Urban Planning 538 - Economic Development Planning
April 25, 2005
Investment within inner cities has been a difficult task since the decline of cities began in the seventies. There have been numerous strategies to attack this issue, ranging from downtown development to the addition of stadiums and casinos. None of these issues directly address actual inner city concerns. Cities feel that by increasing its tax base and attracting additional forms of revenues (i.e. tourism and businesses) it will then be able to address many of the issues that are important to residents whom don't happen to live downtown. The trickling down of dollars from downtown doesn't seem to make it to many neighborhoods in cities. Journey through any blighted part of an American city and one cannot help but notice the similar characteristics. These areas tend to be blighted, crime invested, minority, and for the purposes of this entry devoid of major businesses. Detroit, South Los Angeles, South Chicago, and West Philadelphia are all common in these respects. Yes, these communities do have businesses; however they are not the typical ones that are seen being advertised in commercials. Businesses such as check cashing places, fast food restaurants, hair supply stores, mom and pop stores, dollar stores, and liquor stores all decorate the landscape in these areas. There is a perception in the business world that their business cannot thrive in these locations because of the increased cost to do business there. The increased cost to do business in these locations scare many investors away. Where some investors look at all the negatives associated with doing business in these areas, others see it as an opportunity to fill a void and make a profit. Businessmen like Earvin “Magic” Johnson have been quite successful in his attempts to serve these communities, by ignoring many of the same negative indicators his counterparts place so much stock in.
Negative Economic Indicators and Stereotypes
Business recruiters from the Detroit Economic Growth Corporation have the unenviable task of recruiting companies to locate within the city of Detroit. Speaking with them it was learned that businesses look at the surrounding areas in which they would be located. These potential investors place the location in the center of a circle, and then with a radius of 2 miles they assess the residents within the circle. Investors look at indicators such as unemployment, household income, and crime. Many times these numbers are not flattering, thus causing investors to look at other cities or in the outlying suburbs. Investors miss out on potential opportunities however, by not taking into account the concentration of these areas. A market study done by Robert Weissbourd and Christopher Berry, support this claim, “A neighborhood like South Shore in Chicago have more buying power than even the wealthiest suburbs, for example while South Shore's median family income is only $22,000, compared with $124,000 in the affluent suburb of Kenilworth, South Shore packs $69,000 of retail spending power per acre, nearly twice that of Kenilworth at $38,000” (Weissbourd and Berry, 1999, The Market Potential of Inner City neighborhoods, pg.5, http://www.brookings.edu/dybdocroot/es/urban/Weissbourd.PDF, 4/25). The two also argue that “the lack of reliable market information on low-income communities” (Weissbourd and Berry, 1999, The Market Potential of Inner City neighborhoods, pg.12, http://www.brookings.edu/dybdocroot/es/urban/Weissbourd.PDF, 4/25) is to blame as well for the lack of investment. Many times, income indicators are not reliable sources to determine truly how much money people in these areas are making, “relying on income data from the Census can also be misleading because of under-counting and under-reporting” (Weissbourd and Berry, 1999, The Market Potential of Inner City neighborhoods, pg.14, http://www.brookings.edu/dybdocroot/es/urban/Weissbourd.PDF, 4/25) which is a common problem for Census collectors in inner-city communities. Also feeding the monster and continuing the cycle of disinvestments are the negative perceptions associated with doing business in mostly minority and poor communities. This is one of the hardest hurdles to overcome for an inner city community. A reverend in inner city Los Angeles shared this sentiment with the Los Angeles business journal in 2000, “There's still the fear of the ghetto in corporate America . Maybe McDonald's and Taco Bell have learned, but most feel that the inner-city customer is dangerous and still on welfare and drugs" (Rev.Willie Ivory, West Angeles Church of God and Christ, http://www.findarticles.com/p/articles/mi_m5072/is_16_22/ai_62197569, 4/25). Stereotypes and economic indicators together help to create a negative climate for doing business within the inner city.
Magic Johnson has successfully been investing within inner city communities since his playing days ended with the Los Angeles Lakers 10 years ago. His company Johnson Development Corporation has formed successful partnerships with Loews Theaters, TGIF, Starbucks, and also Washington Mutual Bank. He locates his investments in underserved communities, and is profitable doing so. The reason why Magic is able to do this, is because he understands the markets he is serving. As there are more success stories with development, banks become increasingly more cooperative in lending and giving small business loans, Oliver Wesson owner of a real estate investment vehicle talks of a recent resurgence in a formerly blighted neighborhood in Harlem, NY. “We've got some success stories now. Banks are more interested in lending than they were 10 years ago” (Prince, http://www.entrepreneur.com/mag/article/0,1539,294608,00.html, 4/25). An illustration of this in New York, were statistics provided by the Initiative for a Competitive Inner City (ICIC); which estimated that grocery stores in the inner city outperformed the regional average by 39%. Professor Michael Porter who founded the organization, believes the success lies in the untapped potential, “inner cities are really the last pools of underemployed workers. The growth rate of the workforce is forecast to be less than 1%. You have companies moving into urban cores because that is the best place to access workers that they can retain. This is going to be an enduring trend. It is not just a business cycle” (Porter, http://www.businessweek.com/smallbiz/news/coladvice/trends/tr991011.htm, 4/25). The ICIC also estimates that 15% of inner city residents earn 35K to 50K a year that, is on par with the 17% of all U.S. households in the same category. (http://www.retailtrafficmag.com/mag/retail_urban_magic/, 4/25). Between the higher than projected income and the higher density, it does not seem as risky to invest in these communities. The secret to Magic' success, is that he brings a certain expertise, by providing “great knowledge of real estate in key metropolitan markets and relationships in local communities” (Wendy Beckman, director of Urban Coffee Opportunities, the JDC-Starbucks venture, retailtrafficmag.com/mag/retail_urban_magic, 4/25). Now other investors are following the blue print of Magic Johnson. South Central Los Angeles native Keyshawn Johnson (no relation) is currently a wide receiver for the Dallas Cowboys. Just recently he was given the ICIC National Inner City Leadership Award for the recent investments he has done in South Los Angeles . His company Keyshawn Capital Development was involved in the construction of Chesterfield Square. The $75 million pedestrian shopping center was completed in 2002. His company is currently involved in the construction of Marlton Square, a $123 million mixed-use development, also located in South Los Angeles (www.icic.org).
The problem that lies with investors not being able to invest in the inner city lies not in their economic analyze of an area, but instead their lack of understanding of a particular market. Magic believes that his race has something to do with him being able to understand urban markets, “Yes, race matters. I've based my business on it. I wanted to show the business world that you can be successful in minority communities. It was uncharted waters and took some convincing. I would drive companies through places like South Central ( Los Angeles ) and say, "I want to bring your business here," and they would look at me like I was crazy. I knew it would work, though” (Magic Johnson, http://www.fortune.com/fortune/smallbusiness/articles/0,15114,551745,00.html ). Until investors understand that urban markets can support businesses other than fast food restaurants and liquor stores, these areas will continue to be ignored. Investors and entrepreneurs like Magic understand the neglected market. They understand that people in these communities can support nice restaurants, grocery stores, movie theaters, and other retails because these are services that communities need. Investors looking strictly at economic indicators could potentially be missing the opportunity to make a profit in a market that is not being served. Magic Johnson and others are showing people the way.
References and Related links:
Big Chains Are Realizing Value of Urban-Area (Article) http://www.findarticles.com/p/articles/mi_m5072/is_16_22/ai_62197569
Los Angeles Business Journal http://www.labusinessjournal.com/
Michael Porter Interview http://www.businessweek.com/smallbiz/news/coladvice/trends/tr991011.htm
Initiative for a Competitive Inner City http://www.icic.org
(W)inner City (Article) http://www.entrepreneur.com/mag/article/0,1539,294608,00.html
Magic Johnson Corporation http://www.johnsondevelopmentcorp.com/
Urban Magic (Article) http://www.retailtrafficmag.com/mag/retail_urban_magic/
Magic Johnson Interview http://www.fortune.com/fortune/smallbusiness/articles/0,15114,551745,00.html
Social Compact http://www.socialcompact.org/
Detroit Economic Growth Corporation http://www.degc.org/
The Brookings Institute http://www.brookings.edu/
Brookings Study http://www.brookings.edu/dybdocroot/es/urban/Weissbourd.pdf