Sunday, December 8th, 2013
I was a guest on the show “Where We Live” on WNPR radio in Connecticut this week. The theme was “Suburban Corporate Wasteland” – the increasing numbers of white elephant office campuses in suburbs. Apparently Connecticut has several of these and some buildings are actually being demolished because there’s no demand for them.
The entire program is worth a listen, particularly if you are someone trying to figure out how to redevelop one of these things. Several local officials join to talk about efforts to do that in their towns. If you want to just hear Yours Truly, I’m on for about 10 minutes starting at 38:30. Here’s the audio embed. If it doesn’t display for you, click here to listen.
There are a number of challenges converging to put pressure on suburban office campuses in some places:
1. Decentralization has run its course. There was a massive wave of suburbanization in the post-War era that has finished. That’s not to say things are going to be re-centralizing. Rather, the massive move from the core to the periphery is largely complete. The development pattern of the United States will continue to be decentralized, but it will largely be driven by organic growth rather than relocations. I think something similar happened with driving. The factors driving VMT growth above the rate of inflation – more cars per household, women entering the workforce, and such – are pretty much played out in terms of driving huge additional travel miles.
2. Corporate M&A and industry restructurings have dampened demand in some areas. In Connecticut specifically, a number of the complexes in question were from pharmaceutical and insurance companies. There has been a lot of consolidation in the pharma industry, for example. And with a challenging environment for new drug development, pharma companies are now really focusing on cost cutting and reducing overhead, not building massive new office parks.
3. The nature of work is changing. There was a popular trend for a while towards massive suburban office HQ campuses. For example, Sears moved from its namesake tower in downtown Chicago to a big campus in Hoffman Estates. These campuses had tons of free parking and lots of onsite amenities like gyms, dry cleaners, cafeterias, day care, etc. They also offered an idyllic, almost pastoral setting in some respects. Workers could spend their days cocooned inside the campus. Today’s firms are less vertical integrated and more networked. They are heavily globalized and collaborative. They’ve also figured out that people who don’t get out and engage with the world around them end up cut off from information flows, leaving them a step behind. Workers are also demanding more flexible working conditions. And of course there’s cost cutting pressures. This leads to things like hoteling, co-working, and telecommuting – no massive suburban office park needed.
4. In select industries and cities, there has been a resurgence in the fortunes of downtown offices. This has particularly been the case in high tech. Google’s second largest office is in Manhattan. Salesforce.com’s Exact Target unit employs a thousand people in downtown Indianapolis. Amazon is building a large urban campus is Seattle. Many companies in Chicago have relocated downtown from the suburbs. I’ve probably seen more announcement of these types of moves in Chicago than anywhere else. I’d caution that in most downtowns the trends in private sector employment have remained negative. But in select locales and industries, things have been looking up. In industries where there’s a need for proximity to high end business services or where there are unique clustering or labor force issues, downtowns will retain an appeal.
Put it all together and it’s clear office space demand is weaker than it used to be. Joel Kotkin recently surveyed the same trends and suggests that the US may have hit “peak office”. The idea is not that office space will actually decline, rather that it won’t be growing at the same rates as in the past. This will affect both urban and suburban markets.
It’s easy to see how these trends combined to pound a place like Connecticut. It’s next to NYC, the premier central business district zone in America. But it is also far enough to make commuting to most of it a pain (even the express train to Stamford takes about an hour). And it’s an expensive and business hostile environment to boot. Large scale employers who want a suburban footprint can find many better places.
We are in fact seeing this happen in finance. Goldman Sachs is booming in Manhattan, but has what I believe is their second largest US office in Salt Lake City, presumably housing back office functions. Deutsche Bank is building a big facility in Jacksonville. JP Morgan Chase has a huge presence in Columbus, Ohio, where its former Bank One unit was based. A place like Connecticut is the odd man out. Suburban Chicago is probably set to be another loser. But in smaller cities the suburbs will do much better.
Also, don’t be too quick to write the eulogy for the suburban office campus, even in the tech industry. A recent article in Der Spiegel featured Silicon Valley’s new “monuments to digital domination” – including Apple’s $5 billion Norman Foster designed campus, Frank Gehry’s campus for Facebook, and others for Google, NVidia, and Samsung. In Houston, Exxon Mobil is putting the finishing touches on a three million square foot campus that will employ 10,000 people. But unlike Google moving 2,500 people to downtown Chicago, projects like that don’t make national headlines.
I don’t think there will be a massive back to downtown wave, and the suburban office park is not dead. But there are headwinds facing suburban office space, particularly in expensive, mature markets.
Friday, December 6th, 2013
There’s been so much ink spilled over Detroit’s bankruptcy that I haven’t felt the need to add much to it. But this week the judge overseeing the case ruled that the city of Detroit is eligible for bankruptcy. He also went ahead and ruled that pensions can be cut for the city’s retirees. Meanwhile, the city has received an appraisal of less than $2 billion for the most famous paintings in the Detroit Institute of the Arts.
A couple of thoughts on this:
First, every city in America should be doing a strategic review of its assets, and moving everything it doesn’t want turned into de facto debt collateral into entities that can’t be touched by the courts. In the case of the DIA, the city owns the museum and the collection. Hence the question of whether or not art should be sold to satisfy debts. If it were typical separately chartered non-profit institution, this wouldn’t even be a question.
At this point, I’d suggest cities ought to be taking a hard look at whether they own assets like museums, zoos, etc. that should be spun off into a separate non-profit entity. Keep in mind, the tax dollars that support the institutions can continue flowing to it. But this does protect the assets in the event of a bankruptcy.
In the case of Detroit, it seems inevitable that at least some art work will be sold. Given that worker pensions are going to be cut, it would be pretty tough to say no to selling art. Assuming this is the case, post-sale the museum should be spun off as a separate entity to hopefully reboot its standing the museum world. As the trustees of the group that operates it have been adamantly opposed to any sale, one would hope other museums would not hold any violations of industry standards against them for, particularly if they acquire ownership of the building and artwork away from the city afterward. The city of Detroit doesn’t need to be in the museum business anyway. It has bigger fish to fry.
Secondly, public sector employees will have to start rethinking their approach to retirement benefits. The current mindset has been to grab as much as you can anytime you can because the taxpayer will always be forced to cover the promises no matter what. As the actual results in Central Falls, RI and now this show, that’s no longer a good assumption.
Detroit’s workers don’t have lavish pensions as these things go. But they weren’t shy about abusing the system either. They in effect looted their own pensions by taking out extra, unearned “13th checks”. They also used pensions funds to give a guaranteed 7.9% annual rate of return on supplemental savings accounts workers were allowed to establish. All told these “extra” payments drained about $2 billion out of the pension system.
This was not something the city did through an arm’s length transaction. As the Detroit Free Press reported, Mayor Dennis Archer was alarmed by the practice and wanted to stop it. But “the city doesn’t control its pension funds, which have been largely administered by union officials serving on two independent pension boards.” So he tried to amend the city’s charter to stop the practice. According the Free Press, “Archer backed an effort to block the payments through a proposed new city charter, which actually passed in August 1996. Enraged, several city unions and a retiree group sued and won. Archer tried again to block payments through a ballot initiative, called Proposal T, but it failed.”
The unions could brazenly loot their own pension plan because they felt rock-solid assurance that the taxpayers would ultimately be required to make them whole. This bankruptcy is showing that may not be the case after all. It should serve as a warning to unions everywhere not to get too aggressive with their shenanigans.
They’ll of course appeal the judge’s ruling and may win. But the Michigan constitution says pensions are a contract right. The very definition of bankruptcy is that you can’t pay what you’re contractually obligated to. Bankruptcy is all about breaking contracts. The bondholders have contracts that are not supposed to be impaired too, after all. I’m a fan of local government autonomy as you know, but as Steve Eide rightly points out, any freedom worth its name is freedom to fail. If cities and their various constituencies don’t suffer the consequences of their mistakes, they should be heavily micromanaged from on high.
When individuals fail, we have a safety net (unemployment insurance, for example). Plus we have personal bankruptcy to give people a fresh start. We don’t even worry about whether the person is at fault for their own position or not. We provide that backstop regardless. But that backstop doesn’t allow people to go on living like they did before as if nothing happened. Similarly, cities in trouble shouldn’t be abandoned, but they need to realize that there are genuine consequences for failure. A realization that failure has consequences for pension holders as well as the taxpayer should hopefully promote healthier decisions about how retirement benefits should be offered, funded, and administered.
Thursday, December 5th, 2013
Small scale special service districts in their various forms – such as conservancies, business improvement districts, and management agencies – are increasingly common in our urban landscape. This is part of a trend towards public-private partnerships, or perhaps more accurately in this case, privatized/outsourced government.
Are these a good thing or a bad thing? In my latest post at New Geography I take a look. It’s called “Are Special Service Districts a Bane or a Boon?.” Here’s an excerpt:
In fact, the move towards privatized services in wealthier areas could be a good thing for the rest of the city if it is used to free up funds for use where there isn’t as much private capital available. In this case a city could look to move parks, street cleaning, and other items “off the books” via special service districts in areas that can afford to fund such services largely by themselves. The city would then concentrate public funds in poorer or middle class areas. The tradeoff would be that the wealthier areas might be allowed to purchase higher quality services for themselves, but that would be structured in a way that let service quality be raised for others.
On the other hand, it’s not hard to see how this could evolve as a mechanism for “strategic abandonment” as well. In this case the city would cut general service levels then allowing wealthier areas to buy them back. Critics have charged that special service districts are exactly the legal mechanism that will be used to implement planned shrinkage in Detroit.
In the case of Detroit, the city has no good options and may well be forced by reality to make tough choices like this. But not everyplace has that excuse.
Thursday, December 5th, 2013
From the High Line in New York to London’s Silicon Roundabout to the Dharavi slums in Mumbai to bicycling in Copenhagen, British writer and urban historian Leo Hollis offers a broad and sumptuous survey of contemporary urban life in his new book, Cities Are Good For You. Unfortunately, his claim doesn’t quite stick, as Hollis never fully explains what the vignettes and case studies he has assembled add up to—while his scrupulous reporting uncovers plenty of unflattering urban details. The reader comes away with only a vaguely positive impression of cities’ potential to increase prosperity and improve lives.
Wednesday, December 4th, 2013
Note: I’m keeping this ebook post pinned to the top during the holiday shopping season. Scroll down for new content.
Here’s a reminder that my first Urbanophile Kindle e-book is out, conveniently in time for the holidays. It’s called “The Urban State of Mind: Meditations on the City” and you can get it at that link from Amazon. The e-book contains 28 of the best, most challenging, most make you think posts from nearly 1,200 articles during the first seven years of the Urbanophile. It’s a great introduction to my work. But what’s more, even for those of you who’ve already read everything, I’m including two new original essays as well as seven brief meditations on the city.
In The Urban State of Mind I write about innovation, talent attraction and brain drain, global soft power, sustainability, economic development, and localism. The essays are designed to provide a different angle on the issue from the conventional wisdom and prompt you to really start thinking about and wrestling with these complex and challenging issues.
Wednesday, December 4th, 2013
This week’s video feature is a time lapse of Barcelona, an amazing city, by Alexandr Kravtsov. As always with these, I suggest full screen, high definition. If the video doesn’t display for you, click here.
Sunday, December 1st, 2013
Jim Russell and Richey Piiparinen have released a new whitepaper on Cleveland that should be read by anyone looking to reboot the economies of struggling post-industrial cities. Released under the auspices of Ohio City, Inc., “From Balkanized Cleveland to Global Cleveland: A Theory of Change For Legacy Cities” looks at how a lack of population churn has stunted Cleveland’s ability to connect to the global economy.
This paper puts a different spin on talent and the knowledge economy. “Knowledge” is not just facts acquired through education or work experience. It also includes the set of personal relationships and knowledge of other places and social networks that we all carry to some extent. Global cities not only score well on traditional knowledge measures, but because they are destinations for migrants, they excel in this more broader notion as well.
Cleveland is not a global city. In fact, in his book Caught in the Middle, Richard Longworth said, “When I went to Cleveland I found not alarm but complacency. In a city that is being destroyed by global forces…I found almost nobody willing to actually talk about globalization or global challenges…In all my travels through the Midwest, Cleveland was the only place, big or small, that seemed heedless of the global challenge.”
Part of that comes from a lack of migrants coming in to bring global knowledge and connectivity to global networks. Using IRS data from Telestrian, Russell and Piiparinen note that Cleveland actually only ranks 34th in America in its outflow of people, versus being the 28th largest metropolitan area. The city is actually doing a better than average job of retention.
The problem is that Cleveland ranks 47th in inflow of people. Attraction is very weak. Hence population decline, but also an inbred, closed society. About 75% of the people in metro Cleveland were born in Ohio, versus 30-60% in other, more globalized cities. Among large metros in the US, Cleveland ranks 6th in its percentage of the population living in the state they were born. (In fairness, this in part derives from a low foreign born percentage and the fact that the Cleveland region isn’t a multi-state metro).
I did my own analysis to take a look at the in-migration shed of the city. Cuyahoga County (the central county of the Cleveland region) had reported in-migration from 320 counties during the 2000s, with 228 of these sending at least 100 people to Cleveland. I decided to contrast with better preforming Columbus. There, the core county of Franklin drew people from 486 counties, with 335 of them having at least 100 people. Now Columbus is a huge university town, so I also looked at Indianapolis. Indy’s central county of Marion, which is significantly smaller than Cuyahoga in population, drew from 381 counties, including 273 of 100 or more people.
Clearly Cleveland is drawing fewer people from the outside world, and drawing from fewer places, than cities that are performing better, though one could quibble with the causality arrow here.
As a result, we see what is frequently true in such places. Cleveland’s social and power networks have balkinized. They don’t receive much new information or many new people, and what they do receive they don’t integrate well. Hence what Longworth observed. Cleveland needs much more demographic churn to open up these social networks and generate more global connectivity.
That’s the bad news. The good news is that there’s evidence this is already happening. The authors note that several central city areas have attracted newcomers from both inside and outside of the region – and these are disproportionately young. My own analysis showed that Cleveland had surprisingly strong downtown population growth of 4,200 people, one of the best showings in the Midwest.
The authors also note other potentially encouraging trends. A good number of Cleveland’s gentrifying neighborhoods are also becoming more not less diverse. While all they note diversity doesn’t mean people automatically start interacting with each other, it’s a start. What’s more, they suggest that the decline in social capital that results in diverse neighborhoods might paradoxically be a plus, as Cleveland suffers from excess social capital today. Lastly, they note that Cleveland has pretty high churn already with both New York and Chicago, making it one of the few similar types of cities that already has well-established migration paths. They believe this is poised to continue as high costs and “cool fatigue” push people out of many of today’s key global hubs like New York.
The potential for Cleveland in capturing this is significant in their view. As the paper notes, “This scenario, then, that’s unfolding in which coastal talent is arriving, or re-arriving, into the legacy city landscape can foretell an economic sea change…The long-term economic potential for this talent migration rests not in how many microbrews are consumed or condos are leased, but rather how it affects Cleveland’s global interconnectivity. These migrations are re-arranging Cleveland’s historical insular social networks, with the gentrifying neighborhoods acting as urban portals to the global flow of information.”
This was not intended as a critique of microbreweries. Rather, the idea is that luring people is about way more than just boosting the consuming classes, it’s about tangible change in the social and economic structure of the community.
No one should pretend that positive indicators like strong downtown population growth means Cleveland’s problems are solved. I’d describe this more as “green shoots” than anything. But it’s undeniably positive and provides a platform for further growth.
The authors don’t suggest any particular policies in response to their findings. They were more interested in moving beyond the traditional “brain drain” frame of talent and inject both some key facts around Cleveland’s migration patterns and their talent churn theory of civic change into the local discourse. They got a nice writeup in the Plain Dealer, so they are off to a good start there. But more work will need to be done in the future on an effective policy response.
Wednesday, November 27th, 2013
It’s Thanksgiving week here in the US, and I’ll be off until after the holiday. But I figure, what better to leave you with than a little humor at Canada’s expense?
First, Saturday Night Live’s take on Rob Ford. The embed likely won’t show in a reader or such, so to watch, click here.
And next, Chris Farley stars in Rob Ford the Movie. If the video doesn’t display for you, click here.
Incidentally, although the crack video has now been found, I stand by my previous assertions that dubious reporting and the underhanded ways people tried to get Ford removed from office were wrong. In fact, I think they fuel the persecution complex that helps explain why even today Ford is more popular in Toronto than President Obama and Congress are here.
Sunday, November 24th, 2013
Well, that’s not exactly the headline on the front page of the Wall Street Journal last week. The actual one was “Drop in Traffic Takes Toll on Investors in Private Roads” (subscription required). The Journal nails that part of the story, but only briefly addresses the way that the private companies that build these roads have already reacted by shifting to more favorable (to them) contracts arrangements that virtually guarantee their profits.
One of the theoretical benefits of privatizing a government asset or service through a lease or equivalent is that it hedges future risk by transferring it to the vendor. That obviously comes with a price tag, but that’s clearly because it has value. It provides predictability to the government.
In practice, these contracts have proven to be so stacked in favor of the vendor that the taxpayer retains most of the risk. For example, in the case of the Chicago parking meter lease, the city retains the risk resulting from any street shutdowns due to construction or events like the NATO summit. They have to pay the vendor compensation if anything impairs the value of the meter system. Pretty much the only risk the vendor took on was whether or not people would continue to put quarters into the machines. Similarly, when the Borman Expressway flooded and Indiana decided to make travel on the Toll Road free until it was drained, the state had to pay compensation to the vendor for this. The flood risk was retained by the state. This doesn’t mean it was a bad deal. In fact, it remains a great deal – one of the best from a taxpayer perspective. But the degree of risk transfer can be overstated. The price to construct and maintain roads is pretty well understood by the people doing these deals, so the main risk to the vendor again was revenue risk – would people keep throwing money in the toll baskets?
Well, apparently even just the revenue risk was significant. The Great Recession, a traffic drop off instead of increases, and prices stoked by irrational exuberance have put many private road operators in financial distress. According to the Journal, one such operator – American Roads, LLC – is already in Chapter 11. Their bond insurer is alleging fraud from deliberately inflated traffic projections. The Indiana Toll Road consortium may file bankruptcy. The Dulles Greenway is struggling.
Across the country, toll roads are carrying less traffic than projected. The Metropolitan Planning Council put together this chart showing the trends (via Streetsblog Chicago):
For toll roads run by the government, this is a real public risk. But for privately run roads like the Indiana Toll Road, it’s the investors problem. That’s the beauty of these deals and shows that privatization can work. As Indiana Gov. Mitch Daniels said of his state’s toll road lease, it was the best deal since Manhattan was sold for beads, only this time the natives won.
Perhaps predictably, the private road industry has responded by changing contract terms. Instead of these leases where revenue risk lies with the vendor, they’ve decided they can’t take on any risk at all, so they are now doing business with states increasingly under what’s called an “availability payments” model. What’s this? Well, according to AASHTO:
Availability payments are a means of compensating a private concessionaire for its responsibility to design, construct, operate, and/or maintain a tolled or non-tolled roadway for a set period of time. These payments are made by a public project sponsor (a state DOT or authority, for example) based on particular project milestones or facility performance standards…..Availability payments are often used for toll facilities that are not expected to generate adequate revenues to pay for their own construction and operation. In this case the project sponsor retains the underlying revenue risk associated with the toll facility rather than the private partner. Also in this manner, there is less overall risk to the private entity than with a full concession. Rather than relying on achieving certain levels of traffic and revenue, the concessionaire receives a predictable, fixed set of payments over the life of the agreement. The concessionaire also can rely on the public agency’s credit to secure financing rather than unpredictable toll revenue.
A couple things jump out immediately. First, if the road can’t pay for itself via tolls, isn’t that a flashing red light that says it doesn’t make economic sense from a transport perspective?
Second, from the standpoint of the private vendor what’s not to love? You basically have a similar deal structure as before, except that now instead of tolls that might not materialize, you have a contractually guaranteed, predictable revenue stream from the state. They’ve converted a variable revenue stream into a fixed one. In effect, these deals hand the only real risk that was outsourced, the revenue risk, right back to the taxpayer.
This immediately raises the question as to what the actual value of this type of deal structure is from a taxpayer and motorist perspective. It seems to be a sort of design/build/maintain contract with a mixture of funding sources all of which ultimately fall back on the state and its availability payments stream. Why resort to this type of structure which greatly adds to the opacity of the transaction and makes it much harder to tell if the public got a good deal or not?
Some people say that one source of value in these transaction is the fact that private entities don’t have to comply with cumbersome government procurement rules. But it took nearly three years for the Port Authority to contract its Goethals Bridge replacement project based on availability payments. And one of the parties is a major construction company so it doesn’t seem like that’s big deal here. Possibly, as with the previous leases, this will generate a bunch of tax deductions that in effect siphon off a subsidy from Uncle Sam. I don’t know.
In the case of the project to build two new Ohio River bridges in Louisville, Indiana is using an availability payments based P3 for its bridge, while Kentucky is using a more traditional toll finance system for its side. There’s been little discussion of the merits of these approaches. There are certainly questions in my mind. For example, Indiana has talked about saving $225 million. But if savings materialize during the project, who actually gets them? If the vendor has their payments stream locked in, any savings would fall straight to their bottom line. The same should be true of overruns (though with the way these contracts are written, I wouldn’t take that to the bank), but given the limited number of competitors for these mega-deals and the general lack of visibility into the transaction, I suspect that these guys know going in where they can save a lot money to juice their profits. State DOTs routinely bid projects that come in well below the engineer’s estimate, as they rightly try to be conservative on costs. But in this case the actual savings might not actually flow to the taxpayer but to the vendor.
Is that actually the case? I don’t know. Nor have I seen much in the way of discussion on this in the mainstream press. Given the huge dollars at stake and the risk in any government contract that the taxpayers might get fleeced, the use of these not very easy to understand and model contracts with non-obvious value propositions to the public makes it hard for a financially challenged media to really provide any sunshine. I’d love to see the Journal do a deep dive on this issue, because somebody needs to really trace through the value, the money flows, and the risks associated with these deals.
In the meantime, specialty sites like Toll Roads News have provided some interesting coverage. It’s clear the use of availability payments is ramping up. Here’s their piece on the Goethals Bridge project. They also note that “Indiana to take traffic and revenue risk from outset of procurement of P3 for Illiana Expressway.” Illinois appears to be gearing up for an availability payments model on their share of the Illiana.
Their piece call “Illiana P3 meaning stretched by availability payments – P3s 101” raises a number of excellent points. Here’s an excerpt:
Boosters of the Illiana Expressway in the empty countryside south out of Chicago are suggesting by their choice of words that the public private partnership (P3) envisaged puts major risk on “investors”. The Northwest Times newspaper for example had a headline that the governors of Indiana and Illinois were in town to “pitch Illiana Expressway to investors.”
However when a P3 is not a toll concession but an availability payments deal (an AP-P3) it is fundamentally different. Now the P3 operator is entitled to be paid for having the highway available to the state regardless of traffic and revenue. The road has only to be operated and maintained – at rather predictable cost – and the payments roll in. They are quite independent of the traffic and revenue. The state may run a toll operation on the road but it assumes the traffic and revenue risk.
The great bulk of the risk – residing in the traffic and revenue forecasts – is assumed by the state and its taxpayers just as surely as if it was a state tollroad operation. AP-P3s then don’t look for real “investors.” They look for contractors, big contractors with a big contract, but a contract all the same..
Bingo. Public officials are using the lingo “investment” when what they are really doing is creating a very complex and opaque construction contract. It’s very misleading. No one should be surprised when down the road we discover the taxpayers got pillaged on these days. Of course, these contracts no doubt have non-disclosure agreements designed to protect the “confidential” information of the vendor that make it unlikely the real financials will ever be fully known by the public.
In any event, this is emerging area clearly needs much more public scrutiny than it has gotten to date.
Wednesday, November 20th, 2013
This week it’s back to time lapses, with “Nightvision”, a sort of greatest hits our of famous buildings in various European cities, shot at night of course. As always, full screen recommended. If the video doesn’t display for you, click here.