Real estate development and housing provision are businesses. Value capture of business activity is economic development. Business activity generated by residents is necessary for capturing economic value locally.
Since the Great Recession of 2008, private real estate developers have embarked on a market rate building boom in New Haven. Thousands of new rental apartments, hundreds of hotel rooms, dozens of storefronts, and several biomedical research laboratory buildings have been constructed and many existing mixed-use buildings, multifamily apartment complexes, and commercial buildings have been renovated.
Booms and Busts in New Haven Real Estate
This contemporary building boom stands out from preceding decades of development in New Haven for a number of reasons. In the early twentieth century, the city was growing – new neighborhoods and infrastructure were being built and land uses in existing neighborhoods were intensifying as industry flourished, people moved here, businesses opened, and civic organizations multiplied. By the middle of the century, however, New Haven’s population began declining as immigration slowed and large numbers of people started moving from central city neighborhoods out to surrounding suburbs. With little market demand and expensive costs of rehabilitating and redeveloping urban property, private real estate development dwindled.
At the same time, Yale University expanded its campus to accommodate new schools, a growing student body, and more faculty. Yale’s mid-twentieth century building boom provided the city, local businesses, and residents with construction jobs, building permit fees, and people with disposable incomes in need of goods and services, but little in the way of property tax.
To support real estate development in the city, a plethora of public subsidies were offered in order to attract developers to New Haven. Infrastructure like roads, sewers, and utilities were upgraded. Building sites were prepared through acquisition, clearance, and consolidation. And individual development projects were provided with low-interest loans, gap financing, operating subsidies, and tax breaks. As a result, modern manufacturing facilities, a shopping mall, and subsidized housing were built in the city, but much of it relied on local property tax abatements and deferrals.
As was the case in many parts of the country, there was a notable building boom of residential condominium complexes in and around New Haven in the 1980s, but much of the construction was concentrated on the periphery of the city and in neighboring suburbs. At the time, the city center was, in many ways, characterized by wide roadways, parking lots, and vacant storefronts. The Savings and Loan Crisis coincided with a bust of the condominium market and an economic recession. Even when emerging from the crisis in the 1990s, New Haven saw little private real estate development that didn’t require significant public subsidies. This largely remained true until the second decade of the twenty-first century.
New Haven’s Contemporary Real Estate Market
In the 2010s, New Haven experienced a rush of developers buying center city properties, proposing new mixed-use apartment buildings, and constructing them with little help from the City other than some zoning text amendments and temporary tax breaks. New Haven’s downtown and several central neighborhoods have been transformed by this boom in private real estate development. The city is home to thousands of new residents, many businesses have opened, and employment opportunities abound.
Many real estate investors believe New Haven’s high number of jobs in the educational and medical fields may fare better in future economic downturns than other sectors. The region’s persistently low vacancy rate for residential rental units is another driver for investment. People are also drawn to the history, culture, social life, entertainment venues, climate, geographic location, transportation options, natural resources, and other aspects of the city. In addition to investors in market rate real estate assets, New Haven has attracted investors in subsidized housing as well. This is, in part, due to local legislators’ eagerness to provide generous subsidies and tax breaks to development projects marketed as being “affordable”, “LGBTQ+ friendly”, and “inclusive”.
How can the level of affordability and inclusivity be measured? Typically, affordability is measured by the number of housing units that are available to households earning a certain percentage of the average income of households in the metropolitan region at prices that do not exceed 30% of their household income. Many State and Federal housing programs aimed at providing housing for low and moderate income households define moderate income as 80% of Area Median Income. As of 2023, 80% of median income for a household of four people is $78,500 in the New Haven-Meriden Region. So an affordable monthly rent for such a household would be considered $1,962.50. Measuring inclusivity, on the other hand, is less straightforward.
In September of 2023, New Haven’s Mayor called a mixed-income development that was under construction at 222 Canal Street an example of “inclusive growth”. The offices of the project’s developer are located in New Haven, a third of the rental apartments are reserved as “affordable”, and, according to the developer, 20 percent of the contractor’s workers are local New Haven residents. To better understand whether this, or any recent, development project in New Haven is an example of “inclusive growth”, it would be helpful to better understand how a typical real estate asset is developed.
The Contemporary Real Estate Development Model
Real estate professionals are constantly looking for investment opportunities. They may seek out undervalued properties that could be improved to attract new higher-paying residents. They may invest in a newly-built or renovated building that is full of tenants who recently signed 12-month leases. Or real estate investors may search for underutilized land that could be developed with new residential or short-term stay units, or commercial office or biomedical laboratory suites in places where there is demand for such spaces.
Once a potential investment property is identified, the developer will likely engage legal and design services to determine what is feasible to build on the site and whether the revenue that the property could generate sufficiently exceeds the costs of developing it. If the developer senses that the building will not generate sufficient revenue or the costs of construction are too high, they won’t move forward with that project. If the development team can arrive at a feasible design, then local land use approvals will be sought. If they haven’t already done so, the developer can acquire the property, secure financing from lenders and investors, and prepare the design for construction. A general contractor, usually having outbid other firms for the construction work, will work with subcontractors to prepare the site for development and then construct the the building. Meanwhile, the developer will hire a leasing and property management firm to create a marketing campaign for the building, advertise the building to prospective users, and, as construction is nearing completion, begin negotiating leasing or sales agreements with prospective renters or buyers. Upon completion and full leasing of the building the developer may refinance their loan or look to sell the property.
Almost any recent development project in New Haven follows a similar pattern. The developer and their legal counsel, architects, engineers, general contractor, subcontractors, lenders, investors, realtors, and property managers are usually based outside of New Haven and frequently outside of Connecticut. Sometimes the professional firms working on the development project may have local offices, but rarely are the firms, and especially their leadership, made up of New Haven residents, public school graduates, parents of public schoolchildren, or otherwise people who are involved in local community or civic activities in the city. When New Haveners are excluded from most real estate development activity in the city, the vast majority of expenditures on, value derived from, and revenue generated by real estate development gets extracted out of the local economy. The exclusion of New Haveners and extraction of wealth from New Haven is done neither intentionally nor for nefarious reasons. There is no conspiracy to purposefully exclude local residents nor extract wealth out of the city. While this is certainly the outcome, it is by circumstance – not design.
The cost of building a new residential unit is upwards of a quarter of a million dollars. To construct a building with several dozen or hundreds of units costs tens or even hundreds of millions of dollars. This level of finance requires large banks and wealthy investors. Local lenders, like New Haven Bank, tend to specialize in smaller loans of a few hundred thousand dollars and cannot accept the risks or terms to compete with a larger bank for a construction loan on a large-scale development project.
Likewise, a building with a hundred residential units is complicated to design, engineer, and build. This requires highly experienced and well-insured legal, architectural, engineering, and contracting firms. Few of these firms are headquartered in New Haven, so when developers seek the most qualified and competitively-priced professionals, they often must turn to firms whose offices and staff happen to be in other communities elsewhere in Connecticut and beyond. While some lower level staff may be local residents, most of the expenditures on legal advise, design, and construction are exported out of the city by upper management and the business owners. In addition to labor expenses, most building materials are also not sourced locally due to global manufacturing, shipping, and trade systems. Only a small portion of development expenditures are collected by the municipal government through building permit fees – much of which is used to pay the salaries and benefits of Office of Building Inspection and Enforcement employees and retirees.
Upon refinance or sale of a real estate asset, like a one hundred unit residential building, nearly all of the value is captured by the developer, the lender, and the investors. In the case of a sale, the City receives a modest conveyance fee on the property transaction, but this mostly covers administrative costs rather than generating revenue for the municipality. The price that a buyer is willing to pay for a real estate asset is a function of many things, including the revenue that the asset generates relative to its operating costs. A fully-occupied one hundred unit residential building in New Haven could generate several million dollars in revenue a year. That revenue will be used to pay for property management services, building operational costs, local property taxes, and to repay any principal and interest on a bank loan and returns for investors.
Exclusive and Extractive Growth
This real estate development model remains fairly consistent regardless of whether the asset is market rate, affordable, mixed-income, residential, or commercial. In a market rate development, the revenue generated by the building through leases or sales must exceed the costs of developing the project. In an affordable apartment building, prices of units are often set below what is required to cover development costs. The real estate professionals involved in an affordable project, from the developer to the service providers and investors, expect to be compensated comparably to a market rate development, so public subsidies in the form of gap financing, tax breaks, and revenue assistance are required in order to maintain the profitability of the asset.
In the case of the 222 Canal Street mixed-income development, the City of New Haven provided gap funding for the project through the American Rescue Plan Act along with a 15-year local property tax abatement. Local Initiatives Support Corp., a nonprofit community development financial institution, also provided financial assistance for the development project. The bulk of the $50 million project’s financing comes in the form of $38.5 million loan from a New Canaan-based lender. The development’s ownership, meanwhile, is based in West Hartford and Norwalk. The general contractor for the construction is headquartered in Shelton, while the engineer and architect have offices in New Haven. The electrical subcontractor for the project is based in Avon and the mechanical, plumbing, and heater subcontractor operates out of Hamden. The bulk of the expenditures, value, and revenue of this development project will be exported to Fairfield County with some also going to Hartford’s suburbs and a small portion staying within the New Haven area as well.
For a city like New Haven, the contemporary real estate development model is inherently exclusive and extractive. New Haveners are largely excluded from real estate ownership, investment, and the development process itself. The wealth generated as a result of this development model is extracted out of the city. For anyone interested in equality, equity, and inclusion, the obvious issues with the contemporary real estate development model as manifest in New Haven should be of major concern.
Strategies for Lessening Exclusion and Extraction
One approach to addressing this issue would be to explore how, if at all, this exclusive and extractive model of growth could be made less exclusive and less extractive. Strategies that have gained traction in recent years have the potential to reduce the exclusivity of New Haveners and extraction of wealth from the local economy that would otherwise occur from future development and growth. Among these strategies are attempts to unionize hotel workers, and requirements for local hiring for construction projects and minimum affordable housing set asides.
In many hotels through the country, workers like receptionists, cleaning staff, and concierges are paid low wages, asked to work long hours, and have few employment benefits and protections. Individual workers may struggle to negotiate fair employment terms with their employers, who are often multinational hotel chains empowered by extensive legal teams. In New Haven, where municipal employees, much of Yale University’s staff, and other unionized workers have organized, there has been increased interest in working to unionize the staffs of new hotels, including The Graduate, a 72-room short-term stay building renovated in 2019. Unionization may help increase wages, salaries, and benefits for hotel employees, many of whom are New Haven residents. This may help keep more of the revenue that the hotel generates circulating in New Haven’s economy from workers buying goods and services at local businesses.
For construction projects that receive public funding or when the City sells land to a developer, there has been a push in recent years for the general contractor to promise to hire local residents and minority-owned business for a certain percentage of construction work. This can help ensure that more of the money spent on developing a real estate asset remains in the city. To help prepare workers for construction jobs, training and other workforce development services have been made available through private apprenticeships and public programs at the federal, state, and local level. Unfortunately, even if all the labor for a construction project were locally sourced, most of the expenditures, value, and revenue generated for and from real estate development projects would be extracted out of the city because only a fraction of overall development project budgets are spent on construction labor. Some businesses also misrepresent their ownership as being majority women or minority by designating a token employee with majority ownership on paper while the actual leadership is disguised.
For decades, New Haven has approved developer requests for property tax abatements for projects that promise to set aside at least some units as affordable for low- and moderate-income households. As part of Land Disposition Agreements where the City sells land it owns to a private party for housing development, the developer is often required to provide some affordable housing. In 2022, the Board of Alders approved the creation of a citywide Inclusionary Zoning regulation that requires new and substantially rehabilitated multifamily buildings to designate a certain percentage of units as “affordable”. This policy’s supporters hope that it will result in high quality housing units being made available for long-time low-income residents who are struggling to afford housing in the private market. Some critics believe the “inclusionary” units will likely go to newly arriving and income-eligible Yale affiliates like post-doctoral researchers, thereby leaving long-time residents fending for themselves in the city’s tight housing market. In any case, the rent being paid by residential and commercial tenants in new apartment buildings is extracted out of the city by absentee owners, lenders, investors, and managers.
Anti-Exclusive and Anti-Extractive Development
Is lessening the exclusivity and extraction of development sufficient for making meaningful progress on inequality and inequity? Can paternalistic real estate development be incrementally reformed into community development? Must community-orientation to development be the starting point?
New Haven should not be starting from an assumed position of exclusion and extraction and then trying to work backwards by introducing inclusivity to the contemporary real estate development model’s inherently exclusive and extractive nature. Rather, we should start from a position of anti-exclusion and anti-extraction and then work from there. In other words, a model of growth conceived through inclusion and generative wealth-building strategies must be the starting point. If you start from exclusion and extraction, incorporating inclusivity may be able to lessen exclusivity and extraction, but it can never overcome it.
An analogy may be helpful. In order to get the best results when baking, it is a good idea to mix dry ingredients into the wet ingredients. Trying to mix wet ingredients into dry ingredients will often lead to overmixing and overdevelopment of gluten, which can produce a tough and dense batter. Trying to add inclusivity to the contemporary real estate development model will not achieve the desired equitable outcomes. Inclusivity must be the starting point to which aspects of real estate development expertise are added in as needed to meet demand.
Real Inclusive Growth
If the contemporary real estate development model is assumed as the default for growth, the best New Haven can ever hope to achieve is to lessen the amount of exclusion and extraction. Policies like the Inclusionary Zoning Ordinance, initiatives like unionizing hotel workers, and requirements for local hiring on publicly-funded construction projects indicate that lessening the amount of exclusion and extraction from real estate development is possible. But the goal of inclusive growth should aim higher. Wrangling a few more crumbs out from the hands of conventional real estate interests will not achieve the transformative change New Haven demands. Alternative growth and development strategies that enable local ownership, equity, and wealth-generation are needed.
New Haven Urbanism has developed a comprehensive vision and specific strategies for being Real Inclusive Growth to the city. To access this vision and these strategies, check out New Haven Urbanism’s Community Development Services and reach out to newhavenurbanism@gmail.com for more information.
NEW HAVEN URBANISM 