Friday, December 19th, 2014

Why the Rent Is Too High, Reason #239

It’s no secret housing costs are high and going higher in major US cities like NYC, San Francisco, etc. I was just tweeting with someone this week who moved back from Park Slope, Brooklyn to Indianapolis because her rent was being raised by over 50% (possibly that’s a cumulative increase over time – not sure).

Most of the urbanist discussion tends to focus around zoning as the reason prices are high. That’s certainly an important factor. But there are also other things driving up costs and rents. The NYT highlighted one of them last Sunday, namely the permit expediter tax:

When Mark Brotter dies, the inscription on his tombstone will read simply: “Thank God — no more plumbing Schedule B.”

Mr. Brotter, 55, is an expediter, an imprecise term that is used to describe the men and women whose workdays are spent queuing up at the Manhattan branch of the New York City Department of Buildings to file the documents and pull the permits that allow construction projects — your kitchen renovation and the high-rise next door — to go forward. “I’m basically a middleman,” he said. For its part, the Buildings Department insists on the title “filing representative.”

Others are employed by large firms that do nothing but expediting, or are on the staffs of architectural or engineering firms. In the early 1990s, expediters numbered 300 to 400; today there are more than 8,300. (Filing representatives must register with the Buildings Department and pay a $50 annual fee for the right to stand on lines at department offices.)

The expediter’s fee varies depending on the outlay of time and the complexity of a job. The charge for securing a permit for a contractor ranges from $200 to $400; for filing a project, $1,500 to $3,500. Plans that must go before the Landmarks Commission are a more costly proposition, as are projects that involve the conversion of a commercial space to a residence.

Now these prices aren’t ridiculous in the grand scheme of things for New York City real estate. But the idea that there are 8,300 people making a living standing in line to file permits for people points to the entire structure of how development gets done in big cities (NYC is hardly alone in this particular industry) in ways that continually raise costs. This is beyond the cost of delays that a baroque permitting process introduces.

Particularly when you are trying to build lower rent buildings, all of the fixed costs you have to incur to built anything (land, permits, expediters, etc.) have to be recovered and amortized across the units. When you have a hyper-complex development environment, these fixed costs raise the minimum viable rent threshold and thus push the cost of construction towards the higher end of the market that is already being served.

To bring the cost of housing down, cities should be working on all fronts, not just zoning to make it happen.

This particular case is instructive regarding barriers to reform, however. If the city made it easy enough to file plans and get permits in ways that didn’t require an expediter industry, 8,300 people would be out of work. Presumably they would squawk about it. I’m sure I would if I were in their shoes As with many regulatory reforms, the benefits are diffuse and hard to see, whereas the costs are concentrated and obvious.

Also, just one reform in and of itself is unlikely to produce immediate substantive change. Broad based reform in many areas is needed, then there will be a lag as investors adjust to and take advantage of the new environment. This may involve shorter term pain for longer term gain, much like disruptive technical innovation.

That’s not a formula politicians like. It’s one reason Japanese Prime Minister Abe’s “third arrow” of structural reform remains mostly in its quiver. Too many interest groups face immediate pain from reform, but the payoff is raising the economic potential of Japan and creating conditions in which future growth can occur, the exact nature of which can’t be predicted. That’s a hard sell to make, which is one reason politicians tend to focus on things that have immediate benefits to at least some people, such as tax cuts or spending programs.

Regardless, beyond just changes in zoning or this or that process or regulation, there needs to be a mindset shift in how these cities approach development to bring about a broad based change in housing affordability.

Tuesday, December 16th, 2014

The Silent Killer – The Company Your Community Never Created by Mark Suster

[ My fellow Accenture alum Mark Suster is a former startup founder and now a VC based out of Los Angeles. Hence he writes the fantastic tech startup blog Both Sides of the Table that’s a must read if you’re into tech startups. This recent piece particularly caught my eye as it’s relevant to so many cities’ startup scenes. Mark graciously gave me permission to repost it here – Aaron. ]

I was at a dinner recently in Chicago and the table discussion was about building great companies outside of Silicon Valley. Of course this can be done and of course I am a big proponent of the rise of startup centers across the country as the Internet has moved from the “infrastructure phase” to the “application phase” dominated by the three C’s: content, communications and commerce. But the dinner discussion included too much denial for my liking.

I think startup communities being simple cheerleaders doesn’t help anyone. Those of us outside Silicon Valley need to make an effort to effect change not just wish for it.

At the dinner some of those arguing that Chicago has everything it needs now that it has built: Groupon, Braintree, GrubHub and others and that it has “come along way” and “will never get the full respect it deserves just because it’s not Silicon Valley.” But I think this misses the point. I’m a very big fan of Chicago. I started my career at Andersen Consulting (now Accenture) so I went to Chicago many times a year for nearly 9 years. I then got my MBA at University of Chicago so I secretly pull for local entrepreneurs as long as they don’t make me visit in the Winter any more.

But no community can become complacent with the wins that it has. It’s not the great companies you build, it’s the silent killer of those that should have been build locally and weren’t. It’s the thousands of jobs that weren’t created but you don’t even know it.

Think about Facebook had it stayed in Boston. Could it have become the behemoth that it is today? Who knows. But I’ll bet the Boston community would take 50% of the success of Facebook built locally. And the truth is that successful startups beget more successful local startups, wealthy VPs who go on to build their next startups, etc. Even Mark has acknowledged moving wasn’t the be all, end all in this famous interview:

“If I were starting now, I would have stayed in Boston. [Silicon Valley] is a little short-term focused and that bothers me.”

Boston is still a great tech hub. But wouldn’t it want to be great PLUS have Facebook?

We have similar stories in LA and most people don’t know it. For example, Lookout is a mobile security company that was founded by three talented graduates of USC. They started their company in LA but a couple of years after raising capital from Khosla Ventures in the Bay Area they ended up relocating there. A few years later they announced $150 million in a funding round at $1 billion+ valuation and are ramping up jobs to secure their market-leading position. You could say the team would have gone North anyways. Perhaps – who knows? But I know with local funding and local support that’s certainly less likely.

And consider Snapchat – one of our hometown favorites as they’re based in LA (Venice Beach). Luckily for our community the founders decided they wanted to build their company in LA regardless of not having local funding from LA. That’s our great gain as Snapchat has also raised a lot of money at a monster valuation ($10 billion reported) and has been scooping up talented Stanford engineers and relocating them to LA. Locally we call it “the Snapchat effect.” The VPs of SnapChat will be LA’s great founders 5 years from now.

Silicon Valley is littered with startups where the founders were originally in LA. Klout was an LA company – sold for $200 million to Lithium. As was FarmVille (sold to Zynga) and many, many others.

Local capital matters. Local mentors matter.

That was my original idea behind Launchpad LA. I figured if we couldn’t fund every company locally we should at least embrace them as a community and show that we’re willing to mentor them whether they raise their money in town or not.

So what can a community do?

I often point out the story of when we raised our fourth fund a few years ago. I went to see several LP funds in Boston. At least twice I had conversations that went like this, “Yes. It’s true. Your fund performance has been great. But there’s also several great funds in Boston and while our first priority is to returns we have an equal responsibility to local funds and local jobs.”

LA public pension funds and endowments have historically been the opposite. I think government and community members need to understand that capital formation is an incredibly important part of economic revival. People often say, “Great entrepreneurs will build a community and the capital will follow.” I don’t see much evidence of that. I think it’s a combination of the two. It’s clear capital with no talent ends up having to travel to do deals. But talent with no capital is another word for migration.

And then there is public policy. Historically the City of LA has been hostile to startups. I’m reminded of LegalZoom who was founded in LA but moved it’s headquarters to Glendale and much of its operations to Austin, Texas. While LA was trying to impose archaic taxes on the firm and seemed to care less about its existence since it was a “startup” – the first lady of Texas welcomed them to Austin by picking up the CEO at the airport on his first visit there. It’s no wonder hundreds of jobs migrated. Luckily since then we elected Mayor Eric Garcetti who understands the importance of startups and of technology and venture capital on job creation.

But we still need more funds. No – I’m not worried about the competition. We’ll win our fair share of deals. But when you remember the Snapchat effect you see that I gain even from the deals we didn’t get to do. I’m guessing the future leaders of Lookout will build companies in the Bay Area.

Communities can make a difference. I wrote about the awesome efforts of Cincinnati to stimulate its startup community and the role of Paddy Cosgrave in Dublin, Ireland as well the entire Irish business community, the IDA, etc. who woo businesses to put their headquarters there. I also covered the impact of Brad Feld in Boulder or Fred Wilson in NYC as observed from my keynote on a trip to Seattle, which I felt could have a huge boom if its elder statesmen embraced startups a bit more.

Don’t get me wrong. Chicago has made strides. The Pritzker Family has been very active and the opening of 1871 as an entrepreneurial hub is a great example. But my conversations with countless Chicago entrepreneurs suggests it has similar issues to all non-Silicon Valley centers: not enough venture capital, too few tech angel investors, not enough talent for product management or engineering, not enough local tech powerhouses to drive local biz dev / keiretsu. I think this is true of LA, NY and many other tech communities so I’m not singling out Chicago.

My point is this … cheerleading isn’t enough. We need to help create local venture capital funds who may be national in investment strategy (as we are) but who will do more than their fair share of fundings locally (for us that’s 50%). Fund formation + local mentors + local talent = a shot at creating successes that drive the future job growth of our great cities.

This post originally appeared in Both Sides of the Table on November 15, 2014.

Sunday, December 14th, 2014

The Inevitability of Tradeoffs, or Understanding New England’s Sky High Energy Costs

People advance two main sorts of arguments in favor of things for which they advocate: the moral argument (it’s the right thing to do) and the utilitarian one (it will make us better off). As it happens, in practice most people tend to implicitly suggest there’s a 100% overlap between the two categories. That is, if we do what’s right, it will always make us better off too with no down sides at all.

But is that true?

For most of us, our life experience suggests that there are always tradeoffs and there’s no such thing as a free lunch. Urbanists tend to argue in way that suggests this isn’t the case. The types of policies advocated by urbanists tend to be presented not only as right in a certain moral sense, but also ones that make society better off in every way. When things go awry in some respect, as they always seem to do, this is always seen as an avoidable defect in policy implementation, not as a problem inherent to the policy itself. Urbanists aren’t alone in this of course. It affects most of the world. But since I cover the urban beat, I’ll focus on us for a minute.

Today the New York Times opens a window into the type of trade-offs that are studiously avoided in most writings on the subject of climate change. Called “Even Before Long Winter Begins, Energy Bills Send Shivers in New England,” it talks about how a lack of natural gas pipeline capacity is sending electricity and gas costs through the roof as the temperature turns cold.

John York, who owns a small printing business here, nearly fell out of his chair the other day when he opened his electric bill. For October, he had paid $376. For November, with virtually no change in his volume of work and without having turned up the thermostat in his two-room shop, his bill came to $788, a staggering increase of 110 percent. “This is insane,” he said, shaking his head. “We can’t go on like this.”

For months, utility companies across New England have been warning customers to expect sharp price increases, for which the companies blame the continuing shortage of pipeline capacity to bring natural gas to the region. Now that the higher bills are starting to arrive, many stunned customers are finding the sticker shock much worse than they imagined.

I’ve written about this before re:Rhode Island, which is among the most expensive states in America for electricity (most of which is generated by gas). But all of New England is high, with Connecticut ranked as having the country’s most expensive electricity. Gas prices spike every winter to levels far above the rest of the country, as the graph below that I found via City Lab shows:

This would appear to be a simple problem to solve: just build more pipelines. I included on my list of starter ideas for improving economic competitiveness in the state.

Unfortunately, planned pipelines haven’t been built due to environmental opposition:

The region has five pipeline systems now. Seven new projects have been proposed. But several of them — including a major gas pipeline through western Massachusetts and southern New Hampshire, and a transmission line in New Hampshire carrying hydropower from Quebec — have stalled because of ferocious opposition.

The concerns go beyond fears about blighting the countryside and losing property to eminent domain. Environmentalists say it makes no sense to perpetuate the region’s dependence on fossil fuels while it is trying to mitigate the effects of climate change, and many do not want to support the gas-extraction process known as hydraulic fracturing, or fracking, that has made the cheap gas from Pennsylvania available.
….
A year ago, the governors of the six New England states agreed to pursue a coordinated regional strategy, including more pipelines and at least one major transmission line for hydropower. The plan called for electricity customers in all six states to subsidize the projects, on the theory that they would make up that money in lower utility bills.

But in August, the Massachusetts Legislature rejected the plan, saying in part that cheap energy would flood the market and thwart attempts to advance wind and solar projects. That halted the whole effort.

Here we see the clear tradeoff in action. Reducing carbon emissions has a clear human and economic cost. High electricity costs wallop household budgets in a region with many communities that are struggling or even outright impoverished (as recently as last year, for example, a third of the residents of Woonsocket, RI were on food stamps). This particularly harms poor and minority residents. What’s more, it helps contribute to the region’s low ranking as a place to do business and its anemic job creation.

Given that gas itself is dirt cheap and will be for the foreseeable future thanks to fracking, hurting residents through high electricity prices designed to drive energy transition is clearly a deliberate policy choice.

Fair enough if you believe reducing carbon requires subordinating other public goals like more money in poor people’s pockets. But how often is this forthrightly stated by advocates? Almost never.

Instead we’re treated to article after article in various urbanist publications talking about some awesome green project that’s being implemented somewhere, and how other places ought to do the same thing. There’s lots of doom and gloom about the increased potential for future disasters if the policies aren’t followed. But there’s seldom much about the immediate negative consequences that almost certainly will follow if they are.

I like energy efficiency. I’m glad we have more fuel efficient cars. I’m very glad I don’t own a car anymore. I’m not so excited about light bulb mandates and other “feel bad” policies that don’t materially affect emissions. But there’s definitely a lot we can do on the energy front.

But I also care about things like poor people’s electricity bills and economic growth. And I’m not willing to make unlimited sacrifices (including imposing sacrifices on other people) in the name of conservation. I can appreciate that others might make different tradeoffs and want more conservation than I do. But at least they ought to be honest about the costs and harm they are imposing on people in the name of their preferred policy matrix.

Instead there’s disingenuous talk about the “green economy” powering local economies when there’s no such thing as green industry. Or claiming, as many did in response to my article earlier this year, that Rhode Island’s government is actually conservative, so its problems can’t be laid at the foot of excessively progressive policies imported from places with vastly more economic leverage than most of New England. I guess I did not know that killing gas pipelines in the name of promoting renewable energy via high prices was a Tea Party idea.

Actually, not even the places that do have huge economic leverage are behaving like this. New York City has more economic leverage than just about anybody. But it also, as the chart above shows, has cheaper gas. One reason is that, as City Lab reported, NYC recently just opened a new gas pipeline into the city:

A really important thing happened last month to New York City and the rest of the mid-Atlantic. This event will change the daily lives of millions of people, especially during the coldest months of winter. And, despite some protesters, it all went down with less fanfare than Jay Z and Beyonce going vegan for a month.

An $856-million pipeline expansion began ramping up service, allowing more natural gas to get to New York City consumers. The New York-New Jersey expansion project moves more gas the last few miles from Jersey, which is the terminus for much of the Marcellus Shale gas flowing out of Pennsylvania, into Manhattan. The Energy Information Administration called it “one of the biggest… expansions in the Northeast during the past two decades.” It will bring an additional 800 billion British thermal units (BTU) of gas to the area per day.

Maybe New England wants to out do New York City when it comes to driving a green energy transition. (NYC seems to be focusing more on climate change adaptation, aka “resiliency,” these days). That’s a valid policy choice to make. But it’s one with consequences.

Unfortunately, the consequences of these policy choices are seldom presented by their advocates. People only discover them when the costs show up in a way that can be tangible traced back to those policies. Maybe in the case of New England and energy costs, people are starting to wake up to the matter, possibly in a way similar to how sky high housing costs in so many cities woke people up to the actual trade-offs being made in housing policy.

Advocates are there to advocate of course. So perhaps it’s unrealistic to expect advocates of any stripe to give you the full story. But that’s why we should always pay attention to what the critics of particularly policies have to say. That will give us a more complete picture of the tradeoffs any particular policy set will require.

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Topics: Economic Development, Public Policy
Cities: Providence

Tuesday, December 9th, 2014

Divergent Demographic and Economic Trends in Chicago by Bill Sander and Bill Testa

[ This week a post from Bill Sander and Bill Testa from the Chicago Fed’s Midwest Economy site, looking at the various trends affecting the city of Chicago – Aaron. ]

The fortunes of the city of Chicago have become clouded in recent years as concerns over its weakening finances and heavy debt obligations have grown. The tally for the unfunded public employee debt obligations of Chicago’s overlapping units of local governments (including those for public schools, parks, and county services) is now approaching $30 billion. Moreover, the city government has been criticized for its practices of funding current public services with proceeds from the issuance of long-term debt and the long-term leases of public assets (such as its parking meter system). However, faith in Chicago’s ability to address its debts has not fallen so far as that in Detroit’s, chiefly because the Windy City’s economic trends display more vibrancy.

Population change is a prominent indicator of the health of an urban economy because it reflects a city’s ability to hold on to its residents (as opposed to losing them to the suburbs or other locales). Over the past few decades, similar to other central cities, Chicago has experienced an erosion in its population share of the broader metropolitan statistical area (MSA);[1] in contrast, the surrounding suburbs have seen their share climb. According to the U.S. Census, Chicago held 38% of the MSA’s population in 1980, with this share falling to 35% by 1990; in the subsequent 20 years, Chicago’s population share of the MSA decreased another 3 percentage points per decade, reaching 29% by 2010 (see table below). During the 1980–2010 period, Chicago lost a total of over 300,000 residents. At the same time, suburban Chicago gained close to 2 million in population. Since 2010, the city of Chicago’s population and population share of the MSA have strengthened somewhat, though the (off-Census year) estimates are probably not as reliable.

While population trends can be telling for a city’s prospects, they can also belie changes in its residents’ wealth and income. Despite the city of Chicago’s population loss over the past few decades, its economic trends have been generally more encouraging.[2] Household income is an important indicator of Chicago’s fortunes relative to those of its suburbs. In 1990, median household income in the city was just 67% of the median household income in suburban Chicago. By 2010, this income ratio had climbed to 73% (see table below). Decomposing household income statistics by (self-reported) racial/ethnic group reveals that this trend was pervasive for the three largest groups: non-Hispanic white, black, and Hispanic. The ratio of city median income to suburban median income among white households experienced the greatest change; it rose from 77% in 1990 to 98% (near parity) in 2010.

These robust trends are echoed by Chicago’s rising share of adults aged 25 and older who have attained at least a bachelor’s degree. In 1990, among adults aged 25 and older, 19% of those residing in the city had attained a four-year college degree versus 28% of those residing in the suburbs (see table below). By 2010, Chicagoans in this age demographic had almost reached the same share in this regard as their suburban counterparts (33% for city residents versus 35% for suburban residents). The non-Hispanic whites again experienced the greatest change among the three largest racial/ethnic groups. In 1990, 29% of the white city population aged 25 and older had a four-year college degree—the same percentage as the white suburban population in this age demographic; however, by 2010, 55% of such white city dwellers had a bachelor’s degree, while 39% of their white suburbanite counterparts did. Between 1990 and 2010, the city’s black population also made substantial gains in education, as evidenced by the share of black adults aged 25 and older with a bachelor’s degree having risen from 11% to 17%.

By “drilling down” through the data to examine specific neighborhoods, we can see how geographically concentrated the city’s gains in college-educated adults aged 25 and older have been. These gains have been highly concentrated in Chicago’s central business district (“the Loop”) and the surrounding areas, as well as the neighborhoods west of Chicago’s northern lakeshore. As shown in the table below, dramatic gains in the college-educated population were seen in the Loop and the neighborhoods just south, west, and north of it. For example, the Near South Side saw an increase in the share of adults with a four-year college degree climb from 9% in 1980 to 68% in 2010. No less dramatic were such gains in Chicago’s neighborhoods west of its northern lakeshore: The shares of the college-educated population there typically doubled or tripled between 1980 and 2010 (in the case of the North Center neighborhood, this share increased sixfold—from 11% in 1980 to 66% in 2010).

As one might expect, many college-educated Chicago residents work in proximity to their residence. Of those living in the Central Area and Mid-North Lakefront, an estimated 57% work in the Central Area of Chicago and 79% work somewhere in the city.[3] Of those who do work in the Central Area, an estimated 19% travel to work by driving alone (as opposed to walking, public transit, bike, and carpooling); this percentage is much smaller than the nearly 70% of metropolitan Chicago workers who travel to work by driving alone.[4] The trends highlighted thus far point to the fact that the city of Chicago draws and retains many jobs. By one count, the city of Chicago’s Central Area is the domicile of over half a million jobs. As seen below, job counts in the Central Area have remained fairly constant over the past 13 years, even while job levels in the remainder of the city and in the remainder of Cook County have been falling.

Meanwhile, compensation levels per job have continued to climb in Chicago’s Central Area, reflecting a work force with greater skills and education. Annual compensation per worker on the payroll in Chicago’s Central Area exceeds that of the overall MSA by 50%.

Many of the trends shown here bode well for the city of Chicago, despite the fiscal challenges it currently faces. To be sure, many large central cities in the Midwest, including Detroit, are experiencing strong growth of both jobs and households centered around their central areas and downtowns. In this, the central Chicago area enjoys a strong start. ________________________________________

[1] Current and historical delineations of MSAs are available at www.census.gov/population/metro/. (Return to text)

[2] This is not to say that all parts of the city have been on the economic upswing. Several Chicago neighborhoods have seen severe deterioration in wealth and income, as well as in living conditions, as evidenced by increasing incidences of homelessness and crime in certain areas in the past few decades; see, e.g., http://danielkayhertz.com/2013/08/05/weve-talked-about-homicide-in-chicago-at-least-one-million-times-but-i-dont-think-this-has-come-up/. (Return to text)

[3] This statement covers 113,000 workers living in these areas as of the year 2000. Estimates were pulled from www.rtams.org and are based on the Census Transportation Planning Package (CTPP), “which is a special tabulation of the decennial U.S. Census for transportation planners” and “contains detailed tabulations on the characteristics of workers at their place of residence (‘part 1’), at their place of work (‘part 2’), and on work trip flows between home and work (‘part 3’)” (see www.rtams.org/rtams/ctppHome.jsp). Workers who work at home are excluded. See also http://definingdowntown.org/wp-content/uploads/docs/Defining_DowntownReport.pdf; this report ranks Chicago second among major U.S. cities in terms of the percentage of residents living within one mile of downtown who work downtown (figure 3 in the report), and ranks Chicago first in terms of population growth in the downtown area over the period 2000–10 (figure 4 in the report). (Return to text)

[4] Estimates are from www.rtams.org and are based on the Census Transportation Planning Package (CTPP). (Return to text)

This post originally appeared in Chicago Fed Midwest Economy on December 3, 2014.

Monday, December 8th, 2014

London’s Global City Royal Flush

A recent article in the Economist about the Rosetta space probe reminded me again of the uniqueness of London on the global stage. The piece notes:

In a clean room at the Airbus Defence & Space (ADS) factory north of London, scientists are working on LISA Pathfinder (pictured), a hexagon-shaped satellite due to be launched next year. The aim of the ambitious space mission is to try, for the first time, to find and measure gravitational waves—ripples in space-time predicted by Einstein’s general theory of relativity.

About one-quarter of the world’s commercial communication satellites are built in Britain and 40% of the world’s small satellites…The whole space sector directly employs 35,000 people, and the supply-chain accounts for thousands more jobs. London-based Inmarsat is one of the world’s largest satellite operators, specialising in mobile telephony.

When you think of London, finance, media and creative industries tend to be top of mind. Aerospace and defense may not immediately register, but greater London is a key node in that global industry. Beyond the space related industries noted above, there’s also companies like defense contractor BAE Systems, and events such as the globally significant Farnborough Airshow.

In fact, in some of the research I contributed to a recent global cities survey found that London uniquely has some strength is every single globally important macroindustry I looked at. No other city – not even New York – was as simultaneously broad and deep.

London’s status as a global financial center is of course well known. It’s also hugely influential in global culture and entertainment. It is a global center of the music industry, with British acts predominantly from or drawn to London routinely becoming best sellers around the world. Warner Brothers has a major production studio there, creating such films as Harry Potter. The BBC, Economist, and Financial Times are news outlets of global reach and influence, even outside the English speaking world. The Daily Mail and the Guardian are the two largest newspaper web sites in the world. London is a major advertising and marketing hub, a major fashion hub, a major tourist destination, and is home to world-renowned cultural institutions.

London has also emerged as Europe’s stop tech hub. Not only are there tons of startups – it has the top ranked startup ecosystem that outranked any European city according to analysis of Startup Genome project data – companies like Google have opened huge offices there.

But there’s more to it than that. London is a center of the global pharmaceutical industry and is headquarters to GlaxoSmithKline and Astra Zeneca, plus is home to foreign HQ’d operations as well. BP is an energy major there and other big firms like Chevron maintain operations and regional HQs in the area. Oil services firm Petrofac is based there and its home to the European HQ Baker Hughes. Its weakest industry I found was automotive, but even here it’s home to Honda’s European HQ.

Not all of these companies are located in central London. But the Greater London area is home to a simply huge number of firms in all sorts of industries, making it a top to bottom global powerhouse. This isn’t just a global city built on finance and other services. It’s a global city built on everything.

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Topics: Economic Development, Globalization, Urban Culture
Cities: London

Sunday, November 23rd, 2014

Las Vegas: The Once and Future Downtown Project

[ To my email subscribers: I’m about to start cutover type activities to my new mailing list system. So if you get some accidental test messages in there, my apologies. I’ll be in touch further as this moves along – Aaron. ]

There’s been a lot in the news lately about the troubles plaguing Tony Hsieh’s Downtown Project in Las Vegas. The latest is a longish report in the Guardian, which notes:

Yet by late September of this year, the press – especially the technology press – had begun asking some serious questions, as the Downtown Project suddenly laid off 30 people – 10% of the total it then directly employed. Alongside portentous headlines announcing this “bloodletting” appeared claims that Hsieh had “stepped down” from his position of leadership of the project. A damning open letter from the Downtown Project’s former “director of imagination”, David Gould, called the operation from which he had just resigned “a collage of decadence, greed and missing leadership … There were heroes among us,” he added, “and it is for them that my soul weeps.”

Technology web site Re/code also ran a seven part series on the Downtown Project, some of it unflattering, including a part focused on a spate of suicides there, and other on about a prominent failed startup.

I made the obligatory pilgrimage to the Downtown Project in 2013 and wrote up my observations in a three part series, of which you can read part one, part two and part three.

I noted at the time the audacity of one project trying to completely transform a place like downtown Las Vegas:

Las Vegas has the single most savagely bleak downtown of any major city I’ve ever visited. The Downtown Project is almost literally starting at zero. There are practically no assets. So anything that the Downtown Project accomplishes needs to be seen against that backdrop. Most of these other cities have been at the downtown redevelopment game for 30+ years, have massive architectural and institutional assets, and have already been the recipients of untold billions in investment, much of it public money.

I also mentioned that the accolades the project had received in the press were disproportionate to the actual accomplishments to date:

Honestly, it’s a bit infuriating as a guy who lived in Indy, Louisville, and Providence to see a place where so little has happened garner such massive press and accolades when most other regions the size of Vegas have done more while getting far less attention.

Indeed, it’s hard to think of a single downtown redevelopment effort that received as much glowing coverage as the Downtown Project. Not even Dan Gilbert’s Detroit efforts received such fawning attention. This is an accomplishment I’m not sure most people fully appreciate. Tony Hsieh was very savvy in using his status as a tier one entrepreneurial superstar, along with a bank of free “crash pad” apartments for visitors, to create buzz and publicity. Other cities should definitely stand up and take notice.

However, the very success of the project on the PR front primed it for inevitable blowback when problems arose. As the Guardian piece notes, “The story fairly demands an apocalyptic ending.” The higher a star soars in the celebrity firmament, the more knives get drawn when anything disturbs the pristine image. The Guardian reporter also said, based on a very recent trip, that reports of the project’s demise are premature.

So the Downtown Project has run into turbulence? Film at 11. Startups are hard, risky, trouble fraught endeavors. Tony went through multiple meat grinders in the past, and if you’ve read his book it’s by no means certain that Zappos would even survive. There were many times it could have gone under. Clearly the man has a massive appetite for risk, and the Downtown Project was certainly a risky and ambitious undertaking.

The initial puffery was overblown. Time will tell if the blowback is as well. Success was always going to be difficult. I noted last year that the project was going against the grain of the DNA of Vegas as a city, was very reliant on “best practices” type solutions vs. the innovative cultural approach of Zappos, and that “curating” a city was inherently dubious. Yet I admire the ambition and believe they’ve done a lot of things right.

I doubt that the project will ever realize the full, audacious vision that was laid out at the beginning. The commitment of Zappos to its downtown HQ probably prevents a complete flameout. But it may turn out that Tony was unwise to have so heavily promoted the project up front. That has more or less ensured that anything less than perfection will be judged as a failure. He set the bar so high, it is almost impossible to clear. Had there been more modest ambitions, then probably even incremental progress against the backdrop of the disaster zone that was downtown Las Vegas would have been seen as a win. But perhaps in one example of how the Downtown Project did match perfectly with the Vegas DNA, Tony Hsieh elected to pile all his chips on Red 14.

Full Disclosure: I had previous financial relationships with Downtown Project related entities and stayed for free in one of their crash pads during my stay.

Sunday, November 2nd, 2014

The Urbanophile Interview: Portland Mayor Charlie Hales

I was out in Portland, Oregon last week and while there I sat down for an interview with Mayor Charlie Hales. We talked about the real Portland vs. the idea of Portland, the city’s industrial base, retrofitting suburban infrastructure, and a lot more. If the audio doesn’t display for you, click over to Soundcloud.

Mayor Charlie Hales. Image via Wikipedia

Here are some edited highlights of our conversation. For those who prefer reading to listening, a complete transcript is available.

Mayor Hales rejects the idea that we will have to strategically abandon infrastructure because the finances don’t add up:

My point here is that this is about political will. It is not inevitable or immutable that America is going watch its infrastructure decline. It’s a choice. It’s a bad choice to dither and do nothing. And it’s a good choice to step up and do something. And I think you’ll see more cities doing what we’re doing here in Portland. Which is to say, we’re going act locally, and then keep the pressure on Congress and the State House to do their part too.

Regarding how hard it really is to find a job in Portland:

Not hard. In fact, I think it’s 4.8% – the unemployment rate – among 25-34 year olds here – lower than New York, lower than a lot of places. We’re the 3rd greatest city in terms of college educated immigrants moving here deliberately. They move here, and then not long after, they find work. Or they create work by starting their own business because we’re a very entrepreneurial city as well. I did this in 1979. It’s not an original thing for Portland. In fact you could say it’s been happening since Lewis and Clark that we – that people immigrated here from elsewhere because they saw some opportunity here. We’ve been absorbing those people as they come to Portland. They find work. But that’s the value set of that 25-34 year old cohort. They care about quality of place, quality of life, and what they’re going do when they’re not working. And that doesn’t include, say, sitting in traffic in suburbia. So they like the idea of living in Portland, and they come here and try to make it work. And most of them do. Again, we have a better employment situation for those folks than New York City does. So it’s not true that young people come here and are stuck in jobs that they’re way over qualified for indefinitely.

About how the real Portland differs from the idea of Portland people have from the media:

Like all good caricatures, Portlandia makes fun of some things about us that are true. I mean, we do love localism, so Colin the Chicken is somebody that we would care about here in Portland. And we are relentlessly earnest about our values.

There some other ways that we don’t. We’re still an industrial city. We’re a big hands, port industrial city. We build boxcars and barges. We just cut the ribbon on the biggest dry dock in North America last weekend. So we employ a lot of welders and steel fitters and plumbers and pipe fitters, and all those hands-on trades. We build trucks here. We build boxcars. We make steel pipe. There’s a lot of traditional “old economy” industry here.

Another part of Portland that doesn’t show up in the caricature is…the other half of the neighborhoods that were half-baked suburbia when they got annexed into the city. And we’re trying to make them complete communities with a local economy in that neighborhood and those kind of services that you can walk to. And, oh yeah, in many cases, there aren’t even sidewalks, and there’s no neighborhood park. So, we’re spending a lot of effort and money on trying to retrofit those suburban parts of Portland, to not be physically identical to the old neighborhoods, but have those ingredients of a complete neighborhood that Portlanders like to see.

Friday, October 17th, 2014

Visiting Southern Indiana

First, an administrative note. I am suspending all commenting on this site until further notice.

I have always allowed free rein to the comments on my site. I allowed anonymous comments and have continued to allow them while most major sites have switched to systems that require identity. I don’t pre-moderate unless my software flags something as potential spam, and only delete bona fide spam. I’ve allowed and even encouraged people to disagree with me and even allowed people to insult me on my own site.

Unfortunately, my hospitality has been repeatedly and increasingly abused. As a result, the quality of discussion in the comments has been severely degraded. I used to get emails from people telling me that the conversations in the comments were often as or more stimulating than the original posts. But in the last few months I’ve just been getting emails complaining about the commenting.

As the owner of the site, I’ll take responsibility for that. I should have taken stronger action to evolve the commenting platform all along. I’ve been putting off action here because of major forthcoming changes to the site. But I’ve decided I’m not going to wait until then. So as of today, commenting is suspended.

Next, Branden Klayko has rebooted his Louisville blog Broken Sidewalk. He asked me to contribute a piece, and as I was doing a tour of the Southern Indiana area as part of a project there, I put together a short overview post of some developments there. Here’s an excerpt:

The commercial development, particularly restaurants, in New Albany was impressive. Several Louisville establishments have set up shop there, joining locally-based businesses that offer a wide range of high quality goods. I’m talking about places like New Albanian, Quills Coffee, Toast, The Exchange, Bread and Breakfast, and more. There have also been a lot of infrastructure upgrades since I last lived there. For example, a recent streetscape project on New Albany’s Main Street was underway while I was visiting….There are some similar developments in downtown Jeffersonville, where the impact of the full opening of the Big Four Bridge as a pedestrian and bike crossing has been huge. I’ve walked across it several times now and am always amazed by the crowds.

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Topics: Economic Development
Cities: Louisville

Sunday, October 12th, 2014

Replay: The Magic of Microclusters

This post originally appeared on October 27, 2013.

If you look at the list of target industries for any given city or state, you usually find several from the same list of five common items: high technology, life sciences (under various names), green tech, advanced manufacturing, logistics. Take a few from this list, and add a legacy industry if there’s one or two where you are already particularly strong, and there you have it.

The problem is that everybody and their brother is now claiming to be a tech or startup “hub”, etc. And there’s probably some fairness in that. Starting companies is much easier than it used to be, and despite the so-called “20 minute rule”, venture capitalists seem very willing to travel to find deals where they can make good money. For example, payments startup Dwolla didn’t have trouble attracting top name backers even though it was in Des Moines.

So in a sense everybody can play right now. At some point though, there will inevitably be another shakeout of sorts. If you want to be a long term survivor, have a claim to fame that will make you stand out from the crowd, generate above average returns, etc., you need to have something that makes you distinct.

One way to do that is to be sub-specialized. “High tech” is an extremely broad category. A city could have a large number of nominally high tech companies that are totally unalike, and which do not form any type of real ecosystem, integrated supply chain, etc. This is a cluster in name only.

One way to stand out is a concept I’ve called “microclusters”. That is, rather than simply saying “We’re high tech”, you have some specialty within the broader tech industry where you can be a real national leader.

A couple of news stories make me revisit this with regards to the internet marketing microcluster in Indianapolis. Like most cities, Indy is targeting, you guessed it, high tech, life sciences, green tech, advanced manufacturing, and logistics. The main promotional organization for high tech is called Techpoint. (I should note this organization does double duty as a statewide group as well).

But somehow, organically, within tech generally Indianapolis had a lot of startups in the internet marketing space. There were something like 70 or so last time I saw someone who had made a list. One of them, Exact Target, was recently acquired by Salesforce.com for $2.5 billion. That’s a legitimate exit by any standards. Also recently, a content marketing cloud provider called Compendium was bought by Oracle for its own marketing cloud suite. (Terms not disclosed but surely much, much smaller).

When two tech bluechip names decide to go fishing in the same pond for companies in the same field, you start to think there’s something to it. (Salesforce and Oracle weren’t the first either. Terradata bought out a company called Aprimo for $525 million a couple years ago). Wanting to build on the momentum, Techpoint just held a big shindig called M-Tech to launch a campaign they are launching in an effort to boost the city’s marketing technology cluster.

What will this turn into? I don’t know. A news report about M-Tech noted potential challenges from competitors. What’s more, if there’s no pipeline of new companies, this sort of thing will fizzle out. But if money and talent continues to develop new solutions and companies in a place where there’s real domain expertise and a bona fide ecosystem, it will potentially give the city a niche where it can be a truly top tier player and not just another me-too startup hub.

On a more mature level, I wrote some years back about the motorsports industry cluster in Indianapolis. Everybody knows the Indianapolis Motor Speedway and the 500-mile Race, but Indianapolis Raceway Park (now Lucas Oil Raceway) in Brownsburg also happens to be home to arguably the top drag racing event in the US. It’s near Brownsburg predominantly where a collection of (as of 2008 when I got the last report) 400 motorsports companies, employing 8,800 people at average wages of around $50,000/year is centered. Thus this cluster is both a sub-industry (a type of advanced manufacturing) microcluster and a geographic one. (I might note it’s certainly not the only global location in this industry as places like London and Charlotte also have such clusters). People have actually moved to Indianapolis from as far away as Australia and England to start companies in this space, a pretty good indicator it’s a real opportunity zone.

Again, both of these grew organically, so I don’t want to suggest that you can conjure one up with an economic development program. But I suspect most cities have a few of these out there or in the process of developing. It just so happens I know Indianapolis well and so can name what’s there. Identifying these and providing institutional or infrastructural support (e.g., specialized community college training programs) is probably a worthwhile endeavor.

Today’s economy doesn’t have one plant employing 10,000 people. But a good microcluster can be as impactful if not more so. Obviously the smaller your metro, the bigger a splash something like this will make. What’s more, specialization and a true integrated ecosystem can produce what Warren Buffett calls a “wide moat” business that can be defended against upstarts. Also recall that Jack Welch at GE famously didn’t want to be in a business if he couldn’t be #1 or #2 at it. It’s not realistic for smaller cities to ever think they’ll be #1 or #2 in tech generally, nor even have the large tech scene of a New York or Chicago. But they can find particular areas where they can punch above their weight. And as the recent Indy acquisitions show, generate legitimate big dollar exits.

Update: Richard Layman posted some additional thoughts on his blog.

Friday, October 10th, 2014

More On the Midwest vs. the South

My post on Sunday about SEC vs. Big 10 football produced quite a stir. There are 165 comments and counting, and it even prompted posts by Richard Longworth and Crain’s Cleveland Business.

Not everyone was critical but the ones that were basically say that it’s ludicrous to say that football proves anything. I don’t think that it does. But I will make three points:

1. The differing fortunes of the two conference is yet another in an extremely long series of data points and episodes that demonstrate a shift in demographic, economic, and cultural vitality to the South.
2. Sports is one of the many areas in which Midwestern states have clung to traditional approaches, even though those approaches haven’t been producing results.
3. Demographic and economic changes have consequences. It’s not realistic to expect that the Midwest’s excellent institutions will necessarily be able to retain excellence when supported by hollowed out economies.

I’d like to throw up a couple of charts to illustrate the longer term trends at work. The first is a comparison of per capita personal income as a percent of the US average for Illinois vs. Georgia since 1950:

il-vs-ga

Here’s the same chart of Ohio vs. North Carolina:

oh-vs-nc

If I put up the population or job numbers, the same charts would show the South mutilating the Midwest. (Indiana, Georgia, and North Carolina were all about the same population in 1980, but the latter two have skyrocketed ahead since then for example). What’s more, the South’s major metros score better on diversity and attracting immigrants than the Midwest’s major metros as a general rule.

These charts show the convergence in incomes over time. The decline in relative income of the Midwest is possibly in part to increases elsewhere, not internal dynamics. But think about what the Midwest looked like in 1950, 60, or 70 vs the South, then think about it today and it’s night and day. The Midwest may still be endowed with better educational and cultural institutions than the South, but we can see where the trends are going. Keep in mind that those things are lagging indicators. Chicago didn’t get classy until after it got rich, for example.

Now we see that Southern income performance hasn’t been great since the mid to late 90s. This is a problem for them. As is their dependence on growth itself in their communities. I won’t claim that the South is trouble free or will necessarily thrive over the long haul. But they seem to have a clearer sense of identity, where they want to go, and what their deficiencies are than most Midwestern places.

Longworth seems to buy the decline theory but has a different explanation of the source, namely that Chicago has sucked the life out of other Midwestern states:

In the global economy, sheer size is a great big magnet, drawing in the resources and people from the surrounding region. We see this in the exploding cities of China, India and South America. We see it in Europe, where London booms while the rest of England slowly rots.

And we see it in the Midwest where, as the urbanologist Richard Florida has written, Chicago has simply sucked the life – the finance, the business services, the investment, especially the best young people – out of the rest of the Midwest.

To any young person in Nashville or Charlotte, the home town offers plenty of opportunities for work and a good life. To any young person stuck in post-industrial Cleveland or Detroit, it’s only logical to decamp to Chicago, rather than to stay home and try to build something in the wreckage of a vanished economy.

This seems to be a common view (see another example), even in the places that would be on the victim side of the equation. But I’ve never seen strong data that suggests this is actually the case. Are college grads and young people getting sucked out of the rest of the Midwest into Chicago?

Thanks to the Census Bureau, we now have a view, albeit limited, into this. The American Community Survey releases county to county migration patterns off of their five year surveys sliced by attribute. There seems to be some statistical noise in these, and for various reasons I can’t track state to metro migrations, but thanks to my Telestrian tool, I was able to aggregate this to at least get metro to metro migration. So here is a map of migration of adults with college degrees for the Chicago metro area from the 2007-2011 ACS:

degree-migration
Net migration of adults 25+ with a bachelors degree or higher with the Chicago metropolitan area. Source: 2007-2011 ACS county to county migration data with aggregation and mapping by Telestrian

This looks like a mixed bag to me, not a hoover operation. What about the “young and restless”? Here’s a similar map of people aged 18-34:

ya-migration
Net migration of 18-34yos with the Chicago metropolitan area. Source: 2006-2010 ACS county to county migration data with aggregation and mapping by Telestrian

This is an absolute blowout, with a massive amount of red on the map showing areas to which Chicago is actually losing young adults. Honestly, this only makes sense given the well known headline negative domestic migration numbers for Chicago.

I do find it interesting that there’s a strong draw from Michigan. Clearly Michigan has taken a decade plus long beating. There’s been strong net out-migration from Michigan to many other Midwestern cities during that time frame, and its the same in Cleveland, which also took an economic beating in the last decade. This is just an impression so I don’t want to overstate, but it seems to me that a disproportionate number of the stories about brain drain to Chicago give examples from Michigan. Longworth uses the examples of Detroit and Cleveland. These would appear to be the places where the argument has been truly legitimate, but that doesn’t mean you can extrapolate generally from there.

What’s more, even if a young person with a college degree does move to Chicago from somewhere else, will they stay there long term? They may circulate out back to where they came from or somewhere else after absorbing skills and experience. It’s the same with New York, DC, SF, etc. I’ve said these places should be viewed as human capital refineries, much like universities. That’s not a bad thing at all. In fact, it’s a big plus for everybody all around. Chicago is doing fine there. But it’s a more complex talent dynamic than is generally presented, a presentation that does not seem to be backed up by the data in any case.

The Urban State of Mind: Meditations on the City is the first Urbanophile e-book, featuring provocative essays on the key issues facing our cities, including innovation, talent attraction and brain drain, global soft power, sustainability, economic development, and localism. Included are 28 carefully curated essays out of nearly 1,200 posts in the first seven years of the Urbanophile, plus 9 original pieces. It's great for anyone who cares about our cities.

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