, and the metropolitan CHRE cluster as a generator of economic opportunity and activity in distressed areas. Through rigorous data analysis, this section of the study examines the impact of CHRE activity on job creation and retail expansion for the 100 largest cities and their inner cites for the period of 1998-2005, as well as provides a summary of national level trends. This study joins ICIC’s other work on inner city retail to advance the organization’s overall research agenda. While most practitioners and experts agree that retail and housing development are complementary processes, there is limited understanding of the specific conditions under which activity in one cluster promotes development in the other. With ICIC’s detailed and proprietary data on cluster activity in inner cities, the CHRE cluster study addresses this deficiency and fills a major gap in the current literature; the importance of housing as an economic driver and development tool has not yet been fully described or adequately estimated. The study will develop the analytical capability and logic needed to establish the full role of housing and related activity as a driver of economic vitality for America’s neighborhoods, and especially for our poorest urban communities.

Understanding the CHRE cluster is critical for the key players who participate in it—from investors and developers on the one hand, to city governments and community development organizations on the other. Only hard data can provide a bridge over the chasms that exist between the providers of capital, the deployers of capital, and the consumers of capital in disadvantaged communities. Examining the nuances in the performance of the CHRE cluster helps to reveal opportunities for maximizing financial and social returns. Many inner cities are on an upswing in the economic pendulum and represent a powerful opportunity for investors interested in buying power, demographic trends, infrastructure development, or even business vitality. Identifying top-performers—and more importantly, the soon-to-be top performers—is crucial if capital is to be invested efficiently.

As cities turn inward from sprawl and look for core development strategies, and as minority populations continue to burgeon in cities, the density and opportunity of America’s urban core will serve as the growth marketplace of tomorrow. From Harlem in New York to MLK Boulevard in Birmingham, Alabama, land at the heart of the city—whether an infill, a brownfield, a derelict warehouse or a defunct manufacturing facility—is an increasingly precious resource that needs to be examined with fresh eyes. Today, a vacant plot in an inner city location no longer represents fallow land; for a clever investor it represents an above-market rate of return; for a canny developer it represents a plum opportunity in putting together a mixed-use development project and taps into the areas latent purchasing power; for a city government it represents an opportunity for creating jobs, affordable housing or infrastructure development; and for a community development organization it represents an opportunity to bring products and services that the local community currently lacks.

Today, more than ever, there is tremendous competition for capital in place-based investing. Capital will flow to those destinations that want it—and do everything in their power to facilitate the deployment of capital. The ability to position an investment quickly, efficiently and at a competitive rate of return will decide where investments will flow. For America’s inner cities, that’s a critical message: when it comes to real-estate investments, our domestic emerging markets now compete with global emerging markets. The challenge then is this: can Chinatown in Detroit compete with Dalian in China? What do cities need to do to attract, retain and deploy capital? What do capital providers and developers need to do to spot opportunities in domestic emerging markets as they do for global opportunities? And how can invested capital be deployed most efficiently in inner cities such that it results in economic inclusion—and not isolation—for inner city residents?