Wall Street Journal - February 13, 2007

 

COMMENTARY

The Myth of 'Superstar Cities'

"If New York City is a business, it isn't Wal-Mart — it isn't trying to be the lowest-priced product in the market. It's a high-end product, maybe even a luxury product. New York offers tremendous value, but only for those companies able to capitalize on it."

— Mayor Michael Bloomberg, January 2003

hese seem the best of times for America's elite cities. Wall Street's 2006 megabonuses created thousands of instant millionaires, and, with their venture-fund soulmates in places like San Francisco, Boston and Greenwich, the best people are prowling for Ferraris, planes, multimillion-dollar condos, the newest $200 lunch place and the latest in high fashion. In some markets, office prices and rents are breaking all-time records.

The bluest of the blue cities can also celebrate their rise to the top of the congressional pole. Speaker Nancy Pelosi of San Francisco, Finance Chairman Barney Frank of suburban Boston and Ways and Means Chairman Charles Rangel of Manhattan all represent something of an economic coup for the "good rich" such as dot-com billionaires, subsidized downtown real-estate developers and "enlightened" investment bankers. The new notables most likely won't find fault with their constituents' windfalls as they have with those of the oil companies, the pharmaceutical firms or Wal-Mart.

Yet these triumphs obscure the longer-term developments that continue to reshape metropolitan America. Economic and demographic trends suggest that the future of American urbanism lies not in the elite cities but in younger, more affordable and less self-regarding places.

Over the past 15 years, it has been opportunistic newcomers — Houston, Charlotte, Las Vegas, Phoenix, Dallas, Riverside — that have created the most new jobs and gained the most net domestic migration. In contrast there has been virtually negligible long-term net growth in jobs or positive domestic migration to places like New York, Los Angeles, Boston or the San Francisco Bay Area.

What as much as anything distinguishes elite places — what Wharton real-estate professor Joe Gyourko calls "the superstar cities" — are their absurdly high real-estate prices. New York, Boston, San Francisco and Los Angeles have long been more expensive than, say, Dallas, Houston or Phoenix — but in recent years the difference in price, he calculates, has increased beyond all reason. San Francisco prices since 1950, for example, have grown at twice the national rate for the 50 largest metropolitan areas.

This is good news for those who hold property, but has been less than a blessing for those middle-class families who might want to enter these markets. In some superstar cities less than 10% of households can afford a median-priced home. Nationally the average is about 50%.

Mr. Gyourko traces these surging prices to two basic causes. First, there remains in superstar cities a remarkable concentration of very high-earning families who can bid up real estate. The second factor lies with the regulatory and tax regimes, which greatly limit the production of housing and job opportunities, particularly for middle-income families, not only in the city cores but in surrounding areas.

Of course high productivity from educated workers and companies resident in these cities also contributes to the superstar phenomena. But Mr. Gyourko asserts these earning are not nearly high enough to explain the massive real-estate price differential. "You don't have to be productive to live in these places, you just have to have money," Mr. Gyourko suggests.

What drives the process is a simple combination of limited middle-class housing options combined with strong demand among the wealthy. Given the economic centrality and cultural vitality of a place like New York, there remains a sizeable top echelon, many in business, that can and does consume the Bloombergian "luxury product" as their primary or secondary residence.

The high-price trend is further exaggerated by the large concentrations of "trustafarians," or those with large amounts of inherited capital, in these areas. Many of these people have multiple residences — in some Manhattan buildings as many of half of the owners are non-residents — but can still drive up prices. Together with top-end business types, they can create what Mr. Gyourko describes as "the Vailization" effect: that is, turning part of the city into something akin to a high-amenity resort area, a "scarce luxury good" for a relative few and those who must remain behind to service them.

So what about the rest of the hoi polloi — what is their urban future? For the most part, sadly, not in the "superstar" cities. Middle-class people have been fleeing the expensive cities for more affordable ones for a generation, and the migration has continued as the price differentials have grown.

Fortunately the jobs are headed in the same direction. After all, companies depend not only on elite MBAs but upon on the collective skills of middle managers, technicians and skilled laborers. Most companies also tend to be more mindful of basic costs, taxes and regulations than the average hedge-fund manager or trustafarian.

This perhaps explains why the largest companies — with the notable exception of Silicon Valley — have continued to move toward the more opportunistic cities. New York and its environs, for example, had 140 such firms in 1960; in 2006 the number had dropped to less than half that, some of those running with only skeleton top management. Houston, in contrast, had only one Fortune 500 company in 1960; today it is home to over 20. Houston companies tend to staff heavily locally; this is one reason the city was able to replace New York and other high-cost locales as the nation's unchallenged energy capital. Another example of this trend is Charlotte's rise as the nation's second-ranked banking center in terms of assets, surpassing San Francisco, Chicago and Los Angeles, indeed all superstar cities except New York.

The non-superstar cities have become the nation's most prodigious centers for job creation. Between 1990 and 2006, job growth in Las Vegas averaged over 6% annually; Phoenix and Riverside well over 3%; Houston, Atlanta, Dallas and Charlotte right around 2%. New York City, L.A., Boston, Chicago and San Francisco all remained well less than 1%.

Since 2000, these divergences have, if anything, actually widened. One reason is that superstar cities have continued to hemorrhage prodigious numbers of blue-collar jobs, including in fields such as manufacturing and warehousing that once sustained many urban working-class families.

To be sure, the superstar cities still likely boast far more high-six- and seven-figure incomes in finance and other business services. But in any industry this covers only a relatively small minority of workers. Overall, according to data collected by Pepperdine University's Mike Shires, the average real income — after factoring in taxes and the cost of living — of workers in professional business services is actually higher in places like Phoenix, Denver, Houston and Dallas than in the pricey environs of San Francisco, New York, Boston or L.A.

Some urban boosters see these shifts to the high end as evidence of superiority. After all, they argue, only the "best" remain, while immigrants, the poor and ordinary middle-income slobs migrate out to the suburbs and other less elite regions.

Yet, even here, the demographic trends are not nearly so promising. Over the past decade college-educated workers — who once disproportionately migrated to the superstar cities — now appear to be tilting instead to more affordable, family-friendly places. Since 2000, Riverside, Phoenix, Charlotte, Las Vegas and Dallas all have been among the big net gainers with such migrants. In contrast New York, Boston, L.A. and even the Bay Area, a big winner in the 1990s, appear to have become among the highest net losers. The big outlier here, as in many things, is Washington, D.C., where an ever expanding federal government and its satellites continue to draw in ever more educated workers.

Another intriguing shift is taking place among immigrants, the group who did much in the 1990s to help reverse demographic and economic decline in places like New York. Recent census data suggests they are increasingly likely to move to more affordable, business-friendly places such as Houston, Dallas, Charlotte and Phoenix.

These phenomena have led Andrew Beveridge, a sociologist at Queens College, to dismiss Mayor Bloomberg's much ballyhooed projections of another million New Yorkers to roughly nine million by 2025. Mr. Beveridge's numbers show that New York's briefly impressive population growth is markedly slowing. The growth in the immigrant population, he notes, appears to be dropping significantly since the late '90s.

New York has had high population expectations before — 1940s census estimates of 8.5 million for 1970 proved a million off target. This may be the case again now, Mr. Beveridge suggests, unless the city finds ways to address the basic issues that affect the middle class — high housing costs, taxes, regulation, schools and lack of support for diverse small businesses, particularly in the outer boroughs. How else can New York hope to create opportunities for a population already overwhelmingly minority and predominately working class?

To raise such issues amidst today's giddiness tends to reap the scorn of many big city developers and other devotees of the superstar version of urbanism. Elite city boosters like academic Richard Florida consider any return to a traditional "back to basics" agenda as reflective of "neocon anti-urbanism."

This is something of an oddity, where the fashionable "left" defines successful urbanism by its ability to lure the superaffluent, the hypereducated and the avant garde — or what Dr. Florida calls "the greatest number of the most skilled people." One wonders what true progressives like Harry Truman or Fiorella La Guardia would think of such an approach.

La Guardia or Truman understood that great cities become so, in large part, due to the strivings of the upwardly mobile middle class and families, not the elites of any stripe. It may well be true, as Mr. Gyourko argues, that as the nation grows to 400 million or more there could be a niche for 10 to 20 such "productive resorts" serving as "enclaves of the wealthy." But the urban future — today as in past generations — will belong mostly to places that continue to draw and nurture the middle class, which has driven the rise of most successful capitalist cities.

The game, however, is far from over. Some larger superstar cities, like New York or L.A., may still possess enough economic and social diversity as well as the physical space to shift direction. Despite their dysfunctional political systems, radical changes in tax, regulatory and education policies, including a new emphasis on practical skills training, could restore their historic attraction to those who wish to start a small business, or maintain a middle-class family.

Such a city might not pass always Mayor Bloomberg's "luxury" calculus, but to its residents it might seem super indeed.

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