Big-money real estate developers are flocking to the American South, lured by aggressive economic development policies, generous tax incentives, lax regulations, low-cost land, cheap labor and a booming population. Investors are pouring considerable dollars into large real estate funds that typically target the same five to ten big cities. These dominance of these so-called “mega-funds,” which typically require a minimum ante of $25 million, have created a capital gap in the market, and the region still struggles with a lack of investment in low- to moderate-income communities. Hyper-investment in some areas, paired with underinvestment in others, exacerbates income inequality across the South.
The unmet demand for financing below $15 million presents an opportunity for mission-driven investors like foundations to help smaller and growing communities achieve their potential. As part of our ongoing efforts to align our investments with our mission and values, we recently closed on a program-related investment in a new fund focused on real estate projects that will benefit low-income people and communities in ten Southern states. (Due to securities laws, we cannot identify the fund or its managers until the offering period has concluded.) This fund targets projects in frequently overlooked areas in the lower middle-market – $6 million to $100 million – a range far below mega-funds’ typical $500 million threshold. It’s one way for Babcock to promote community economic development that achieves positive outcomes, including:
- permanent jobs with living wages, benefits, training and opportunities for advancement
- mixed-income, multifamily housing
- retail and restaurant space
- grocery stores, farmers markets and other healthy food options
- medical facilities and clinics
- banking services, financial counseling and veterans’ assistance
- small business support, including technical assistance, banking services and office space
- educational programs, including schools, language programs for immigrants, music, art and physical education
The fund seeks to achieve these outcomes while incorporating positive environmental practices and impacts, including LEED-certified buildings, adaptive use of vacant structures, modernization of utility systems, alternative energy use, recycled construction materials and transit-oriented development. This is a critical consideration for our investments since pollution, extractive practices and other forms of environmental degradation cause outsized harm to low-income communities.
The fund has attracted a range of investors for a handful of reasons: its goals of promoting economic development in hard-to-serve communities, its experienced managers, and its blend of market-rate and program-related investment (PRI) shares. Since sparking sustainable, community-driven economic development in underserved areas aligns with the values of the Babcock Foundation, we are investing through our PRI program. We hope our investment encourages other mission-driven foundations and donors to seek opportunities in low- and middle-market communities in the South.
Helping to catalyze development projects that rehabilitate unused properties, create living-wage jobs and revitalize distressed, nonmetropolitan areas helps MRBF advance our mission of helping to move people and places out of poverty.