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.

Sunday, November 30th, 2014

Overselling America’s Infrastructure Crisis

60 Minutes ran a segment last week called “Falling Apart” that was another alarmist take on the state of American infrastructure. I’ll embed here but if it doesn’t display for you, click to CBS News to watch (autoplay link).

We’ve seen this story before. America’s infrastructure is falling apart and we need to spend many billions on upgrades, but politicians won’t agree because they are too craven.

There’s some truth to this point of view. The problem is that it’s oversold using the worst examples. It also gives short shrift to the many infrastructure upgrades that we have been making. And it ignores how people and businesses make capital purchase decisions in the real world.

First, I’m not surprised to see that 60 Minutes spent a lot of time in Pennsylvania. In my experience, Pennsylvania is in a class by itself when it comes to infrastructure. Drive something like I-70 from Washington to the Ohio state line and prepare to be appalled. Pittsburgh legitimately has a massive infrastructure maintenance overhang. Philly too. And much of the infrastructure there was under built to begin with. The Schuylkill Expressway goes down to two lanes each way, for example. Similarly, 60 Minutes is right about some of the obsolete bridges on Amtrak’s Northeast Corridor. They may have easily included other high profile embarrassments like LaGuardia Airport or Penn Station. Or they might have taken a look at state of decay of Rhode Island’s bridges.

There are clearly some high profile legacy items that need to be addressed. But that neglects the other side of the coin, namely that there’s a ton of major infrastructure that has been upgraded.

60 Minutes includes some footage of Chicago. Clearly there’s a need for bigtime investment there. But in the last 20 years or so IDOT reconstructed completely many of the major freeways in the area like the Kennedy and Dan Ryan. The Tollway Authority widened virtually the entire system and implemented open road tolling, vastly reducing congestion. Similarly the CTA opened the brand new Orange Line, did major work to renovate the Green and Pink Lines, just did major infrastructure upgrades on the south branch of the Red Line, and expanded capacity on the Ravenswood. They’ve also gone from tokens and cash to electronic fare collection. At least one new commuter rail line was opened (the North Central line). The O’Hare Modernization program is underway with new runways already online and a significant reduction in congestion there. A new terminal was also built and the existing terminals given some refreshes.

Is there a lot to do in Chicago? Undoubtedly. But let’s give credit for what has already been done.

It’s the same elsewhere. Nicole Gelinas notes that New York has invested $123 billion in the transit system in the last 30 years. That’s not chump change. The third water tunnel is now online there as well. Indianapolis built an ultra-modern airport terminal complex that’s up to international standards. Many other airports like DTW, SJC, SFO, etc. have built major new terminals or seriously upgraded their acts. There have actually been a lot of investments in port infrastructure to get ready for post-Panamax ships.

I’m told even Pennsylvania has done a good job of starting to address its infrastructure problems. The Philadelphia airport is actually quite nice these days, for example.

So we’ve actually done a lot already that 60 Minutes doesn’t give us credit for.

But what’s more, the presence of infrastructure that’s at or near the end of its useful life isn’t necessarily a bad thing anyway. Would it make sense for every single car on the road to be brand new? Of course not. Most cars ultimately end up getting driven till the wheels fall off. And that makes perfect sense. Why would you junk an asset that still has lots of service life left? We reallocate ownership of a lot of those cars during their lifespan, but we try to get the max out of their useful life.

It’s similar in our homes. How many of us replace a furnace at the first sign of rust? Yes, sometimes we do a complete upgrade or refresh of a kitchen or bathroom, but most of the time we don’t replace major household systems like furnaces or roofs until they appear to be at a point where paying for repairs when they break appears to be futile in light of the asset age. It makes sense to pay $400 to replace a starter that fails when the car has 125,000 miles. It’s more questionable when the transmission goes out at 175.

The fact that some issues or incidents with infrastructure can cause temporary closure or disruption is exactly how most personal capital assets work. A part goes out on our car. It needs to be towed and fixed. And it’s out of commission during that period. That’s annoying, disruptive, and costly. But does it mean that we should all go out and buy a brand new car? I don’t think so. And that’s certainly not how people behave in the real world. Obviously you have to build in a margin of safety on items like bridges where a failure would be catastrophic, but the same general principle applies. We shouldn’t wait for them to fail before replacement, but we do and should get the full useful life out of them.

Why would we expect our government to spend our money on its capital assets in a manner differently from how we spend our money on our own personal possessions? This explains why the public is much more skeptical of spending on infrastructure than the infrastructure lobby would like. It’s to be expected that some percentage of our infrastructure will perpetually be at or near end of life, as that’s the nature of the capital asset life cycle.

What’s more, when we replace a furnace or car, most of us don’t go out and buy Cadillacs. We buy something that fits the budget. Unfortunately, this mindset doesn’t seem to penetrate the public sector, where a significant amount of infrastructure is gold plated and priced at a level far out of line with international comparisons. The big problem in New York isn’t a lack of investment in transit. It’s the fact that the region has just about the highest transit capital costs in the world. Wonder why Madrid and Calgary have nice train systems? Among other reasons, they were very cost-efficient in their design and construction. Rather than more money, maybe we should first try some reform in our broken system of building stuff that results in lengthy project timelines and out of control costs.

So there are some things that need to be taken care of and we need to do that. But scaremongering about dangerous bridges isn’t the right answer. And where I see the biggest infrastructure needs are on local streets and bridges, where federal and state dollars are least likely to be applicable. It’s no surprise to me that most of the pothole ridden, bombed out streets we drive on are local city streets, where they are the maintenance responsibility of an entity that lacks the large, dedicated infrastructure revenue streams available to the state and federal governments. But that’s a topic I’ll have to explore in a future post.

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.

Tuesday, November 18th, 2014

Two Chicagos, Defined by Pete Saunders

[ Here’s another nice piece of analysis about Chicago from Pete Saunders. He originally did this earlier this year – Aaron. ]


Chicago skyline.  Source: wikipedia.org

Years ago, when I first started working as a planner for the City of Chicago, my primary responsibility was working with community organizations that received Community Development Block Grant (CDBG) funding for commercial revitalization activities.  This being CDBG funding, our work was constrained to areas of the city where 51% or more of households earned less than the median household income for the Chicago metro area.  In the early 1990’s, this hardly interfered with our work — outside of the Gold Coast, the Near North Side, Lincoln Park, Lakeview and a few parts of the Northwest and Southwest sides, we were able to grant CDBG funding to virtually the entire city.

Fast forward twenty years.  Chicago’s transition from Rust Belt Capital to Global City has been unparalleled.  Where there once had been large swaths of middle-class, working-class and impoverished neighborhoods, with high-income enclaves, there are now nearly as many high-income neighborhoods as there are of the other three.  Perhaps someone who moved to Chicago post-1995 and lives in one of the up-and-coming areas is vaguely aware of this, but anyone who was here before then is quite right to be astounded.

Despite Chicago’s transformation, it’s been pretty well-documented that not all parts of the city have benefited.  The battle over the closing of nearly 50 schools, mostly located in the city’s poorer South and West side neighborhoods, brought this to light, as did Chicago’s high-profile murder and violent crime rates through 2013 (which, to date in 2014, have gone down dramatically).  Inequalities and disparities became evident in both areas; University of Chicago graduate student and blogger Daniel Kay Hertz brought the disparities to light with his analysis of violent crime in Chicago.  As he said in his piece:

Over the last twenty years, at the same time as overall crime has declined, the inequality of violence in Chicago has skyrocketed. There have always been safer and more dangerous areas here, as there are everywhere; but the gap between them is way, way bigger now than it used to be.

Over the last two decades a new but undefined paradigm has emerged, the one of “Two Chicagos”.  This is probably best explained once again by Dan Hertz, who recounted an overheard conversation on the L:

I was on the train earlier this week, and two white men got on and asked their neighbors, who were two black women, how to get to a hotel. The women told them. And then began a sort of stock conversation that Chicagoans have with tourists: How do you like the weather, ha ha? The men, who were from Atlanta, did not like it. Have you been on a subway before? Yes, but not often. Would you come back? Oh, yes. We love Chicago, the men said.

The men reached their station, and left.

One woman said to the other: I hate it when people say that – I love Chicago. No, you don’t. You love downtown and the North Side. The other woman said, Uh huh. 

That is a frequent sentiment of those who live on the other side of the invisible divide in Chicago.  But what, exactly, is that divide?  Where are the boundaries?  Exactly how deep are the difference?

I took a stab at trying to figure this out.

I compared some socio-economic statistics for the 56 zip codes in Chicago against medians and averages for the entire Chicago metro area (Indiana and Wisconsin excluded).  The differences are stark.

Let’s start by looking at maps of the areas of examination.  Here is the seven-county Illinois portion of Chicago’s metro area, with Chicago etched in:

I gathered data for all suburban municipalities and all City of Chicago zip codes within this area, for five variables — population, non-white population percentage, median household income, and median home value, and bachelor’s degree or more for persons 25+.  The data comes from the 2011 U.S. Census American Community Survey.  After collecting that data, I established an “average of medians” or “average of averages” to get a baseline for the metro area, and an understanding of how jurisdictions or zip codes would compare to one another.  One fairly big caveat — an average of medians or average of averages weighs all jurisdictions equally, skewing the numbers higher due to the number of small but well-to-do suburban municipalities.  So while the 2011 actual median household income for the seven-county area overall was $61,491, the average of medians was $74,731.  But since all data is expressed this way, differences are negated.

Next, I looked for Chicago zip codes that were above the metro area average in at least one of three categories — median household income, median home value, and bachelor’s degree or more for persons 25+.  These are the higher income neighborhoods that can be called “Global Chicago”.  Within the city, they look like this, in yellow:

Most Chicagoans would recognize this as the wealthier parts of the city.  It stretches from the far Northwest Side eastward to the lake, south to downtown and continuing south before ending in the Hyde Park neighborhood on the South Side.  Again, I included all zip codes that were above the metro average for at least one of the three categories I examined, so not all communities are the same.  Hyde Park, for example, is here because it has high educational attainment, but is below the average for income and home value.  The same applies to Rogers Park and Edgewater on the city’s northern border with Evanston.  Jefferson Park, Norwood Park and Sauganash, on the other hand, located on the Northwest Side, rank highly in home value but lower for income and educational attainment.

Taken together, you can see how “Global Chicago” compares with the Illinois portion of the metro area, the metro area excluding Chicago to give you Suburban Chicago, and the balance of the city beyond “Global Chicago” that I’ve called “Rust Belt Chicago”:

The differences are indeed stark.  “Global Chicago” is on par with the Chicago suburbs and the metro area overall in terms of income, and has a lower percentage of minority residents compared to the metro area.  Interestingly, “Global Chicago” has a much higher home value and educational attainment when compared to the metro area overall or the ‘burbs.  Meanwhile, “Rust Belt Chicago” lags far behind.  “Rust Belt Chicago” has a large majority-minority population, has an income nearly one-half as much as the suburban households, and has only one-third as many college graduates as “Global Chicago”.

I decided to take this analysis a little further and determine if there is a core to “Global Chicago”, and how it would compare to the rest of the city.  I collected data for zip codes that exceeded the metro average in two or more of the three categories.  That produced this map:

And this table:

Here, a “Super Global Chicago” compares favorably with the ‘burbs in terms of income, but far exceeds it in terms of home value and educational attainment.  Including some of the peripheral areas of the previous “Global Chicago” with the previous “Rust Belt Chicago” to produce an “Average Chicago” leads to some gains, but it still lags far behind the other slices of the metro area.

Right now, the CNN series “Chicagoland” is doing its best to illustrate the “Two Chicagos” meme, highlighting blues festivals and Stanley Cup championship celebrations on one end of town and school closures and endless crime on another.  However, these maps and tables may do a far better job of demonstrating the impact of past and current practices and policies on the city’s landscape.  In fact, I think Chicago’s example is one that will serve as a model, for better or worse, for other cities across the nation.

In reality I see the “Two Chicagos” meme as overplayed.  Chicago may be better understood in thirds — one-third San Francisco, two-thirds Detroit.

This post originally appeared at Corner Side Yard on March 18, 2014.

Tuesday, November 4th, 2014

Investing Cheap Money by Charles Marohn

[ Many of you have probably heard of the web site Strong Towns. If not, you should definitely check it out. They focus on the long term financial consequences of current development and transportation investment patterns. They also publish their content under a Creative Commons Attribution-Sharealike License. So I’m taking advantage of that to repost this piece by Strong Towns front man Charles Marohn – Aaron ]

Interest rates are at historically low levels while local governments have a huge backlog of infrastructure needs to address. It seems logical that this presents an opportunity for earnest city officials.

Yesterday’s post on domain dependence was a prelude to answering the question posed me last week on Facebook.

How can we best invest cheap money to sustain growth in the future and not squander this opportunity?

There are two types of transactions where cities are justified in taking on debt. The first I will call a “true investment” and the second I will call “legitimate cash flow”. This is true regardless of how cheap money is.

True Investment

In the public realm, we call a lot of things investments that really are not, a lot of things assets that are really liabilities. So when I say a “true investment” I am referring to an expenditure that has the following properties.

  1. The expenditure has the potential to lead to an improvement of the city’s financial position.
  2. That improvement is measurable in terms of dollars.
  3. The actual return in dollars is measured, accounted for and used to inform subsequent investments.

Note that this doesn’t preclude speculative investments, and I’ve indicated that I support a certain level of speculation. My public project portfolio for nearly every American city in 2014 would include many small projects spread out over a large area as opposed to one, two or a handful or large projects. I would also never borrow more money – in terms of term and payment amount – than my current cash flow could cover if the investment went bad.

I would never take on debt speculating on future growth if the repayment of that debt depended on the growth. Never. Cities are not private businesses, property owners aren’t shareholders. The local government has a responsibility to be prudent stewards of the public purse, not gamblers at the casino, regardless of how confident they are that the slots are loose.

Should we be using cheap money to make a true investment? I wouldn’t necessarily have a problem with that, and the cheapness of the money certainly lowers the threshold for success. I would be extra careful, however, to fight the impulse to ignore the need for a return on the investment simply because the money is cheap.

Legitimate Cash Flow

Most cities borrow money for cash flow purposes. In doing so, they are mistaking their insolvency problem for a simple cash flow problem.

Let me give an example. Let’s say a city has four streets. Each street lasts four years before it needs to be repaired. One street was built each year and so they are on a nice four-year maintenance rotation. If the city is solvent – if there is enough wealth in the community where the tax revenue can cover the city’s long term obligations – then there should never be a need for debt. Each year, each street produces 1/4 of the tax revenue needed to fix the street and after four years every street is fixed and the process starts over.

Cities don’t generally have their maintenance obligations so nicely staggered. Often they come in bunches, an echo of the hasty timeframe in which they were originally built. Let’s say that all four streets need to be maintained in the first year. In that case, the city could tax four times the normal amount the first year and nothing the last four OR they could take on debt in the first year to cover the project and then pay it back in the next three. (Note: Obviously this is very simplified and so I’ve not bothered with interest.)

That is a legitimate cash flow problem that the local government can solve with a judicious use of debt. I fully support it.

Let’s say, however, that all four streets need to be maintained in the first year but the city’s tax rate is only half of the prior example. In other words, the city is not collecting enough money from each street – there is not enough wealth there to collect – to cover the cost of maintenance. As in the second scenario, the city takes on debt to cover the maintenance cost but, when we get to the end of the fourth year and need to fix the streets again, they have not been able to pay off all that debt.

Scenario 3 is a case of confusing insolvency with a cash flow problem. The local government believes they have a cash flow problem – there’s plenty of wealth there, just not right now – but what they really have is an insolvency problem. They don’t have the money to maintain everything they’ve taken on. By taking on debt at this point (good interest rates or not), they are piling more obligations on top of the unfunded liabilities they already have. This is a recipe for disaster.

Here’s the scary thing: all cities that take on debt for infrastructure maintenance believe they have a cash flow problem. They believe this despite not having the actual analysis to determine whether or not this is true. My example is four streets over four years. Cities sometimes have hundreds of miles of streets with maintenance occurring over decades. You have to be pretty intentional, organized and disciplined if you want to discern your true financial status.

Most cities don’t. They want to believe they have a cash flow problem because it is convenient, because insolvency is too difficult to fathom, especially when everyone else appears to be doing the exact same thing. Could everyone be wrong? Could we all be insolvent? These two questions probably cost me a total of six years in the intellectual wilderness as I clung to the notion that what I was seeing and measuring could not possibly be true, that a wisdom greater than mine had to be at work that I hadn’t perceived.

While I’m not going to say that low interest rates are a bad thing (they absolutely wouldn’t be if they were real, not artificial), they have the desired effect when it comes to local governments: it induces them to borrow and spend more. This is my primary critique of our current monetary policy, and Federal Reserve intervention, in general: it assumes an underlying economic model that is functioning. When the economy slows or stalls, the theory says to create the liquidity needed to get it back going again. What if it is stalling because it’s broken? What if it shouldn’t go on? Short of total collapse, where is the painful financial feedback that is going to force a change?

Some would argue that this is why we need good policy. Sure, but the smartest minds at the time – from both sides of the political spectrum – believed that suburbanization was a good thing. Same with urban renewal. Same with the nationalization of automobile transport policy. What is a good policy and how can we ever have the confidence to put the overpowering weight of the U.S. economy behind what we think it is? And what if it is a good policy, but only to a degree? Is local nuance even possible with such a highly centralized approach?

The Growth Ponzi scheme has three predictable phases: growth, stagnation and then decline. During the growth phase, everyone is a genius as the new revenue pour in and all the maintenance liabilities are decades away. During stagnation, the debt climbs as we fail to deal with the insolvency problem, mistaking it for simple cash flow. When we are finally forced to deal with insolvency in the decline phase, we have to do it with a crushing debt burden already in hand. Unfortunately, this fate awaits a great number of our places.

So, how can we best invest cheap money? With a Strong Towns approach to debt centered on true investments which pay a measurable return and legitimate cash flow in a city that understands its true balance sheet.

This post originally appeared at Strong Towns on September 9, 2014.

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.

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.

Sunday, October 5th, 2014

The Decline of the Midwest, the Rise of the South

The New York Times ran an article last week that’s nominally about football, but really gives insight into the decline of the Midwest and the rise of the South. Called “As Big Ten Declines, Homegrown Talent Flees,” this piece ties in perfectly with my recent essay on the differing social states of the Midwest and South. The NYT’s money quote says it all:

The SEC sold excellence. The Big Ten sold tradition.

Ironically, it is the formerly stigmatized “backwoods” South that has embraced excellence while the former industrial champion of the Midwest has spurned it. I don’t think that Midwesterners understand how much things have changed in the South. I hear the same stereotypical view of the South that might have had a lot of truth decades ago but have changes substantially. For example, those who think it is both a good thing and bad have quipped that Indiana is like an extension of the South into the Midwest. I don’t think so.

For example, Charlotte built a light rail system. Dallas has poured a billion dollars into a downtown arts district. Atlanta has a multi-billion infill strategy around its former Belt Line railroad. Nashville eliminated downtown parking minimums and implemented a form based code. South Carolina has its German style apprenticeship program. North Carolina built Research Triangle Park – in 1959. Southern cities like Atlanta have proudly claimed and built success around their black heritage. And Charlotte’s Chamber of Commerce CEO said, “To understand Charlotte, you have to understand our ambition. We have a serious chip on our shoulder. We don’t want to be No. 2 to anybody.” Outside of Chicago, does anybody in the Midwest talk like that?

Sure, there are bits and pieces here and there in the Midwest that speak to excellence. But they are the anomalies in a region that has retrogressed. Whereas in the South they’ve massively elevated their game in the last 40 years and are working hard to keep getting better. Sure, low costs and taxes play a role in their success. Climate and the universality of air conditioning as well. But they aren’t content to rest on just that. They want to get better. Meanwhile the Midwest is regressing towards what the South used to be such as, for example, by turning paved roads back to gravel because they can’t afford the maintenance.

The NYT piece brings up an interesting factor driving the rise of the SEC vs. the Big Ten, namely the shift in underlying population ratios over time: “An instructive comparison is Michigan and Georgia. In 1960, Michigan had twice Georgia’s population; in 1990, it was nearly one and a half times as big; today, their populations are roughly equivalent.”

The decline in Midwest population and economic heft brings with it a price that has to be paid. It’s showing up in the football world today. But it’s sure to hit the academic prowess of the Midwest’s major state schools as well. How long can these places maintain their relative rankings of excellence without the financial firepower to play in the big leagues? There’s more inertia on the academic side, but don’t think it won’t eventually happen here as well. The same is true in many other aspects of civic life. Even mighty Chicago has nearly bankrupted itself in its efforts to keep up with other global cities.

The Big Ten obviously saw the writing on the wall and decided to expand outside the region. I dislike this for reasons of, naturally, tradition. But it’s a rational response to a declining marketplace. Similarly, the Cleveland Orchestra established a Miami residency in the pursuit of cash to keep its artistic excellence intact. Might some of these institutions at some point become Midwest in name only? Time will tell.

Tuesday, September 23rd, 2014

Midsize Midwest Cities — Where Do They Go Now? by Pete Saunders

[ Here’s another piece of analytical insight from Pete Saunders, who originally posted it over at his site Corner Side Yard – Aaron. ]

There are some things I posted in the early days of this blog that probably enjoyed very little attention and received little followup on my part.  This piece on midsize Midwestern cities definitely fits that bill.  Since I started this blog nearly two years ago, the attention given to the Rust Belt seems to have grown exponentially — Detroit’s bankruptcy, Chicago’s crime, and Pittsburgh’s revitalization have occupied center stage at various times.  Unconventional ideas are emerging on how to turn around major Rust Belt cities, but smaller ones seem to escape inclusion.  So rather than repost my original post without further comment, I’ve decided to revisit and do some followup commentary.

First, the research.  Looking at 2010 U.S. Census data, I found there are 74 cities in the Midwest as I’ve described it with a population between 50,000 and 300,000.  I eliminated primary cities that fit the population threshold but were part of metro areas that had more than one million people (i.e., St. Paul, MN; Cincinnati, OH; Buffalo, NY), leaving me with 71 midsize Midwest cities.  The largest is Toledo, OH (287,208 residents) and the smallest is Elkhart, IN (50,949).  In between are cities that have become the icons of American Heartland – see the table below.


Midsize Midwest Cities 2010 City Population 2010 Metro Area Population
Toledo, OH 287,208 651,429
Lincoln, NE 258,379 302,157
Ft. Wayne, IN 253,691 416,257
Madison, WI 233,209 568,593
Des Moines, IA 203,433 569,633
Akron, OH 199,110 703,200
Aurora, IL 197,899 9,461,105
Grand Rapids, MI 188,040 774,160
Sioux Falls, SD 153,888 228,261
Rockford, IL 152,871 349,431
Joliet, IL 147,433 9,461,105
Kansas City, KS 145,786 2,035,334
Dayton, OH 141,527 841,502
Topeka, KS 127,473 233,870
Cedar Rapids, IA 126,326 257,940
Evansville, IN 117,429 358,676
Independence, MO 116,830 2,035,334
Springfield, IL 116,250 210,170
Peoria, IL 115,007 379,186
Lansing, MI 114,297 464,036
Ann Arbor, MI 113,934 344,791
Elgin, IL 108,188 9,461,105
Rochester, MN 160,769 186,011
Fargo, ND 105,549 208,777
Green Bay, WI 104,057 306,241
Flint, MI 102,434 425,790
Erie, PA 101,786 280,566
South Bend, IN 101,168 319,224
Davenport, IA 99,685 379,690
Kenosha, WI 99,218 9,461,105
Waukegan, IL 89,078 9,461,105
Lawrence, KS 87,643 110,826
Duluth, MN 86,265 279,771
Sioux City, IA 82,684 143,577
Champaign, IL 81,055 231,891
Bloomington, IN 80,405 192,714
Gary, IN 80,294 9,461,105
Racine, WI 78,860 195,408
Appleton, WI 78,086 225,666
St. Joseph, MO 76,780 127,379
Bloomington, IL 76,610 169,572
Decatur, IL 76,122 110,768
Kalamazoo, MI 74,262 326,589
Canton, OH 73,007 404,422
Muncie, IN 70,085 117,671
Waterloo, IA 68,426 167,819
Iowa City, IA 67,862 152,586
Lafayette, IN 67,140 201,789
Youngstown, OH 66,982 565,773
Oshkosh, WI 66,083 166,994
Eau Claire, WI 65,883 161,151
St. Cloud, MN 65,842 189,093
Lorain, OH 64,097 2,077,240
Janesville, WI 62,948 160,331
Hamilton, OH 62,477 2,130,151
Council Bluffs, IA 62,230 865,350
Bismarck, ND 61,272 108,779
Terre Haute, IN 60,785 172,425
Springfield, OH 60,608 138,333
Pontiac, MI 59,515 4,296,250
Ames, IA 58,965 89,542
Dubuque, IA 57,637 93,653
Owensboro, KY 57,265 114,752
Anderson, IN 56,129 131,636
Grand Forks, ND 52,838 98,461
Normal, IL 52,497 169,572
LaCrosse, WI 52,485 133,665
Manhattan, KS 52,281 127,081
Battle Creek, MI 52,347 136,146
Saginaw, MI 51,508 200,169
Elkhart, IN 50,949 197,559


I listed them all in a spreadsheet that included their 2010 city population and their 2010 metro area population, and started to make some early observations.  For example, metro area population is likely a better indicator of the relative “imprint” of a city, rather than primary city population.  Saginaw, MI, with a population of 51,000 but a metro area of 200,000, seems bigger than Muncie, IN, with a city population of 70,000 but a metro area population of just 118,000. And of course, cities that were relatively close to large metro areas (having a population greater than one million) seem to share more characteristics with their bigger neighbors than their smaller ones, economically and socially.

That led me to ask a few questions that could shed some light on other city characteristics:

  • Is the city a county seat or a county’s largest city, yet not the primary city of a metro area?
  • Is the city a part of or adjacent to a large metro area (with a population of more than one million)?
  • Is the city less than 60 miles from a large metro area?
  • Is the city a state capital?
  • Is the city a college town?

And that exercise led to some interesting conclusions.  Using those questions I was able to identify seven different categories of midsize Midwest cities, and the categories provide a glimpse into each city’s economic history and strengths:

  1.  Captured Satellite City: A once independent midsize city that has been pulled into the “orbit” of a larger metro area. There are eleven in this category.
  1.  Emerging Satellite City: An independent midsize city that is in the process of or on the verge of being pulled into the orbit of a larger metro area.  There are six in this group.
  1. State Capital and College Town:  A city fortunate enough to be a government center and the home of a major university.  There are just three in this category.
  1. Emerging Satellite City and College Town: A combination of points 2 and 3, they retain some measure of independence from larger metros, and benefit from having large schools.  There are only two in this group.
  1. State Capital: Self-explanatory.  There are four here.
  1. College Town: I’m defining a college town as one with a school with an enrollment greater than about 15,000 students, making the school large enough to have a significant impact on the local economy (in case you’re wondering why Notre Dame and South Bend, for example, aren’t included).  There are ten in this group.
  1.  Independent Midsize City: Ah yes, the largest group, with 35 in this category.  Too far from major metros to bask in their glory, and no state capital or university to build from.

Here’s how the cities stack up in a table:


Midsize Midwest City Categories Cities By Category
Captured Satellite City Aurora, IL; Joliet, IL; Kansas City, KS; Independence, MO; Elgin, IL; Kenosha, WI; Waukegan, IL; Gary, IN; Lorain, OH; Hamilton, OH; Pontiac, MI
Emerging Satellite City Akron, OH; Dayton, OH; Flint, MI; Racine, WI; Springfield, OH; Anderson, IN
State Capital AND College Town Lincoln, NE, Madison, WI; Lansing, MI
Emerging Satellite City AND College Town Ann Arbor, MI; Bloomington, IN
State Capital Des Moines, IA; Topeka, KS; Springfield, IL; Bismarck, ND
College Town Lawrence, KS; Champaign, IL; Bloomington, IL; Kalamazoo, MI; Muncie, IN; Iowa City, IA; Lafayette, IN; Ames, IA, Normal, IL; Manhattan, KS
Independent Midsize City Toledo, OH; Ft. Wayne, IN; Grand Rapids, MI; Sioux Falls, SD; Rockford, IL; Cedar Rapids, IA; Evansville, IN; Peoria, IL; Rochester, MN; Fargo, ND; Green Bay, WI; Erie, PA; South Bend, IN; Davenport, IA; Duluth, MN; Sioux City, IA; Appleton, WI; St. Joseph, MO; Decatur, IL; Canton, OH; Waterloo, IA; Youngstown, OH; Oshkosh, WI; Eau Claire, WI; St. Cloud, MN; Janesville, WI; Council Bluffs, IA; Terre Haute, IN; Dubuque, IA; Owensboro, KY; Grand Forks, ND; La Crosse, WI; Battle Creek, MI; Saginaw, MI; Elkhart, IN


So what do the categories suggest about each midsize city’s present and future economic prospects?

Captured Satellite City: These cities have economic fortunes that are closely tied to the economic fortunes of the much larger metro area surrounding it.  Some cities seem to recognize this and have planned accordingly; others still have memories of their earlier independence and have struggled in the face of industrial restructuring.  Perhaps their future is better served by becoming low-cost urban options in otherwise suburban areas.

Emerging Satellite City: These are cities that sit on the periphery of major metro areas, and have yet to fully benefit from being “pulled” into the larger orbit.  They, too, have memories of earlier independence, and may struggle with adjusting to a more dependent future.

State Capital and College Town: With only three in this category, Madison leads the way in terms of economic strength, with Lincoln not far behind.  Lansing, despite having the capital and college attributes, has historically relied on its industrial legacy as well, possibly diluting the government and education benefits.  If it can tap those strengths maybe it can duplicate the others’ success.

Emerging Satellite City and College Town: Ann Arbor and Bloomington are truly unique in that they are the flagship universities in their respective states and are in close proximity to each state’s largest city.  Ann Arbor seems to figure more prominently in metro Detroit’s future; Bloomington remains relatively disconnected from metro Indy.  My guess is that when these cities are fully brought into the larger metro’s orbit, they — and the entire metro — will greatly benefit.

State Capital: As long as the four cities here remain state capitals, they have a reason d’etre and economic catalyst that will support them.  They will continue to have strengths that will elude other similarly-sized cities.

College Town: In many respects the college towns are similar to the state capitals, with an existing reason d’etre and economic catalyst.  The difficulty, perhaps, lies in strengthening and reinforcing the college’s links to the rest of the city and metro.

Independent Midsize City: Here, I believe, are the midsize Midwest cities whose future is most tenuous.  When people wonder about the future of smaller post-industrial cities, these are generally the ones we think of.  What can Youngstown, OH do to forestall its decline?  What strengths does Decatur, IL have that can serve as a foundation for revitalization?  What lies ahead for Terre Haute, IN?  Wtih respect to the other midsize Midwest cities, which have more clear futures (whether or not they choose to accept them), I’ll start exploring what might happen with the independent, midsize, post-industrial Midwest city.

This post originally appeared in Corner Side Yard on November 9, 2013.

Wednesday, September 17th, 2014

The World City

Last week’s episode of the Monocle 24 show the Urbanist was an interesting look at the “world city” or “global city.” They take a bit of a skeptical look, showing how, for example, many residents of Istanbul are at odds with the construction boom designed to turn the city into what one critic dubbed a low-grade Dubai. And also how smaller cities like Lisbon and Wellington, New Zealand are following their own path without trying to aspire to compete as peers with the big boys. They also take on Vancouver, though fail to note its extremely high housing prices (it’s not livable if you can’t live there), and also its gang wars and other issues that belie the kumbaya vision the mayor is pitching. And there’s a conversation with an analyst from the Economist Intelligence Unit who talks about that organization’s ratings. It’s a bit eyebrow raising that Monocle, a publication that has done a lot to promote the whole global city idea and transnational norms, values and amenities to which all cities are called on to aspire to (in addition to publishing its own league table), would be critiquing the global city, but it’s a good listen regardless.

If the audio embed doesn’t display for you, click over to listen on Soundcloud.

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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