With Housing Down, Some Buying Spots The Boom Bypassed

By David Devoss
Investor's Business Daily
December 27, 2007

The tougher the real estate market gets, the more analyzing location matters.

Not since the dot-com collapse of 2001 have sales of existing homes been so depressed. Residential property values have declined significantly in 46 states, with only Vermont and North Dakota recording marginal increases, according to the National Association of Realtors. Home sales in Seattle, Tucson and Baltimore, for instance,were down more than 40% from a year ago in the third quarter, a recent study by Re/Max International found.

So where can a prudent investor look for value and return when last year's preferred locations have plateaued or depreciated? For some the answer is found in undervalued urban areas bypassed by recent property run-ups.

Take Buffalo, N.Y., in decline for more than half a century. The Rust Belt city is now undergoing renewal and attracting investors.

"It's still possible to get in on the ground floor here," said Anthony Kissling, director of a more than century-old investment firm in New York City, Kissling Interests. He owns 20 buildings in Buffalo with 800 apartments, all of which are rented.

"I'm still looking around," Kissling said. "Property in Buffalo is ripe for the picking."

Buffalo Shuffles Deck

In 1950, Buffalo was a wealthy industrial center — the 15th-largest city in America. But in 1957, when the St. Lawrence Seaway opened, its population and economy began to decline. Throughout the 1990s the city's population fell 1% a year. By the start of this decade, Buffalo had lost half its population and had an unemployment rate 32% above New York's state average.

To save their city, local businessmen in 2000 began contributing $5 million a year toward a $25 million fund designed to support Buffalo Niagara Enterprise, a 501-C-6 private business development organization that would encourage and facilitate inbound investment.

One of BNE's goals has been to lure bioinformatics and human genome research companies to the downtown Buffalo Niagara Medical Campus. Its tools have included a variety of federal grants and state incentives designed to attract life sciences firms and professionals to neighborhoods with viable, if vacant, buildings.

Buffalo took advantage of a change in the state's building code that made it easier to rehab old buildings, and then it partnered with Albany to designate a number of impoverished areas as Empire Zones, where relocated businesses could reduce or eliminate state taxes for up to 10 years.

Entrepreneurs investing in Buffalo can take full advantage of the Department of Housing and Urban Development's Community Renewal and Urban Empowerment Zone initiatives. The incentives include employment credits, a 0% tax on capital gains and accelerated depreciation through Commercial Revitalization Deductions.

"In practical terms this means developers can amortize construction costs in half the time previously allowed," said BNE Chief Executive Tom Kucharski. "For every employee hired to work in an Empire Zone business, employers receive a $1,500 tax credit. If the hired employee actually lives in the zone, the credit jumps to $3,000. These additional funds allow us to appeal to residential investors."

Tax credits and financial incentives have attracted dozens of new companies, such asNew Era Cap Co., SmartPill and Bass Pro Shops, which plans to anchor a 12-acre historically themed commercial district located at the start of the old Erie Canal. According to Buffalo's Office of Strategic Planning, about $3.6 billion in new investment has poured into the city, with the vast majority of it coming from the private sector. Indeed, more than $1 billion worth of privately financed construction is under way.

Kissling is one successful developer in the residential sector.

"Nine years ago, when property got so expensive in Manhattan, I began traveling to large towns close to New York looking for a better return on investment," Kissling said. "I went to 13 cities and found nothing. Then I arrived in Buffalo and discovered architecturally significant buildings that cost 15% of what they would in New York."

Residential foreclosures may be the precursor of a declining economy, but public indebtedness can signal a commitment to future growth. That's the case in Oak Cliff, Texas, a residential section of Dallas that lies just west of the Trinity River.

Largely forgotten for the past half-century as the city sprawled northward, Oak Cliff today is in the initial stages of a massive property build-out planned for the area. It's driven in part by a 1998 bond measure calling for the city to spend $246 million to transform the Trinity River into a massive urban retreat 2 1/2 times larger than New York's Central Park. Complementary development funds from the state, public utilities and other private sources bring the total investment package to $1.3 billion.

Scheduled for completion in 2014, the development will transform the weed-choked Trinity River floodplain, which now divides Dallas, into a town lake bordered by hiking trails, bike paths, an equestrian center, arboretum and wetland refuge for migrating birds. Three bridges designed by Spanish architect Santiago Calatrava will surmount all.

Partially incentivized by a series of Tax Increment Financing districts, or TIFs, new townhomes already are starting to appear on the Oak Cliff side of the Trinity.

River Run Rises In Dallas

From here, residents get an unobstructed view of the downtown Dallas skyline. Developer Scott Hager plans to spend $120 million building 90 to 100 condos and townhomes standing above the river levee.

"We're creating a sophisticated urban lifestyle at a prime location on the Trinity River corridor," Hager said.

A major factor driving new home sales is the soaring cost of energy. According to a study by the nonprofit research firm Surface Transportation Policy Partnership, the average commuter in Dallas spends 19.7% of his income on transportation and loses more time in traffic each year than a motorist in Los Angeles.

"At $1.50 a gallon, people could afford to make 25-mile-long commutes from (the northern Dallas suburbs of) Plano or Frisco, but at today's prices, Oak Cliff starts to look very attractive," said Alan McDonald, senior managing director of the Incap Fund, a Dallas-based private equity firm. Incap is investing more than $200 million to develop 5,000 residential units on 300 acres inside Oak Cliff's Davis Garden District TIF.

McDonald believes that Oak Cliff's value results from it being ignored for so long. "Instead of 'McMansions' and starter castles so prevalent in North Dallas suburbs, Oak Cliff's housing base consists of elegant older homes that would cost $600,000 were they on the other side of the river," McDonald said. "In Oak Cliff you can buy the same house for $300,000, spend $100,000 remodeling and have a $600,000 house just five minutes away from the city's best restaurants, nightlife and culture."

Bucking The Trend?

According to Dallas real estate agent Jim Fite, president of the Century 21 Judge Fite realty firm, Oak Cliff homes in the leafy Kessler Park neighborhood 10 minutes from downtown Dallas may have increased 50% in value over the past decade, but Fite says there is plenty of room for further appreciation.

"Look what happened to San Antonio after the city developed its river," he said.

After decades in decline, Oak Cliff is defying the national housing slump, says Dallas planning and development consultant Jeff West, president of Jeff West Consulting. "Speculators already are moving through Oak Cliff one block at a time," he says. "Even I'm investing my own money there."

© Copyright 2007 Investor's Business Daily.

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