Brownfield Redevelopment ROI = Orders of Magnitude
Multiple studies show brownfield redevelopment raises property values, catalyzes investment and returns orders of magnitude on public investment.
Decades of research have consistently demonstrated that close proximity to polluted sites, brownfields and other unwanted land uses decreases property values substantially. But you don’t have to live next door to feel the impact. Environmental contamination and blight cause neighborhood-wide impacts on the values of other properties located anywhere near these kinds of real estate undesirables.
A 2006 meta-analysis of 80 peer-reviewed journal articles concluded that property value loss is the greatest the closer to an operating facility—as much as 15-30%—but impact ripples to affect values up to several miles away from 4-8%. Homes nearby landfills and Superfund sites experiences a 10-25% discount to value—with impacts up to 1 mile away also between 4% and 8%.
The negative health and safety impacts of abandoned homes, old gas stations, and other brownfield and greyfield properties may be less powerful, but the economic and social impacts can be just as consequential. Even though brownfields may not be especially contaminated or threatening, especially as compared to Superfund sites, there are many more of them. Their poor aesthetic quality creates a stigma—particularly in the aggregate—that causes the neighborhood and surrounding area to be an undesirable place to live and work. Worse, it can attract illegal dumping, vandalism and other crime. An unvirtuous circle results.
The opposite is also true when brownfields are restored. And this is part of the reason why economically distressed urban neighborhoods often experience the highest marginal returns from redevelopment. Redeveloping brownfield properties eliminates the negative force holding down the market and replaces it with something new—to positive effect. This is how real estate markets eliminate the negative and accentuate the positive. Converting “upside down properties” right side up again provides a very real, concurrent double-impact to the community, the economy and the environment.
A recent study carried out by the Western Reserve Port Authority demonstrated property values increased 18% in five years around Mahoning County brownfield sites following clean up. The study also found a 66% discount for real estate adjacent to contaminated sites that had not been cleaned up compared to properties one mile away.
The total value returned by a brownfield redevelopment can be enormous. In a 2012 NBER study, researchers found residential property values increased by 5.1% to 12.8% near brownfield sites once cleanup was completed. And, in a follow-up study, the same researchers found by “averaging over the experiences at a nationally representative sample of brownfield properties, cleanup leads to housing price increases between 4.9 percent and 32.2 percent.”
Under the most conservative estimates of the cleanup effect and the housing value increase, the NBER study found an average benefit value of $3,917,192 per redeveloped brownfield site while the average per-site cost for remediation is $602,000 according to estimates by the Northeast Midwest Institute estimates—part of which occasionally is paid through EPA cleanup grants of up to $200,000 (although the competitive federal program is usually oversubscribed by 5X). Even without the help of an EPA grant, the ROI can be huge.
The researchers concluded housing prices are substantially higher post-cleanup compared to pre-cleanup the closer properties are to the contaminated site. This cleanup effect diminishes the further a property is from the site—or at roughly 4000 meters (about 2.5 miles) in the chart from the study (right).
Another study measuring the effects of brownfield clean-up on the value of surrounding real estate was published this year by a professor at North Carolina State University. Researchers examined the cleanup of sites in Minnesota to determine the before and after land value of nearby properties by collecting data on more than 8,000 industrial and commercial properties in the Twin Cities region of Minneapolis and Saint Paul. They compiled this data with sales data from over 150,000 residential single-family homes.
Using homes nowhere nearby industrial and commercial property as a benchmark, the NC State study found that homes close to a contaminated industrial or commercial site sold for approximately 8% less than benchmark homes. The NC State study also found that once contamination is cleaned up, prices normalized. More than half the sites examined during the study period were remediated and researchers discovered that sale prices rebounded—completely.
Site remediation rebalanced sales prices of homes nearby to be ultimately on par with sales prices of homes around clean industrial and commercial properties. No lasting “stigma” lingered to affect property values post clean up.
But, in spite of the potential rewards, brownfields are generally avoided for their reputation of being tougher to develop, which prevents the private sector from redeveloping them on its own without help. There are substantial legal and financial risks involved in developing potentially contaminated real estate. Private developers need sufficient return on investment to justify taking on the extra risk in developing such a site. The finished real estate product must pay for the cleanup and total reconstruction cost of the site. If the cost to clean up and redevelop is too much, no private developer will consider the site an opportunity worth pursuing.
Compared to blank canvas greenfield development, legacy sites and brownfields are like an unlabeled box of chocolates. They are full of uncertainty and unknown conditions. Often, the true cost to cleanup is unknown until you’re done digging. The possibility for the worst outcome can cause developers to shun a site because the risk of the unknown is too great. Nobody wants to reach in and pull out a maple cream. Private developers have limited appetite or ability to absorb losses from unexpected site conditions that can increase cleanup costs, or worse. A robust insurance industry serves the redevelopment space and helps manage the risk—but even sophisticated modelling tools to measure and manage environmental risk only go so far for developers.
This higher brownfield risk creates additional upfront costs in the form of site assessment and remediation and a longer pre-development phase to address regulatory issues. And even if environmental testing comes back from the lab to show little or no contamination, the obsolete infrastructure and other legacy development impacts can still make brownfield and greyfield redevelopment more costly. These higher upfront costs mean that redevelopment and infill projects generally have lower internal rates of return than other typical developments in the early years.
Greenfields are packaged with incentives to attract development too, but often greyfield, brownfield and Superfund developments are aided by special grant programs, financial incentives and other public mechanisms that are necessary to attract any private capital. The public’s return on these investments comes directly, but also indirectly by increasing the tax base, creating jobs and encouraging other private investment. The result is often economic development that revitalizes neighborhoods and expands employment in the very communities hardest hit by plant closures and economic decline.
Fiscal impacts at the local level can have a double effect, with new revenue created on previously unproductive land along with simultaneous infrastructure savings in the short term—because infrastructure is usually already in place. Greenfields generally require public sewage and water systems additions, and extensions to other utilities, streets and other civic infrastructure. These new additions add maintenance costs, which by comparison can also make brownfield development a cost-saver over the long run. A 2001 study estimated that developers nationwide could save nearly $200 billion over 25 years (2000-2025) in constructing the projected 25 million new housing units needed over that time if brownfields and infill sites were selected and smart growth principles applied.
The economic, social and environmental benefits of brownfield redevelopment are large enough to attract substantial public policy consensus to encourage brownfield investment. This year there were brownfield bills introduced in both the House and Senate by Republicans and Democrats. And brownfield bills often enjoy unanimous consent, a rare thing in U.S. politics.
One reason is the program pays for itself with incredible return on investment. The 2012 NBER study analyzed over 1,000 brownfields in the U.S. in a benefit-cost analysis and concluded: "Taking the most conservative estimate of the value of an average site cleanup, we find that it indeed passes cost-benefit analysis by an order of magnitude based on the expenditures from the Brownfield Program."
Developing brownfields is also a land-saving strategy that spares greenfield land—often agricultural land, open space or habitat. EPA estimates that every acre of brownfield land saves 4.5 acres of greenfield from development. And brownfields also present the opportunity to redevelop a more efficient and sustainable built environment, because many brownfields are located in densely developed areas with much greater location efficiency than greenfield sites. From a site selection perspective, the relative accessibility of many brownfield and greyfield sites—still located on the old roads, railways and canals—offers a large location advantage over far-flung greenfield sites.
This can result in energy savings and reduced emissions. Results of five EPA pilot studies showed a 32% to 57% reduction in vehicle miles traveled (VMT) when development occurred at a brownfield site rather than a greenfield site. Lower VMT leads to a reduction in air pollution emissions and reduced congestion. These same EPA site comparisons showed that brownfield redevelopment improved water quality by reducing stormwater runoff 47% to 62% compared to greenfield site development.
The aforementioned U.S. EPA Brownfields Grant Program has enjoyed wild success since its inception in the 1990’s. Through the first 20 years of its existence, the program leveraged an average of $17.79 of capital for every single EPA Brownfields dollar expended. By 2013, more than $20 billion was leveraged through all brownfields federal, state and tribal programs. Just as impressive, 7.3 jobs were leveraged for every $100,000 spent on the assessment, cleanup and revolving loan fund cooperative agreements awarded and administered through the program—11,182 jobs in 2015 alone. A 2008 national study estimated job returns somewhat higher, determining that one permanent job is leveraged for every $10,000-$13,000 invested in a brownfield redevelopment project.
States can also use brownfields as an opportunity and make redevelopment a policy priority. Wisconsin, for example, has developed several brownfield incentives and legacy site programs designed to overcome redevelopment hurdles and brownfield barriers to capture the multiple economic, community, and environmental benefits that can ripple through the area around each project. And the impact of brownfield investments in the state have been even greater than federal averages.
Wisconsin commissioned an analysis to quantify the impacts of state and local government brownfields investments, so that budget-watchers and policy makers could take measure of the efficacy of its brownfield programs. What was the fiscal efficiency of the public money spent, and the taxpayer’s return on investment?
The study demonstrated leverage ratios for Wisconsin of $27.25 leveraged per $1.00 of state funds spent; and only $3,000 in state brownfields funding to leverage 1 job. Merely by counting direct state revenues generated by the business occupants of newly created space, the state recouped $1.77 billion—over 14X return on investment. Over half of Wisconsin’s revenue outlay is generated just from constructed activity and recouped in state tax revenues. Post redevelopment values were found to exceed pre-development values at a ratio of 3.5:1. Each cleaned up and redeveloped site added an average of $3.4 million to a locality’s assessable base, which also benefitted from rising property values.
One-time impacts from Wisconsin’s investments, together with local government investments and federal assistance to redevelop its brownfields, generated $3.3 billion in direct total investment (or $6 billion of combined direct and indirect investment) in completed brownfield projects and projects underway at the time. The ongoing economic output directly generated by the businesses occupying completed projects was estimated to be $4.4 billion (or $7.6 billion combined direct and indirect) statewide “economic output.” This generated 29,900 direct new and retained permanent jobs (or 54,500 direct and indirect jobs)—with another 9,100 jobs planned at the time of the study for a total brownfield job pipeline is 39,000 direct permanent jobs.
Next door, Minnesota’s public investments in its brownfield grant programs have also leveraged significant private investment, created and retained jobs, and increased local tax bases. The Minnesota Department of Employment & Economic Development administers the state’s largest source of funds for brownfield cleanup and redevelopment. Since 1995, its two main brownfield grant programs have leveraged over $44 of private investment for every $1 of brownfield funding. Minnesota created or retained a total of 104,000 jobs in the state and increased local tax bases by over $1.15 billion.
Like Wisconsin and other states and cities, Minnesota is targeting redevelopment for its positive ripple effects that reverberate beyond property values. Cities too have recently begun to capture the benefits of brownfield development, infill and density by rethinking transit-oriented development, applying economic gardening and incubation strategies to encourage local growth, and cluster-based economic development strategies to encourage ecosystems of interrelated firms, industries, and supporting organizations at a regional level. These new approaches aim to foster innovation, enhance productivity, and improve economic performance to build a new economic future atop the development legacies of the past.
5,700 sites in Minnesota have been assisted through its brownfield programs, but much work still remains. 10,000 more brownfields are estimated to remain in Minnesota, with another half a million to a million brownfields nationwide. In addition, there are millions of underutilized greyfield and legacy sites across the country—with “new” legacy sites ripening past their useful lives each year.
Among these, at the hardcore of redevelopment, there are more than 1,000 highly hazardous sites on the National Priorities List, also known as “Superfund” sites. These sites present clear dangers to human health and the environment and have been prioritized for cleanup, but the necessary funds are lacking. Recent EPA estimates of cleanup costs at just 36 of these Superfund sites alone total more than $4 billion.
And while there have been recent bipartisan proposals to increase brownfield grant funds at the federal level—down roughly 50% since its heyday—there are no serious considerations to outlay the funds required to clean up all 1,000 Superfund sites. And there is growing concern that Superfund funds will dry up entirely. These investments may have outsized returns that ripple outward for miles from the projects themselves, as we have seen, but capitalizing them sufficiently is a big pill to swallow even in the rarefied space of bipartisan brownfield love.
We’ll have to settle for marginal but steady public-sector support and incremental gains every year—for now. The potential for outsized redevelopment returns and generationally strong real estate fundamentals is attracting private sector investment to land recycling like never before. Private equity groups, for example, are even getting into remediating contaminated redfield and Superfund sites.
Every redevelopment dollar has ripple potential. With fundamentals, macros and consumer preferences all tilted toward redevelopment, even in tertiary markets and rural areas, investment flows toward brownfields, and infill and density should continue to progress. And continue on even if interrupted by an inevitable recession. Remediation techniques and land use technologies—like community solar—will continue to advance and open new opportunities on old sites. The success of each redevelopment will ripple into the surrounding area as another great American real estate refit takes shape.