In 2019, a black real estate developer named Brian Rice attempted to secure a loan to renovate some buildings he had purchased in a neighborhood commercial corridor in the predominantly black Ensley neighborhood of Birmingham, Alabama. His vision was to turn these vacant buildings into small businesses. , offices for non-profit organizations and a conference center. But the bank’s appraisers said its properties were essentially without valueleaving Rice with a large gap between the value he believed could be realized with the investment and the value given to him.
What explains this discrepancy? It is possible that Rice was overconfident in the prospects of earning revenue from these developments. But it’s also possible that the properties were devalued because of who lived nearby.
Either way, the tax consequences for black neighborhoods are serious. The commercial real estate (CRE) market is relatively small compared to housing. However, because individual CRE assets are large and more valuable per square foot, their health can have an outsized influence on the well-being of a community.
In new research, we test whether commercial real estate is valued differently based on the black share of the population living in the region and compare these dynamics to residential real estate markets. We find that in majority black ZIP codes, devaluation results in aggregate wealth losses of $235 billion for residential real estate and $171 billion for commercial real estate. In contrast, we find no evidence of devaluation for office space.
In real estate, location and race matter
To isolate the impact of race, we constructed a national dataset of commercial real estate value predictors to investigate how local characteristics (measured at the postcode level) predict CRE asking rents. , emphasizing the racial makeup of neighborhoods as a potential source of market inefficiency, which has yet to be explored.
We found that location characteristics play a huge role in determining CRE value. Ranking postcodes by the aggregate value of each type of real estate product, the top 1% are home to 36% of office value, 11% of retail value, but only 9% of owner-occupied housing.
However, we also find that race matters. After accounting for other predictors of CRE value, we estimate that retail space is undervalued by 7% in predominantly black ZIP codes. Yet office space is only devalued by 1% and the estimates are not statistically significant. Given the importance of tenant income in setting retail rents, the difference between retail space and office space suggests that consumer behavior, which is less important for offices than for retail space, plays a important role in limiting the value of real estate in black neighborhoods.
Consequences for black people and communities
The commercial real estate market is very unequal. Our analysis of data from the 2019 Consumer Finance Survey shows that the richest 1% of households that own CREs control 81% of the value of this category. In contrast, the wealthiest 1% of households who own a non-primary residential property control 49% of the value of this category. Owner-occupied housing wealth is the most egalitarian, with the top 1% owning 16% of the value.
The generally uneven structure of commercial real estate also results in stark racial disparities in the ownership of real estate assets:
- Only 3% of black households own nonresidential commercial real estate, compared to 8% of white households.
- For households that own commercial real estate, the average white household owns $34,000, compared to just $3,600 for the average black household.
- Black wealth is disproportionately dependent on housing: the share of national wealth that black people own is three times higher for owner-occupied real estate (6%) than for non-residential commercial real estate (2%) .
The work of Urban Markets Initiative at Brookings articulated the sources of market information gaps and the mechanisms linking these gaps to barriers and distortions in market activity, such as consumption, site location decisions, and lending. For example, retail stores will see their revenue decline if non-black people are discouraged from going there due to their location in a black neighborhood, and professional business owners may prefer to set up their office in non-black neighborhoods like a signal to potential employees. , who suffer from the same ignorance and bias as retail consumers. These information gaps – and the resulting huge distortions in the size of the markets that black neighborhood home sellers and retailers have access to – are a major cause of devaluation.
Commercial real estate devaluation mirrors other forms of black neighborhood devaluation – and its impacts extend beyond these neighborhoods
We believe that the devaluation of commercial real estate in black neighborhoods is consistent with a general pattern of devaluation of black people living in these neighborhoods that has deep roots in US history. In a series of articles, we have documented that residential accommodation, small enterprises, and now commercial properties in majority black areas have lower market potential than similar properties or businesses located in non-black areas. Devaluation can operate through private decisions, such as discrimination against individual black homeowners, but it can also operate at the neighborhood level, which is irrelevant to traditional civil rights legislation. Since most commercial real estate is not owned by black people, discrimination at the individual level is an unlikely explanation for the disparities we observe.
Neighborhood-level devaluation harms consumers of all races, even when it occurs through race-neutral channels. For example, at least part of the observed devaluation may be due to information asymmetries, leading to market inefficiency. In other words, many potential buyers may be unaware that a home or commercial property in a black neighborhood offers the space they need at a competitive price because they don’t live in majority black neighborhoods, visit these neighborhoods rarely and are not socially connected. residents or visitors. For similar reasons, they may be unaware that a valuable meal could be had at a black-owned restaurant in a black neighborhood. As a result, these potential buyers may pay an artificial premium in a predominantly white neighborhood. As Sheryll Cashin argued“Separation is expensive.”
Another theory is that devaluation might operate through anti-Black stereotypes or other psychological mechanisms consistent with racial discrimination but not necessarily identical to discrimination directed against individuals. Potential buyers of any race may have exaggerated fears or anxieties associated with black neighborhoods or view these spaces as culturally remote. Our goal is to clarify which of these channels is most important in future research.
Any devaluation has real consequences for black neighborhoods. In addition to the direct loss of access to the billions of dollars of residential capital estimated in this analysis, a systematic negative differential in the valuation of black neighborhood real estate deflates the size of the tax base the community has to support infrastructure and services and makes these communities vulnerable to speculation. Since devaluation lowers the costs of owning real estate, it can be exploited by investors with better access to capital who can buy low and sell high, perhaps anticipating future racial demographic shifts in the region.
There is a connection between the racial inequality created by the extraction of wealth from African Americans during slavery and the findings of this report. The connection goes beyond the mere existence of racial bias – it is a legal, economic and moral framework that undermines black people through the home ownership system. A system that allowed freedom would work differently. What comes next must be to imagine this system.