Is There a Brownfield Bubble?

The brownfield market has never been stronger. There are a number of reasons for this, from rising comfort with state VCPs and the liability relief offered, to expanded media coverage, to plentiful investment capital. As people move back into urban centers, many cities are experiencing robust housing and retail markets. This all makes for a strong demand for urban infill properties, causing well-located brownfield sites to command premium pricing.

As industry professionals become more experienced with redevelopment and cleanup, more properties are being repositioned from industrial to residential or commercial use. In many larger urban markets land is at a premium and brownfield sites are all that are left to fuel a national housing and retail boom.

The June 18 issue of The Economist makes a case that the developed world is in the “biggest financial bubble in history.” Many countries have seen unprecedented rises in housing prices. Low interest rates and investors moving from the securities markets to real estate have been the catalyst for this boom, which is also reflected in investment-grade commercial and industrial properties.

But most seasoned real estate investors feel the market is overpriced, which is evident when compared to price-to-rent ratios. Every day there are warnings that when the housing boom busts, it “ain’t going to be pretty.”
What does a correction in the real estate market mean for the brownfield market? To answer this question, it would be nice to know how many brownfield sites there are, how many have been developed and how many remain idle. Of the sites that have been redeveloped, how many were repositioned to residential and how many to commercial?
Unfortunately, we can’t answer these questions. A problem that continues to plague the brownfield industry is that we are unable to quantify market facts. Most information remains anecdotal, which makes it difficult to make market forecasts with any degree of accuracy.

So here is my best guess: Real estate markets exhibit cycles and it is not a matter of if, but when the market will cool. The strong retail market is directly linked to the housing market. As more new homes are built, population densities increase and it becomes easier to justify building more stores to meet demand. So when the housing market declines, the retail market will too.

The brownfield market should continue to grow, but at a slower rate. This is why: When we look at the many factors that have led to the explosive growth of the brownfield market, at the end of the day it is still a specialty market compared to the traditional real estate market. Because fewer deals are transacted on an annual basis, the market will be less affected by a real estate market slowdown.

Many areas where brownfields are located are not experiencing the housing or retail boom as heavily, so they will not be affected by a slowdown. Many brownfield sites are not transacting because they are overpriced. So a market decline may actually improve the amount of sites that are transacted.

The brownfield market has developed its own culture, and though closely linked to the real estate market, it has its own cycle. Plus, the reasons why sites are redeveloped — to reduce blight, clean up contamination and rebuild economies — will remain even in a declining real estate market. The brownfield market is growing rapidly and should continue to grow, because awareness has been raised and people are becoming familiar with the process. As an industry we are joining together to make brownfield programs work in our communities. BFN

Enjoy the Read!
Robert V. Colangelo, Publisher
robertc@brownfieldnews.com