Author: Charlie Bartsch- Senior Policy Advisor for Economic Development at EPA/OSWER

Currently, brownfields – like all real estate – are caught up in the current economic slump – the longest and deepest recession since World War II – and have to grapple with vastly tightened (or simply unavailable) credit, more stringent bank underwriting criteria, and loss of market value and demand.   In addition, many of the common types of new uses for former brownfield properties – big box and small-scale retail, housing, and commercial – are suffering in the current climate; store closings, excess office capacity, stagnant consumer confidence, and similar situations are affecting the marketability of brownfield projects.

Over the past year, I have formally interviewed, and informally discussed, the impact of the current economic climate on brownfield transactions with nearly 50 economists, public officials, developers, lenders, and other transaction support professionals with considerable experience in the brownfields arena.  Most of these experts, as well as corroborating research from a number of sources, suggest the following, in terms of the overall climate: 

• Downward real estate market value “readjustment” is significant in most areas – major banks wrote down, or wrote off, more than $300 billion in value in 2008, the first year of the decline; some experts are forecasting as much as $1 trillion in write downs in 2010-2011.
• Nearly one-third of all real estate investors need to refinance at least part of their portfolios this year – in the face of an average 15 percent decline in their market value decline and a vastly tightened credit market.  
• Declining property values are making more properties “upside down” – where cost of acquisition and cleanup is greater than the value of the shovel ready property; this is putting already upside down properties even deeper in the hole, requiring even greater public subsidies if redevelopment is to take place.   
• Property values are declining, although cleanup and site preparation costs are not, making even more properties upside down. 
• Reduced values have not been reflected in many markets; one expert noted that a “chasm” exists between what buyers are willing to pay for a property, and what sellers will accept. This has caused real estate transaction activity to come to a virtual halt in some areas.  
• Declining property values are leading to reduced state and local tax revenues, which in turn is deterring the use of tax increment finance (TIF) and other tools pegged to anticipated growth; the reduction in TIF is especially detrimental to brownfield redevelopment, since TIF strategies are the most widely used in the country to accumulate the capital needed for brownfield cleanup and site redevelopment.
• In response to the sub-prime meltdown, banks have instituted tighter underwriting standards and more stringent bank due diligence policies – 98% of lenders have reported stricter standards since mid-2008, covering all sorts of criteria, including environmental review.
• Many of the traditional brownfield leaders – investors, institutional funds, major transaction support companies – have taken a “time out”, doing fewer deals and proceeding with much more caution.
• Municipal bond issuances – a staple in economic development and infrastructure financing – suffered a 60 percent drop in 2009 compared to 2007, as public agencies find lack of liquidity and little demand among traditional institutional buyers; the expiration of Build America Bond issuing authority at the end of 2010 could exacerbate this situation. 
• The US General Accountability Office estimates that aggregate state and local budget deficits will approach $200 billion in 2010, with 44 states projecting serious shortfalls this coming year; this squeezes public funding available to plug brownfield redevelopment gaps.  
• Equity investors are mostly on the sidelines now, waiting and observing – such institutions were sitting on an estimated $1.8 trillion in cash at the end of 2010.
• At the same time, in risk lies opportunity, as workouts loom and “vultures” circle in; specialized debt and equity may be available for brownfields in some areas. 
• In the near term, at least, public sector incentives will play an even more important role as project catalysts or gap funders; as traditional programs more competitive, alternative packaging strategies will become more important, and new opportunities will need to be tapped.

These factors are having a serious negative impact on the level of “main street” and community economic development activity.  This shrinkage will undercut the demand for restored brownfield sites, and may raise new concerns as former brownfield sites, some with institutional controls systems in place, are shut down or abandoned.   

What do these market conditions mean for the near-term viability of brownfield projects?  How do general market trends translate into brownfield-specific impediments?  What about the long-term viability of redevelopment?  What are the prospects in the near term, and in the long term, for site reuse opportunities, and what can be done to facilitate these transactions?   More focused discussions with dozens of brownfield experts and suggest that: 

• Corporate downsizing and layoffs have led to rising vacancies, falling cash flows, and flat or negative commercial and industrial space absorption; major food, retail, and service chains have closed hundreds of store since the downturn began in 2008 – all of which has a significant impact on brownfield property renovation/reuse opportunities. 
• The traditional industry leaders in various transaction support sectors – in the insurance, equity, and conventional lending sectors – have gone dormant or curtailed their brownfield operations; new players may bring with them a different perspective or insufficient knowledge about the brownfield industry, and may need to be educated about how the brownfield process can work.  
• Significant variations exist among states and metropolitan areas, in terms of the current pipeline, expectations for continued brownfield market activity, and the nature of incentives being deployed. 
• A new set of “environmental finance” issues is emerging, linked to (a) the impacts of the loss of bank staff and expertise focused on brownfield properties, and (b) to the incomplete or erroneous information about brownfield process elements possessed by staff taking on workouts of troubled projects (or even new ones), such as knowledge of VCPs, that can drive brownfield deals.
• More broadly, lack of information, or mis-information, about the brownfield process – related to both financing (from an underwriting and due diligence vantage point) and the regulatory structure (including the role of VCPs) -- still exists, and that it is likely to worsen as the credit and real estate market shakeouts change the development dynamic, and the players involved in it.    
• Some companies sitting on surplus real estate, recognizing that the market may be flat for a while, may opt to look at alternative, nontraditional uses of these properties, such as production of alternative energy or conservation projects – if appropriately incentivized – as an alternative to mothballing properties they do not wish to relinquish control over.  
• Incentives can still work to make deals happen, and to move properties – but their relative value, importance, and applicability is in flux.
• Demographic changes, and current smart growth and sustainable development policies, could favor development in cities and away from the exurbs – providing an opportunity to strengthen links between a number of existing and program financing sources and brownfield needs. 
• Savvy developers, and some communities, are using (and would like to use) public and private resources now to position properties for recovery – carrying out site assessments, cleanup and development planning, and other activities to make properties ready to roll when capital returns, and when recovery takes place; this may change the nature of public-private partnerships in the near term, and the nature of incentive offerings that are most effective.