The Viability of Sustainable Urban Agriculture as an Alternative Use for Vacant Real Estate – Urban Farming 2.0?

Abstract

There is growing interest in urban farming, and while it is on the rise, urban land prices and the high cost of indoor farming systems make it an expensive proposition. Separately, the amount of vacant commercial real estate has increased over the last several years, driven by reduced demand from traditional tenants and lack of viable alternative use. This research examined whether the growing urban farming movement could intersect with the evolving real estate landscape, whereby real estate owners could renovate vacant real estate and rent space to farmers. If economically viable, this could catalyze the private real estate sector to consider farming as a viable alternative use for vacant real estate and thereby increasing the availability of fresh food in urban areas. With subsidies needing to play an important role, policies could be focused towards underserved communities and affect real change in reducing the prevalence of food deserts and malnutrition. To examine economic viability, I analyzed the return on investment (ROI) from the perspective of a real estate investor converting vacant real estate into agricultural food production centers and leasing space to a farm tenant, and contrasted results between a low-income and a high-income market, and by adjusting tenant mix and adding subsidies and viable ancillary revenue streams. Baseline case study markets examined were Holyoke in Western Massachusetts, a former manufacturing city, where conditions of food desert and urban blight exist, and Somerville in Eastern Massachusetts, a vibrant and densely populated submarket of Boston, with a service-based economy. I hypothesized that economic viability would increase in lower income areas, subsidies would enable a positive ROI and adding complementary revenue streams in conjunction with subsidies would generate an ROI above 10%. To conduct the analysis, I built a dynamic real estate cash flow model with adjustable assumptions to enable running scenarios. The model includes conditional Excel based formulas to help simplify running scenario analyses in any combination, for any type of real estate or tenant, regardless of geographic location. Major drivers of the model include all revenue and expense line items associated with renting to a farm tenant, farmer profitability depending on crop type, tenant mix, other potential income sources, real estate renovation expense and scope, and real estate value and size. The analysis demonstrated how much more viable renting to a farm tenant would be in a lower income market compared to a higher income market, predominantly given the relationship between the price of the real estate and the cost of rent for a farmer. Other factors included higher vacancy rates and in the case of a former manufacturing town, the availability of larger buildings which enabled increased revenue potential via rooftop and parking lot use. Real estate investors should consider converting vacant buildings into agricultural food production centers, with potential ROI higher in lower income areas and in former, struggling manufacturing towns. With subsidies, ROI could compare favorably to other real estate investments. Policy makers should incentivize investment by offering subsidies to enhance economic viability in these locations, which could align with their separate goals of increasing food production, eliminating food deserts or reducing urban blight.