Are downtowns ready to stay afloat? Will they be a long term rising economic ocean without subsidies?

In the early 1970s, I worked a number of jobs to support myself through college. One of the jobs was in real estate sales. At that time, the only significant subsidies to real estate were county department of social service vouchers, Section 8 subsidies for apartment rentals, small tax credits and urban renewal programs. In 1973 when I started in the appraisal industry not much had changed. As the 1970s progressed, New York State instituted various real estate tax abatement programs such as the 485 Business Investment Exemption (BIE) program targeting non residential real estate. This exempted real estate taxes for newly constructed improvements for a finite time period. Soon after, federal Urban Development Action Grants (UDAG) stimulated urban real estate. Then came industrial development bonds both taxable and tax exempt financing. The 1970s represented various financial crisises in the United States forcing President Nixon to take the United States off the gold standard, starting gas rationing and his now infamous wage and price control program. The gas rationing was due to the Arab oil embargo. At the same time New York City was near insolvency. Other large cities in Upstate and New England had lesser financial problems but budgets were increasing. In the late 1970s, President Carter instituted policies which resulted in record high interest rates and high inflation. At the same time, more local, state and federal development incentive programs were enacted and expanded. Also, the late 1970s represented the beginning of a serious flight of companies from New York State especially manufacturing companies in Upstate because of excessive taxes and regulations. Tax credits started to become a big player in new development projects in the rehab of old commercial/ multifamily buildings especially for low income and senior apartments. These various financial incentive programs benefitted all properties in the region based upon the theory that the "rising ocean will rise all boats." The largest incentive programs focused on the urban areas which has escalated during the last decade. The downside is subsidizing new building product presents competition for the existing buildings which violates the so called free market concept of supply and demand. The existing inventory of buildings generally have no subsidies or incentives. This depresses the value of existing supply and creates a market dichotomy of the "haves" and "have nots." The "haves" have the subsidies and the "have nots" don't. Many agree that Downtown is the heart of a Metropolitan area. I've had offices for 38 straight years Downtown and really appreciate the ambiance and convenience. However, it may be time to let the market dictate supply and demand. If the demand is strong in the suburbs; so be it. If there is long term forced allocation of government subsidies, resources, etc. to sectors like Downtown with no significant self sufficiency results, it may be time to reexamine these policies. Subsidizing inefficient enterprises is starting to be questioned given tight public resources. As an example, luxury condominiums, mixed commercial residential projects in various urban areas of Upstate New York are getting 13 year tax abatements which effectively eliminate all real estate taxes for the first 8 years. Over the last 5 years (years 9-13) the abatements will be phased from 100% by 20% per year. It's too early to tell whether the values will be negatively affected when the exemptions burn off and property taxes increase. Will the "ocean" have risen to a level to bring all the "boats" with it along with property value appreciation or stability. The increased amount of new supply reduces the economic life of improvements of older competition. The bright side is the older supply will be more apt to be redeveloped into newer or better uses which will create major new investment and jobs. So the jury is still out on whether Downtowns will someday be a long term rising economic ocean without subsidies. It may be time to test the waters and reduce the subsidies to the Downtown areas to see if they can stay afloat and swim on their own. John Rynne, MAI, SRA is the president and owner of Rynne, Murphy & Associates, Inc., Rochester, N.Y.