Editor’s note: After decades of decline, many U.S. cities are showing signs of rebirth. This three-part series examines a little of what happened to pull people and development away from cities, what’s attracting them back, how shrewd private investors are spotting trends, and what institutional investment and redevelopment projects have done to bring some cities back to life. (Read Part 1, “Why cities shrink … and grow,” and Part 3, “Redevelopment and institutional investment in shrunken cities.”)

A glance at property listings in historically shrunken cities would make any small investor drool. Rents at $400 per unit per month, in a two-unit building for $70,000? Sign me up!

But the underlying reality is less fantastic, and locals know the crucial details that out-of-town investors miss when blinded by an impressive balance sheet. Such details could mean the difference between a sure-fire investment and a sure-fire flop.

Take Philadelphia, for instance. The duplex on 48th Street that fetches $200,000 might only be worth $170,000 on 53rd Street. Why? In this case, a University of Pennsylvania-sponsored program provides its staff with “soft seconds” — a form of easy loan that need not even be repaid after seven years — but only for homes inside a “University City” boundary that ends at 50th Street.

Local knowledge is valuable in every real estate market, of course. But in a shrunken city, three causes make such wisdom even more important:

1. Incentives: Faced with the threat of a smaller tax base, many cities have become bastions of creative cost-relief and financing plans sponsored by governments, nonprofits and employers. Continuing with our Philadelphia example, many capital improvements there receive a 10-year tax abatement that can be passed on to future owners. So if you buy a shell for $40,000 (a typical price in some neighborhoods) and put $100,000 into making it rentable, the building’s taxed value will remain $40,000, saving you — and any future purchaser — hundreds of dollars a month for a full decade.

“Almost every type of structure that takes out a permit, whether for an addition or construction, can get some kind of abatement,” Philadelphia’s Assessment Director Eugene Davey said.

What’s in it for the city? For now, occupancy and use taxes; and in the future, higher assessments. “As some properties go into abatement, others roll off,” said Davey. “Meanwhile the city is getting use and occupancy taxes. The owner of the property’s a winner because they save on taxes. The city’s a winner because its neighborhoods are improved, and at some point the city gets additional taxes as the abatement matures.”

Another person who believes in municipal incentives is Tom Murphy, senior fellow at the Urban Land Institute and mayor of Pittsburgh, Pa., from 1994 to 2006. “Pittsburgh was filled with old industrial sites, where we could either wait for something to happen or we could initiate it. But from the developer’s point of view, taking an old 100-acre steel mill and turning it into housing isn’t as easy as doing the same with 100 acres of farmland. So you have to level the playing field, which could involve some public subsidy. Then once the market starts to work, there’s less and less need for it. It’s a loss-leader sort of thing, and we were very successful in that way in Pittsburgh.”

2. Regional boundaries: In booming cities such as San Francisco or New York’s Manhattan, divisions between “good” and “bad” districts seem to fade in a wash of money. Neighborhoods formerly thought unlivable become more attractive with the prospect of increased demand — and the appreciation it brings. But in a static or shrinking city, such motivations are gone. The despair of bad neighborhoods increases their intransigence, setting them up in stark contrast against better locales and increasing the need to understand the lines that separate them.

3. Increased risk: Miniature boomtowns commonly occur even in shrinking cities, as employers move in, retail districts appear, and well-planned developments coalesce into successful new urban centers. But just as often, a stretch will remain depressed for decades without change, slowly bleeding value from your investment. An understanding of past, local trends is key to predicting future ones, but that understanding is hard-won only through long observation.

One person who knows this well is Ilya Snyder, a “microdeveloper” with the Karras Brothers Co. Born in Detroit, he grew up there until the age of seven before his family moved to the nearby suburb of Grosse Pointe. Even with his knowledge of the city and surrounding areas, he still spent five years looking for the perfect city-center property, which he found in 2002: a commercial building only a couple of blocks from the river, and in the shadow of planned luxury condo developments.

He paid about $175,000 for the building, added $75,000 in renovations, and re-opened it as a bar. The results? The increased traffic and appreciation brought by nearby “urban living” condo developments allowed him to comfortably sell the business but keep the building. He’s now working on development of 50-60 units of rental residences in the same area, with retail on the ground floor and combined investment of approximately $5 million to $7 million.

Snyder credits much of his success to intimate, block-by-block knowledge of Detroit’s downtown. “There are pockets of neighborhoods where development is attractive,” Snyder said. “The real development is focused along the river and along Woodward Avenue, forming a T shape. When you’re a smaller developer, you have to go where there’s a bit more risk. The same property (as mine) would have gone for $450K where big developments were already underway. But two or three blocks away from the riverfront, it’s still attractive to development.”

The puzzle of most downtowns, he said, is in building density: “Businesses will create themselves to support the critical mass of people there”. But he pointed out that it’s a chicken-and-egg problem, as “you can’t expect people to come in and pay $250K-$500K for condos if nobody’s there already.”

Fortunately, city centers are becoming popular again, especially among (as Snyder put it) “empty-nesters, people without families, and younger professionals.” New condos in downtown Detroit, he said, are “near a lot of entertainment and social activities. You can just take a cab or walk — you don’t get that in a suburban experience.” Chris O’Donnell of Philadelphia’s O’Donnell Real Estate agrees, describing the growing success of residences in that city’s center: “Philadelphia’s center is very walkable. You can walk from the oldest theatre company in the country to the Liberty Bell, to the orchestra. So it’s walkable to real attractions.”

O’Donnell — who mostly deals in resales of existing housing — added that the aesthetics of old Philadelphia buildings have increased their value. “The appreciation for old housing stock in cities is great — chestnut woodwork and leaded glass; mahogany mantelpieces; 1850s tiles made by Andrew Mercer or imported from England. You definitely don’t find that in new housing.”

One person attracted by the urban lifestyle is Cris Caruso, a 34-year-old business development manager whose job moved her from New Hampshire to Maryland in 2004. Although her workplace was in the suburbs, she decided to buy a home in Baltimore’s Patterson Park neighborhood, about two miles east of the Inner Harbor.

“I rented in New Hampshire, but when the move came I thought I might buy my first house,” she said. “At first I didn’t think of Baltimore as a choice: I had the impression that it wasn’t so safe. But I had been living in a ‘downtown’ area in N.H., and liked to walk to coffee and shops. Maryland suburbia is full of strip malls and ‘plastic’ houses that don’t really suit me: I didn’t want the life of getting into my car in my garage and driving to work, then driving back home. I chose my ‘up and coming, but not there yet’ neighborhood because I didn’t mind the sweat equity, and wanted to have a way to meet people.”

She bought her future home through the nonprofit Patterson Park Community Development Corp. Since its founding in 1996, the organization has purchased nearly 500 properties, more than 300 of which have been renovated and resold to owner-occupants like Caruso. Recent results of the program have been dramatic, both for the area and for Caruso.

“I signed the contract in March for a purchase price of $159,000. By the time we closed in July, its value was probably around $190,000,” she said. “I put down a good-faith deposit of $2,000 with the contract and had a standard mortgage. The house was a total rehab by the time I moved in, but more-desirable neighborhoods on the border of Patterson Park — Canton, Fells Point and Butchers Hill — were rising in value. Now I notice less trash in general, fewer boarded-up houses, a bigger police presence, and better response to nuisance issues.”

But she was quick to note that her purchase decision was mainly driven by personal needs, not investment. “Being single and gay, I didn’t feel like I was going to fit in with the family nature of the suburbs that I was seeing. But I also see young couples in the ‘hood who have made the same decisions. I think young people — and I think I’m still young — seek community. Living in the city is one way to find it.”

Tom Geller is a freelance writer in San Francisco.

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