Co-authored by Viki Radden and Doug Lawrence

 

Today, the U.S. population is over 316 million.   In less than 40 years, the U.S. Census Bureau projects we’ll reach a national population of 450 million, a 42% increase.   Where is this population going to live?  The answer to that question appears relatively clear; the U.S. Census Bureau reports that America’s urban population increased by 12.1 percent from 2000 to 2010, outpacing the nation’s overall growth rate of 9.7 percent for the same period.  Today, more than 82% of the U.S. lives in urban areas. [1]

Interesting questions result from this macro trend that may impact the future of commercial real estate.

  • How is this surging urban population to be fed?  In example, traditionally, we’ve fumigated, hauled and distributed produce such as tomatoes from the Western U.S. food baskets 3,000 miles to New York City. But, does a tomato grown in California with a priority for breeding for appearance and the hardiness to travel long distances without rotting or damage provide a better product than a tomato grown by local New York City farmers focused on taste and nutritional value?
  • Does this change in demographic living patterns mean we’ll have to rethink our relationships between food production and food distribution?
  • Is there an adaptive re-use of economically, functionally or physically obsolete urban industrial buildings by owners for profitable urban farming?

5 Stone has been looking for solutions to these questions.  And, in this article will try to not only answer them, but also to provoke further thinking.

New York City imports $1 billion in produce each year. This fact is a good starting point for our discussion. The bottom line for sustainable real estate investors is whether we can capture some of this market by creating urban farming tenancies that pay rent, generate local produce and create local jobs.

There is little debate that natural resources, fossil fuels, arable land and fresh water, (agriculture uses 70% of the U.S.’ fresh water) are made dearer by growing populations wanting to enter the middle class and the impact of Climate Change.[2] In fact, the extreme drought in the Western half of the U.S. has already pushed food prices higher.[2]

So we ask, are there  methods to produce healthier crops that (i) are more nutritious and flavorful (ii) use no pesticides, herbicides fertilizers, or fungicides (iii) yield more abundantly and (iv) use less of a precious vanishing asset – clean fresh water?

5 Stone believes urban agriculture will create new ways to harvest value from adaptive reuse of physically, functionally, and economically obsolete light industrial warehouse space and/or their under-utilized rooftops in urban markets by encouraging Controlled Environment Agriculture (“CEA”) operators to become tenants.

Hydroponics —  the process of growing plants in a soilless environment.  The plants are grown in a water based nutrient solution and/or moist inert material. Water is recycled and nutrients are carefully managed using approximately 1/10th the water of traditional soil based farming.  Depending on the crop, yields are at least 4x-10x greater per acre because of optimal growing conditions than traditional agriculture.

Hydroponic farming is used on a national commercial scale in Canada, the Netherlands, and many other industrialized nations.  In fact, in 2010, $910 million (USD) of Canada’s fresh produce was grown via controlled environment agriculture. CEA exceeded the value of Canada’s field grown vegetables including potatoes.[3]  5 Stone has established a relationship with the University of Connecticut’s School of Agriculture to implement a CEA strategy.

Aquaponics — a very water efficient closed loop system that uses the waste material (nutrients) from fish to provide the nutrients needed in the hydroponic growing of plants. The water from the plants recycles back to the fish tanks. 5 Stone has established a relationship with the University of the Virgin Islands School of Aquaculture, a globally recognized aquaculture program to further develop this concept.

Aeroponics — a technique for growing plants without soil or hydroponic media. The plants are held above a system that constantly mists the roots with nutrient-laden water.

Vertical farming — a form of hydroponics cultivating plant within a vertical greenhouse or on vertically inclined surfaces (stacking) and enhancing production with artificial grow lights.

Adaptive reuse of economically, physically, technologically and functionally obsolete light industrial assets or development of light industrial assets such as food terminals et al, coupled with a micro grid/renewable storage/and abundant, reliable, low cost/kWh – price & supply stable electricity may be a significant opportunity for real estate owners and more broadly for public policy makers at the city and state level.

One implementation of this urban agriculture strategy is to take the rooftops of existing buildings or the interior space of functionally obsolete or underutilized light industrial buildings and ramp up the asset’s net operating income stream and therefore its asset value by integrating Controlled Environment Agriculture as a tenant or via a ground lessee.  For city dwellers, this strategy may provide a new source of healthy, high quality, sustainable local produce.   State and local governments may gain new jobs, property and sales tax revenues, an improved sustainability ranking, and perhaps even better air quality for their cities as direct and indirect positive consequences.

The CEA model is profitably in effect in Canada. Lufa Farms in Montreal built the world’s first commercial rooftop greenhouse in the borough of Ahuntsic-Cartierville in early 2011 and a second in 2012. “This greenhouse puts high-yield, rooftop agriculture within the reach of any new building development, in any city, on spaces public or private, anyplace in the world,” said M. Hage, founder and president of Lufa Farms. “… we have solved how to cost-effectively grow food, distribute it, integrate it with local farming efforts, and do it all in an environmentally conscious, sustainable way. CEA doesn’t just change how food is grown, it changes how cities eat.”

Gotham Greens in New York, provides another success story.  Gotham Greens is a warehouse rooftop hydroponic farm in the Brooklyn Industrial District and a major supplier of locally grown lettuce and herbs to Whole Foods.   It has been so successful that Whole Foods has installed a Gotham Greens urban farm atop its newest store in Brooklyn.

At nearly 1.5 acres (65,000 square feet), Brooklyn Grange is reputed to be the largest earthen roof top farm in the United States and built atop an old industrial building in the Brooklyn Navy Yard.

The farm has a 20-year lease from the Brooklyn Navy Yard, a 300-acre industrial park on the Brooklyn waterfront (see picture below).  The Navy Yard was once the site of one of the nation’s most storied naval shipbuilding facilities and is now home to over 330 industrial tenants employing nearly 7,000 people.

Brooklyn Grange on top of the Brooklyn Navy Yard

Brooklyn Grange on top of the Brooklyn Navy Yard

The combined economics of urban farming and light industrial real estate are becoming clearer. Brooklyn Grange is a good example.  As a tenant, the earthen farm broke even in its first year of operation, and continues to be profitable. The company produces more than 50,000 lbs. of organically cultivated produce annually.

The farm’s green roof system is comprised of a light weight drainage aggregate, with a layer of felt above that to filter solid particles and keep the system together. “Tomatoes are one of our biggest crops: we have 40 varietals planted. We are also growing salad greens, peppers, kale, chard, bok choy, herbs, carrots, radishes, beans, and many other exciting crops!” according to Ben Flanner, its head farmer.  Brooklyn Granges’ produce is sold directly to its community from several weekly farm stands, as well as to several local restaurants and retail stores.

The math of this alternative roof top use is compelling. As a landlord, the Brooklyn Navy Yard is able to lease 65,000 square feet of once fallow space, for approximately $1.00 per square foot according to Brooklyn Grange.

For the building’s owner, $65,000 per year of additional rental income capitalized at a 5% rate, equates to a $1.3 million valuation increase. We presume that the insulating impact and storm water cleaning/drainage improvements of the earthen farm may also reduce heating, cooling, and sewer charges thereby further enhancing the building’s net operating income; however, we have not been able to confirm these assumptions.

In summary, the urban farm tenancy is accretive to the building’s value, and increases net operating income by leasing and occupying grossly underutilized space.

We at 5 Stone Green Capital believe urban agriculture potentially brings revitalization of underutilized buildings, operating cost reductions (water, sewer, heating and cooling), new revenue streams, and job creation to local urban communities.

With the well-established and growing demand for fresh, pesticide free, local produce and food products, urban agriculture may be a winning solution for all stakeholders – municipalities, consumers, and landlords.

For local and state governments it improves livability, creates new businesses and jobs and for city residents it answers the call for safer, fresh local produce. For building owners, urban agriculture may provide reduced operating expenses, increased net operating income, and improved occupancy and higher valuations.

 

Viki Radden is the Chief Operating Officer & Director of Controlled Environment Agriculture at 5 Stone Green Capital.

 

Doug Lawrence is Managing Principal, 5 Stone Green Capital

 

[1] US Census Bureau 1990-2000, Urban/Rural Census Data 1900 to 2000
[2] Source:  Science Progress-the Sate of Climate Change
[3] Source:  Wired – The Climate Desk
[4] Source: Statistics Canada