The Devaluation Of Entire Black Neighborhoods, Not Just Homes

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The Devaluation Of Entire Black Neighborhoods, Not Just Homes

Black retail spaces across the country are worth an aggregated $171 billion less than they should be worth, simply because they are located in majority-Black neighborhoods, says a new report. What does that actually mean?

In Chicago's South Side, the E.G. Woode collective's members hope to demonstrate an alternative to the traditional commercial real estate model to revitalize commercial corridors lined with small-scale properties like this one. (Photo courtesy E.G. Woode)

It happened again.

In August, the New York Times reported a story about a Black-owned home in Baltimore that received a higher appraised value after the actual owners had a white friend pose as the owner. In December 2021 it was a Black-owned home in California. In May 2021 it was a Black-owned home in Indianapolis.

The devaluation of Black-owned homes adds up to $235 billion in lost wealth, assets that might otherwise support investments in education or local businesses, according to the researchers behind a landmark 2018 Brookings Institution report. At the time of the report’s release, it was $156 billion in lost wealth, but the researchers say the COVID-19 pandemic has exacerbated the price differences between white and Black neighborhoods, leading to an even bigger gap today.

That 2018 report helped draw attention from Congress on racial bias in home appraisals. The Biden administration recently unveiled a federal plan to address the issue, involving multiple federal agencies.

But the devaluation of Black neighborhoods doesn’t end with Black homes. A new report from the Brookings Institution finds evidence that storefronts, shopping centers and other commercial real estate are also undervalued because they happen to be located in majority-Black neighborhoods. Roughly speaking, the report reads, commercial real estate in high-density Black neighborhoods is valued the same as similar-quality commercial real estate in low-density white neighborhoods.

“The overall body of our work now shows that, similar to how we discriminate against individuals, we also discriminate against entire neighborhoods by not giving them the benefit of the doubt,” says Andre Perry, senior fellow at the Brookings Institution and co-author of both reports. (Perry is also a Next City board member.) “Not giving the benefit of the doubt in investment terms means not locating that business in that area, not building the new school, not putting up that manufacturing plant.”

The consequences of undervalued commercial real estate in Black neighborhoods are more difficult to suss out compared to the undervalued homes.

First of all, the data just to understand valuation are not as readily available. The market for nonresidential commercial real estate is smaller, about one-fourth the size of the residential real estate market. So there are fewer transactions and data points to compare for research purposes. Instead, as is common in the commercial real estate world writ large, the Brookings researchers determined commercial property values based on asking rents per square foot.

For the new report, the Brookings researchers purchased data on commercial rents per square foot from CoStar, a leading commercial real estate data provider. But that’s just a starting point to understand the value of commercial real estate. Using mostly U.S. Census Bureau data, the researchers also weighed factors like population density, the density of other businesses nearby, revenue per business for nearby businesses, commuter times and modes of travel, education levels, nearby park space, crime levels, and neighborhood walkability.

Taking a range of factors into account, the report found that retail spaces are undervalued by 7% in majority-Black ZIP codes compared to similar retail spaces in other ZIP codes. It may not sound like a huge number, but it amounts to $171 billion in total commercial real estate value lost as a result of being located in a majority-Black ZIP code.

Since commercial properties are larger and more valuable per square foot than residential, it’s the per-building figure that may be the most shocking: According to the Brookings report, owners of retail spaces in majority-Black ZIP codes lose out on an estimated $1.7 million in value on average per building.

But unlike Black homes, the devaluation of commercial real estate in Black neighborhoods only indirectly affects Black wealth. Most commercial real estate isn’t actually owned by Black people — even in their neighborhoods.

The Brookings analysis confirmed what others have seen or known, anecdotally or by other numbers: Very few Black people own commercial real estate. Looking at data from the 2019 Survey of Consumer Finances, just 3% of Black households own any commercial real estate, compared with 8% of white households.

Instead, the devaluation of commercial real estate in Black neighborhoods presents itself in different ways to Black communities. Consider the first rehab project that commercial real estate collective E.G. Woode recently completed in Englewood, a predominantly Black neighborhood on the South Side of Chicago. Architect and E.G. Woode co-founder Deon Lucas estimates that the project to rehab a small 4,000 square foot, two-story retail and office building with a basement and outdoor garden should have cost around $1.6 million.

But no appraiser, no bank would believe that the property would be worth anything close to that amount even after rehab, so E.G. Woode wasn’t going to get a bank loan to cover the cost. In 2021, the Cook County Assessor appraised the market value of the building to be just $35,010. E.G. Woode managed to complete the rehab project for around $600,000 using a combination of grant dollars from the local tax increment financing district, community investors, sweat equity, and paying contractors from around the neighborhood whatever they could afford to get work done here and there in-between bigger, higher-paying jobs elsewhere in the city.

“There are quality businesses, and quality business owners, who simply aren’t getting the investment they deserve simply because they’re sited in a Black neighborhood,” says Perry. “It’s a vicious cycle. Buildings are devalued, that leads to lower investment, and lower investment leads to greater devaluation.”

The lack of private investment is just the beginning. Perry and his colleagues are also starting to look into the impact of commercial property devaluation on local property tax revenues. While commercial properties are fewer in number than residential ones in most cities or counties, commercial properties are both higher in value per square foot and taxed at a higher rate than residential. Take, for example, Cook County, which contains Chicago. There, commercial and industrial properties account for 17% of overall real estate market value but 31% of the overall property tax base.

If a large portion of the city’s property tax base isn’t producing the revenue it should because it is commercial real estate in a majority-Black area, the roots of many familiar and heartbreaking situations start to become clear.

For Perry, whose research also focuses on majority-Black cities, there are clear ties to crises like those now facing Jackson, Mississippi, an 80% Black city that can no longer supply safe water to its citizens.

“In Jackson’s water crisis, you have another metaphor for how majority-Black cities and neighborhoods are really at a disadvantage because the devaluation of Black neighborhoods makes it almost impossible to get the public investment [to maintain them],” Perry says.

More revenue from commercial property taxes could also help reduce pressure on residential property taxes, or even lower them, in cities or communities with significant Black populations. It’s because of the way property tax rates get calculated.

Before calculating your property tax rate, local taxing bodies like municipal or county governments or school districts calculate their local tax levy — the amount of dollars they plan to take in via property taxes. It’s the set amount of dollars they need to pay teachers, sanitation workers, firefighters, police officers, facilities costs, insurance and other basic budgetary needs. That pre-set amount has to be drawn from property taxes overall, and if commercial properties are devalued because they’re in Black neighborhoods, the difference has to come from somewhere else — usually homeowners.

Consider Prince George’s County, Maryland, for many years America’s wealthiest majority-Black county. But its majority-Black residents pay the highest property taxes per dollar of property value in the entire D.C. metro area, according to Tracy Hadden Loh, fellow at the Brookings Institution and co-author of the commercial real estate devaluation report.

“Baking this kind of devaluation into their tax base means that to receive the same level of services as any other jurisdiction, they have to tax their residential assessed value harder,” says Hadden Loh. “Prince George’s County cannot depend on commercial real estate property tax revenue in the same way that a [largely white] Montgomery County, Maryland, can.”

There’s much left to learn about the devaluation of commercial real estate in Black neighborhoods. And it’s not just about money. It goes back to ownership, and what ownership means in particular when it comes to retail spaces and other commercial real estate.

“Ownership for Black people is very different, qualitatively different in that we were once owned, we were once the asset,” Perry says. “So when we seek out to own property and businesses, it’s really about self-determination, it’s about having some control over space and time in a much more fundamental way.”

Even setting race aside, real estate ownership is concentrated, and commercial real estate worst of all. The top 1% of households own 81% of nonresidential commercial real estate, while they also own just 16% of owner-occupied housing.

It all creates even more urgency around community-owned commercial real estate efforts in Black and Brown neighborhoods like Chicago’s E.G. Woode, Philadelphia’s Kensington Corridor Trust, Seattle’s Cultural Space Agency, Portland’s Community Investment Trust or Oakland’s East Bay Permanent Real Estate Cooperative.

“When you’re of the community and you own the property, you can determine the means of production that occupy those properties and you can really shape the culture, and too often people who own the property have no connection to the communities they’re in,” Perry says. “That’s very true of commercial properties.”

This story has been updated to reflect that Montgomery County, Maryland, is not majority white non-Hispanic.

This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi.

Oscar is Next City's senior economic justice correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.

Follow Oscar .(JavaScript must be enabled to view this email address)

Tags: economic developmentraceeconomic equity

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