State and local governments eye real estate to unlock funds for social programs

CHICAGO, Jan. 22, 2019 – Looming pension liabilities, lack of affordable housing, neglected neighborhoods and public healthcare crises are just a few of the financial pressures faced by state and local governments. Increasingly, state agencies and local governments are fighting these societal challenges by unlocking funds and facilities from their real estate portfolios.

“Seeking economic development, housing and much-needed capital, governmental officials are looking to their real estate assets, which can be a greater source of value than most people realize,” said Kevin Wayer, CEO, JLL Public Sector and Higher Education. “True innovation comes when you take ‘everyday’ facilities and repurpose those buildings to solve real problems.”

Four trends in public sector real estate

Leaders are finding new ways for buildings to serve constituents more effectively without cutting mission-critical services or staff. Sometimes that means refinancing or selling under-utilized assets; sometimes it means reimagining the use of a longstanding facility. 

Following are four trends illustrating how states and cities will unlock value from their real estate in 2019:

1. State and local governments can’t wait until 2020 to solve the affordable housing crisis.

As housing consumes an ever-growing portion of household income, affordable housing cannot wait. While many cities and states offer housing subsidies, navigating complicated eligibility criteria and processes can create insurmountable obstacles for consumers in need.

On the supply side, affordable housing inventory is often constrained by restrictive zoning laws and high development costs that lead to higher-priced housing. 

“The growing distance between the very rich and middle-class or low-income household has created a housing crisis in some cities, particularly on the West Coast,” said Bob Hunt, Managing Director, JLL. “Forward-looking cities will parlay a combination of zoning changes, redevelopment incentives, tax policy and creative approaches to reduce housing development costs and, ultimately, the costs to consumers.”

For example, an East Coast county recently optimized its real estate portfolio and uncovered hidden value to foster economic development, develop affordable, workforce and senior housing, and ensure a high quality of life for all residents, of all ages and income levels. The county formed several public-private partnerships (P3s) to improve public amenities and infrastructure; support transit-oriented development; and provide workforce, affordable and senior housing in mixed-use communities where residents want to live—all while optimally leveraging existing resources. The county financed an affordable senior housing project by combining a P3 with low-income tax credits and tax-exempt bond financing from the county housing authority. 

2. Cities will find surprising new ways to use and monetize public sites.

Visionary leaders are recognizing that state and local real estate assets may have potential value far beyond their current uses. A facility or land parcel could potentially be a resource for solving civic challenges, whether revitalizing a neighborhood, spurring economic vitality or creating a scenic downtown riverwalk.

For instance, one Midwest city saw the potential of a prime riverfront site that was becoming a nightlife hotspot—and was also home to a large public works facility. The city created a P3 to finance the development of a vibrant live-work-play community and also support the public works relocation.

“Looking ahead, we expect to see some cities take far-reaching steps to unlock the value in major assets to deliver much-needed capital for other projects,” Wayer said. “We’re seeing more interest in opening up valuable city sites for redevelopment with private sector partners. They will direct investments more broadly across their portfolios rather than retaining the value in a single site.”

3. New thinking and an integrated approach bring economic empowerment to underserved communities.

Smart city leaders have seen that reliance on a single economic development mechanism—whether it’s tax increment financing (TIF), New Market Tax Credits, special service area (SSA) or other programs—is rarely enough to bring true economic empowerment. 

As a result, some cities are thinking more boldly in terms of economic development that can change lives and futures. Integrated approaches can become more than the sum of their parts. However, coordinating disparate tax credits, TIFs and subsidies requires significant expertise and understanding of eligibility and reporting requirements.

Another big opportunity in 2019 for state and local governments, and more importantly their constituents, is opportunity zones. These are designations created by the Tax Cuts and Jobs Act of 2017 allowing for certain investments to have tax advantages as a way to revitalize economically distressed communities using private investments. State and local governments will play an important role in identifying worthy projects within their communities, providing additional state and local incentives to bring projects to fruition, and bringing together projects and potential investors.

“We’re also seeing visionary developments being created around public transit,” Hunt said. “All the major cities have or are expanding their commuter rail lines and we expect to see more transit-oriented developments in the future—and many with public-private partnerships.”

4. City leaders stop kicking the can down the road to fix crumbling infrastructure.

Decades of deferred maintenance has resulted in crumbling schools, bridges, roads and trains in cities nationwide. In fact, there are nearly 55,000 structurally deficient bridges in the U.S., according to the latest data from the Federal Highway Administration. The American Society of Civil Engineers' 2017 Infrastructure Report Card, which is published every four years, gives U.S. infrastructure a D+ grade, and the ASCE also estimates the U.S. needs to spend some $4.5 trillion by 2025 to improve the state of the country's roads, bridges, dams, airports, schools and more.

Lacking reliable funding for infrastructure investments, cities will increasingly look to P3s as a means of transferring design, construction and financial risk to a private sector partner while leveraging public resources.

“When thoughtfully designed, public-private partnerships can be a solution for modernizing infrastructure elements that can generate user fees or other forms of revenues,” Wayer said. “However, not all infrastructure upgrades can be monetized.”

As cities make investments to address deteriorating systems, some will begin to incorporate smart city technologies such as sensors, ultra-high-speed communication networks, data analytics, and control and automation. Smart, responsive street lighting is a common starting point, as is public broadband access and traffic flow management. Columbus, Ohio, for example, is using integrated data exchange (IDE) to analyze information aggregated from sensors installed on traffic lights, and informs drivers of these danger zones.