The commercial real estate downturn has had an adverse impact on many markets for environmental due diligence—and brownfield redevelopment is no exception. Earlier this month, EDR Insight presented its research into the intersection of commercial real estate, environmental due diligence and brownfields at RTM’s Sustainable Property Transactions conference in Boston. This Strategic Brief for environmental professionals, based on the Boston presentation, highlights the latest trends in this important sector of the environmental due diligence market.
Ask a sample of consultants across the country how the brownfield market looks, as EDR Insight did in its 1Q12 State of the Property Assessment Market Survey, and the answers run the gamut from “trending downward” to “strong.” The largest determinant of the strength of this market appears to be location. Consultants in California, for instance, noted the “demise of redevelopment agencies” there. While private deals for brownfields work are still limited, along with public sector funding, the good news is that some consultants are starting to see more inquiries and quotes to assess and sample brownfield sites. As noted recently by Robert Colangelo, Executive Director of the National Brownfields Association, “The decline in the economy and the real estate development market has not made the brownfield issue go away, but has caused a hiatus until economic conditions improve. While I cannot give you quantifiable statistics and hard facts, my gut tells me that transactional activity is starting to pick up in the brownfield industry. I’m seeing and hearing about the initial green shoots of deal flow.” Below are some promising developments worth mentioning that could potentially bode well for future brownfield opportunities when demand for property investment gains steam.
1. Tight funding shifts focus to other incentives. Government grants for brownfield assessments and remediation at the federal, state and local level have been significantly scaled back in the downturn. In some areas, local brownfields agencies have been disbanded, leaving states and local governments to get the most bang for their buck with limited resources. According to Sue Boyle a brownfield expert at GEI Consultants (Mt. Laurel, NJ), “I am seeing some areas go back to basics, using some funding to do Phase I ESAs so that they have basic information in hand that can then be passed onto the private sector. The funds are just too limited to tackle remediation projects, so they are doing what they can to incentivize the private sector to redevelop brownfields.”
Public agencies, faced with severe budget constraints, are also looking for any non-financial incentives that would appeal to brownfield developers. Connecticut, for instance, adopted a liability protection program that is getting a lot of attention. “These types of liability protection programs,” Boyle noted, “have value to private developers over and above any grants or low interest loans. Developers like certainty, they like maximum liability protection. So if Connecticut’s program takes off, other states could adopt similar initiatives, and we could see more developers moving in to take advantage of them and tackle brownfields redevelopment more enthusiastically.”
2. Alternative energy projects have brownfields slant. Where there is more public funding for brownfield projects is in the area of alternative energy projects focused on repurposing contaminated sites for use as wind farms or solar projects. Some consultants are seeing opportunities in assisting government agencies with the need to screen sites in a state’s brownfield inventory for viability as a future wind farm, looking at variables like property size, wind speed, proximity to the grid, etc.
3. Regional economic redevelopment initiatives address brownfields. At the regional level, there has also been the emergence of economic redevelopment councils that set their own priorities. Those submitting the best proposals get the most state funding. According to Boyle, “I see a great deal of potential for property redevelopment. As a planner, I like that regional areas are setting their own priorities on a broader scale rather than just tackling each brownfield site individually.” Also, given the extremely high unemployment rate, the emphasis, particularly on the East Coast, has shifted toward job creation. So if brownfield initiatives are proposed as a creator of jobs in a particularly hard-hit area, these projects stand a better chance of getting funding.
4. Strong interest in renewed urban cores favors brownfield redevelopment. Across the country, there has been renewed interest in the adaptive reuse of downtown areas, especially in areas littered with projects that failed to get off the ground during the downturn. Revived historic downtowns are particularly popular as migration patterns into urban areas increases. In addition, employers that relocated operations to the suburbs are moving back to the urban core because of the amenity base that downtowns provide. And in many metros, current conditions allow developers to invest in cities that otherwise would be inaccessible because of prohibitive land prices or lack of available land. Old abandoned mills or industrial facilities, for instance, are being transformed into multifamily or mixed use developments. Some were started and stalled in the downturn leaving opportunities to finish via foreclosure proceedings. And in many metros, like Boston, greater NYC or DC, given the limited availability of green space, developers have no choice but to look to brownfield sites in areas with strong real estate potential (e.g., within easy commuting distance of a major metro area).
5. Distressed asset deals bringing brownfields into play. The dramatic decline in property values and the growing number of opportunities to buy properties in distress are giving developers options to buy buildings to redevelop much more cheaply than back in 2006 and 2007. As the debt crisis enters the early innings of resolution, properties that failed are coming back in the market. “We are seeing transactions with a variety of property types in locations that have been slow for several years,” observed Alan Agadoni, Senior Vice President at ATC Associates Inc. (Atlanta, GA), “We are reviewing portfolios of distressed loans with significant environmental conditions, some of which include brownfields that stalled years ago because the owners defaulted and abandoned their development plans.” The devaluation in commercial property has made redevelopment of some brownfield sites a more viable option.
Despite limited funding in the public sector specifically for brownfield assessment and remediation, a number of regulatory and market forces are mobilizing to drive forward the reuse of abandoned properties. As these forces take root, environmental professionals will see demand for services to support brownfield redevelopment either in favor of job creation or alternative energy initiatives, or via private sector clients pursuing deals to buy abandoned, contaminated sites on deals that may now make economic sense in a particular metro.
For a copy of EDR Insight’s full slide presentation, titled State of Commercial Real Estate Industry, Capital Markets and Due Diligence Trends, click here.
NOTE TO READERS: The author wishes to extend special thanks to Sue Boyle for her help in crafting this Strategic Brief, as well as to Alan Agadoni and Robert Colangelo for their valuable insight.