Evolution of Commercial Real Estate by Coldwell Banker Commercial

THE EVOLUTION OF THE COMMERCIAL REAL ESTATE INDUSTRY _____________________________________________ HOW KEY CHANGES THROUGHOUT THE 20th CENTURY CREATED THE INDUSTRY WE KNOW TODAY

A WHITE PAPER COMMISSIONED BY COLDWELL BANKER COMMERCIAL®

Written by Joel Kotkin with contributions from Randy Fuchs of Boxwood Means, Inc. and Sara Priestnall

©2006 Coldwell Banker Real Estate Corporation. All Rights Reserved. Coldwell Banker Commercial® is a Registered Trademark Licensed To Coldwell Banker Real Estate Corporation. An Equal Opportunity Company. Each Office Is Independently Owned And Operated. The views and opinions set forth in this white paper are not necessarily the views and opinions of Coldwell Banker Commercial Affiliates, Inc.

THE EVOLUTION OF THE COMMERCIAL REAL ESTATE INDUSTRY _____________________________________________ HOW KEY CHANGES THROUGHOUT THE 20th CENTURY CREATED THE INDUSTRY WE KNOW TODAY

OUTLINE I.

The Early American Commercial Metropolis

II.

The Industrial Revolution and the Emergence of the High-Rise

III.

The Glory Days of the High-Rise Office District

IV.

Suburbia and the Rise of the Sunbelt City

Suburbia and the Metropolitan Response

VI.

Urban Trends at the Dawn of the 21st Century â&#x20AC;&#x201C; Overall Demographic Outlook

VII.

Economic Trends

VIII.

The Role of Technology

IX.

The Urban Opportunity: A Potentially Lucrative Niche

The Dominant Trend: The Suburbanized Future

I. The Early American Commercial Metropolis The early evolution of America’s commercial districts closely followed models developed earlier in Europe. North America’s greatest metropolis, for example, was built along the commercial model of its Dutch namesake. Most development clustered at the point --- first identified by the Dutch ---where the two rivers surrounding Manhattan Island, the East and the Hudson, converged.1 Starting in 1792, the burgeoning financial center for the city formed in the area around Wall Street, providing the “seedbed” for the city’s later development into the nation’s burgeoning information, financial and media capital.2 i

Immigrants crowded into lower Manhattan 3 and, by 1860, Gotham’s population had topped one million, 42 percent foreign born.4 New York was already becoming a rival to London in many ways --- as a port and business center. 5 Other American cities --- Boston, Baltimore, Charleston, Philadelphia --- resembled smaller versions of New York. They focused heavily on their port districts, and saw the growth of adjacent business districts that served as both centers of retail trade and specialized services such as insurance, banking and accounting. Today many of these cities retain these districts, with their characteristic red-brick construction and dark roof tops. Usually no higher than five or six stories, they often now serve primarily as entertainment and commercial districts, and are often highly prized for their architectural uniqueness and human scale. The Inner Harbor in Baltimore, for example, had once been the thriving commercial center of Baltimore.6 By the 1950s, as the center of Baltimore declined, warehouses stood empty and derelict. Under the leadership of Mayor Donald Schaefer and the business community, the old red-brick commercial area was redeveloped. Harborplace, developed by the Rouse Company and opened in 1980, served as a turning point, encouraging other developers to build office buildings, hotels, entertainment venues and condos along the waterfront. Although the rest of Baltimore

1 Henri and Barbara van der Zee, A Sweet and Alien Land: The Story of Dutch New York, Viking Press, (New York: 1978), pp. 2-3; “New Amsterdam, Frontier Trading Post”, from Nicholas van Wassenaer, Historisch Verhael, in Kenneth T. Jackson and David S. Dunbar, editors, Empire City: New York Through the Centuries, Columbia University Press, (New York: 2002), p. 26. 2 Emanuel Tobier, “Manhattan’s Business District in the Industrial Age”, in John Mollenkopf, editor, Power Culture and Place, Russell Sage Foundation, (New York: 1988), Tobier, p.81; Alfred Chandler, Visible Hand: The Managerial Revolution in American Business, Harvard University Press, (Cambridge, MA: 1977), p. 91. 3 Bernard Bailyn, Voyagers to the West, Knopf, (New York: 1996), pp. 152-154; Brinley Thomas, Economics of International Migration, MacMillan, (New York:1958), pp. 65-66, p. 575. 4 Joseph Salvo and Arun Peter Lobo, “Immigration and the Changing Demographic Profile of New York” in Margaret Graham, Alberto Vourvalias-Bush, editors, The City and the World, Council on Foreign Relations, (New York; 1997), pp. 88-89. 5 Beckert, op. cit., p. 51. 6 http://www.emich.edu/public/geo/557book/d370.innerharbor.html

faces many challenges, the redevelopment around the old commercial core continues, including such projects as the new Ritz-Carlton condominiums.7

II.

The Industrial Revolution and the Emergence of the High-Rise The Industrial Epoch (1860-1950) Emergence of Railroads and Industrial Cities

St.Louis Chicago Detroit Milwaukee Cleveland

The American urban experience changed dramatically with the new technologies created by the industrial revolution. In America the center of the factory belt, Chicago, suffered all the ills of the congested, polluted, and poverty-wracked industrial city. It appeared, as a Swedish visitor commented in 1850, to be “one of the most miserable and ugly cities” of America.8 Cities like Chicago decided that the best course would be to separate their industrial districts from the commercial center. This process was accelerated by the evolution of new construction technology --- most particularly steel frame buildings --- that allowed for larger, multistory structures. The first example of this new form was the Home Insurance Building, built in 1885 at the northeast corner of LaSalle and Adams streets (on the site now occupied by the west portion of the Field building) in Chicago. The development of the "Chicago skeleton" form of construction, as well as the new elevator systems perfected by the Otis Company, allowed buildings to rise to unprecedented heights. 9 Perfected by master architects like Chicago’s Daniel Burnham, the high-rise allowed cities to accommodate more functions in one place than anytime in history.10

III.

The Glory Days of the High-rise Office District

The high-rise building allowed for the creation of something very new --- the modern downtown. First included in Webster’s in 1881, “downtown,” notes historian Robert Fogelson, grew to mean something more than the traditional marketplace or industrial warehouse district. These areas 7

Jen DeGregorio, “Downtown Baltimore has re-emerged as an affluent enclave, joining the outlying suburbs”, The Daily Record (Baltimore, MD), November 4, 2005. 8 Teaford, op. cit. p. 11, p. 19 9 A Chronological History of Chicago, Chicago Municipal Reference Library, updated 2005. 10 Henry Nash Smith, Virgin Land: The American West as Symbol and Myth, Harvard University Press, (Cambridge, MA: 1950), p. 191.

often usurped the roles previously played by older, more specialized districts. Even the largest central business districts contained but one or two percent of the city’s land areas, but they were universally seen as what one Boston planner called “the natural center” for everything except manufacturing, which alone seemed better suited for slightly less valued real estate.11 Downtowns also became the primary retail centers as vast new department stores increasingly supplanted local neighborhood shops.12 These urban "cathedrals of commerce," as author Rita Kramer has described them, turned the central business districts into primary weekend destinations. Frank Woolworth, the founder of the nation’s largest “dime store” empire, based his business on “taking the store to the people” and that place, in the first decades of the century, lay in the downtowns.13 The central dominating structure of the downtown was the high-rise office building --- and nowhere was this more spectacularly evident than in New York City.14 Located on a granite island in the midst of a great natural harbor, Manhattan was peculiarly suited for the construction of “a vertical city”. The tight boundaries of the island had placed a premium on the use of space.15 The rising demands for space by the diverse sectors of the city’s economy --- light manufacturing, trade, finance and other services --- fostered irrepressible pressure for concentration and, among corporations, intense competition for who would have the highest and most arresting tower. New York’s annexation of Brooklyn and other adjacent areas in 1900 --- followed by the opening of the subway system in 1904 --- allowed increasingly large numbers to be shuttled between residential neighborhoods elsewhere on the island and the downtown and midtown office districts. Burrowing under the East River, New York’s subways carried ever more workers, inciting ever more office construction. New York, the writer O. Henry famously remarked, would be “a great place if they ever finished it.”16

Robert M. Fogelson, Downtown: Its Rise and Fall, 1880-1950, (Yale University Press: 2001), p. 12, pp. 183-190. Alfred Chandler, Visible Hand: The Managerial Revolution in American Business, Harvard University Press, (Cambridge, MA: 1977) pp. 8485. 13 Kramer, op. cit. , p. 97; Richard Longstreth, City Center to Regional Mall, MIT Press (Cambridge, MA: 1997), p. 100; William R. Taylor, In Pursuit of Gotham: Culture and Commerce in New York, Oxford University Press, (New York: 1992), p. 45. 14 C.A.E. Goodhart, The New York Money Market and the Finance of Trade:1900-1913, Oxford University Press (Oxford,UK: 1969), pp. 9-10. 15 Robert Bruegmann, “The Paradoxes of Anti-Sprawl Reform”, uncorrected draft for Robert Freestone, editor, The Twentieth Century Planning Experience, Routledge (London: 1999). 16 Max Page, The Creative Destruction of Manhattan: 1900-1940, University of Chicago Press, (Chicago; 1999), p. 5; Kenneth T. Jackson and David S. Dunbar, editors, Empire City: New York City Through the Centuries, Columbia University Press, (New York: 2002), p. 404. 12

“Cathedrals of Commerce”: Downtown 1900-1950 • Downtowns become key area for shopping • Department stores supplant neighborhood shops in most cities • Woolworth’s, Wannamaker’s, Marshall Field’s, Macy’s — the streets that symbolized the new, multi-purpose downtown

The burgeoning demand required structures accommodating hundreds and even thousands of office workers. The first New York skyscraper went up in 1895, quickly followed by others. 17 The key breakthrough came in 1902 with the construction of the Flatiron Building, widely known as “Burnham’s Folly”, after its designer, Chicago architect Daniel H. Burnham, because some thought it would fall of its own weight. Within a decade an even larger building, the sixtystory Woolworth Building, rose nearby. 18 Over the next thirty years, New York further perfected the high-rise office district. This culminated in the Empire State Building, constructed in 1931, followed by the penultimate classic high-rise development, the multi-building Rockefeller Center, which rose amidst the Depression and was finally completed in 1940. Looming over the skyline, these structures --which included office, entertainment and retail spaces --- epitomized the power and elegance of a new kind of city of unprecedented grace.19 Although New York epitomized the new high rise culture --- with Chicago an always inspiring second --- other American cities also rushed to create their own high-rise districts.20 Within a year of the completion of the Woolworth building, Seattle had constructed the forty-two-story Smith Tower, bringing architectural giantism to the Pacific. Chicago, Detroit, Cleveland and St. Louis erected their own monuments to their commercial vitality.21 Even lesser cities rushed to make their statement. At a time when neither London, the world’s largest city, Berlin or Paris boasted a single high-rise, steel-framed towers were rising in such obscure places as Bangor, Maine, Tulsa, Oklahoma and Galveston, Texas. More tradition-bound Philadelphia, Boston and Washington DC, imposed height limits, but in most places the only 17

Emanuel Tobier, “Manhattan’s Business District in the Industrial Age”, in John Mollenkopf, in John Mollenkopf, editor, Power Culture and Place, Russell Sage Foundation, (New York: 1988) pp. 85-87. 18 Beard and Beard, op. cit, p.787. 19 Andrew S. Dolkart, “The Architecture and Development of New York City --- The Birth of the Skyscraper”, Columbia University, Digital Knowledge Ventures. 20 Paul Crowelll and A. H. Raskin, “New York: The Greatest City in the World”, in Robert S. Allen, editor, Our Fair City, The Vanguard Press, (New York: 1947), p. 58. 21 Jon C. Teaford, Cities of the Heartland: The Rise and Fall of the Industrial Midwest, Indiana State University, (Bloomington: 1993), p. 76; John C. Clark, David M. Katzman, Richard D. McKinzie and Theodore Watson, Three Generations in Twentieth Century America: Family, Community, and Nation, Dorsey Press, (Homewood, IL: 1977), p. 403.

restraint was the exuberance of the local downtown real estate market. A “real metropolis”, The Denver Post argued, needed such structures to assert its status.22 The Rise of the American Downtown

• • • •

IV.

High-rise High-rise construction construction made made possible possible by by steel steel beams beams --- first example example Chicago, Chicago, 1885 1885 Industrial Industrial uses generally separated separated off off from from commercial commercial core core The The term term “downtown” “downtown” appears appears in in Webster’s Webster’s for for first first time time in in 1881 1881 By By 1920s 1920s virtually virtually all all major major cities cities have have high-rise high-rise office office districts districts at their their urban urban core core --- “the “the center of of everything” everything” as as one one Boston Boston planner planner put put itit

Suburbia and the Rise of the Sunbelt City

Yet even as America’s cities reached ever higher into the sky, there emerged a dramatic shift away from dense urban centers, a process that continues to the current period. This pattern first emerged in London --- then the world’s largest city --- by the 1850s 23 and then became popularized in American cities such as Philadelphia and Boston by the 1890s. 24 Industrial cities boosted crowding dramatically Urban Land Use 1400-1850 Square meters/Person 120 100 80 60 40 20 0 Medieval Town

Pre-Industrial - Early 19th Century

Industrial - Mid 19th Century

Source: Rudolf Hartog

Early suburban visionaries such as British planner Ebenezer Howard promoted suburbs as a means to counteract the disorder, disease and crime of the contemporary industrial metropolis. Howard favored the creation of “garden cities” --- self contained towns with a population of roughly 30,000 --- that would maintain their own employment base, neighborhoods of pleasant

Robert M. Fogelson, Downtown: Its Rise and Fall, 1880-1950, (Yale University Press: 2001), pp. 112-166. Girouard, op. cit., pp. 280-283; D.A. Reeder, “A Theater of Suburbs: Some Patterns of Development in West London, 1801-1911, in H.J. Dyos, The Study of Urban History, St. Martin’s Press, (New York: 1968), p. 253. 24 A. Digby Baltzell, Philadelphia Gentlemen, Transaction Press, (New Brunswick, NJ:1950 ) pp. 196-209; John Modell, “An Ecology of Family Decisions: Suburbanization, Schooling and Fertility in Philadelphia, 1880-1920”, in Journal of Urban History, Volume 6, Number 4, August 1980, pp. 397-417. 23

cottages and be surrounded by rural areas. “Town and country must be married,” Howard preached, “and out of this joyous union will spring a new hope, a new life, a new civilization.” 25 Yet more than the notion of visionaries, suburbanization owed its success to what one urbanite once described as “the universal aspiration”, that is the dream of owning one’s own single-family residence. 26 This seemed self-evident to working class people, like one Chicago meat-cutter who in the 1920s exchanged a “a four bedroom house on the second floor of an apartment house” for “a six room house with a big yard” in Meadowdale in the far western suburbs.27 As automobile registrations soared in the 1920s, the decentralizing trend gathered speed, with suburbs growing at twice the rate of cities. Cities, noted National Geographic, in 1923, were “spreading out.” 28 The Great Depression temporarily slowed the outward migration but not the yearning among Americans. 29 Southern California, the most rapidly growing region in the country during the early 20th Century, provided the ultimate stage for this new form of development. What made Los Angeles unique was its conscious rejection of the highly concentrated, high-rise dominated downtown in favor of a more sprawling notion of urbanism. This notion was explicit in its comprehensive urban zoning, the first in the nation when adopted in 1908, and at a time when the city had not much more than 100,000 residents. The plan encouraged the development of dispersed subcenters, single-family homes and separated industrial development. 30 The area’s sprawling Pacific Electric railway set the pattern for the city’s expansive geography. Later, the growing use of the automobile further accelerated Los Angeles’ dispersion. As early as the 1920s, Angelinos were four times as likely to own a car as the national average and ten times as likely as a Chicago resident. In a pattern soon to be repeated elsewhere, Los Angeles’ historic downtown soon became increasingly less important as the region’s economic and social center. As the region’s population more than doubled in the period between 1931 and 1947, downtown’s daytime population actually shrank. 31 The usual motivations --- the quest for wealth and power --- motivated these developments. But many among the region’s bureaucrats and developers also believed they were creating a superior, more healthful urban environment. In 1923, the director of city planning proudly proclaimed that Los Angeles had avoided “the mistakes which have happened in the growth of metropolitan areas of the east.” This brash new metropolis of the West, he claimed, would show “how it should be done.” 32

25 William Peterson, “The Ideological Origins of Britain’s New Towns”, in Irving Lewis Allen, editor, New Towns and the Suburban Dream, University Publications, (Port Washington, NY:1977), pp. 62-65; Carl E. Schorske, “The Idea of the City in European Thought”, in The Historian and the City, Oscar Handlin and John Burchard, editors, MIT Press, (Cambridge, MA: 1963), p. 108. 26 Jack Rosenthal, “The Outer City: An Overview Suburban Turmoil in the United States”, in Masotti and Jeffrey K. Hadden, Suburbia in Transition, New Viewpoints, (New York: 1974) p. 269. 27 Teaford, Cities of the Heartland, op. cit, pp. 238-242. 28 Jackson,Crabgrass Frontier, op. cit, p. 176. 29 Scott Donaldson, The Suburban Myth, Columbia University Press, (New York: 1969), p. 3. 30 David Gebhard and Harriette von Bretton, Los Angeles in the Thirties: 1931-1941, Peregrine Smith, (Los Angeles: 1975), p. 28; Witold Rybvzynski, City Life: Urban Expectations in the New World, Scribner, (New York: 1995), p. 143. 31 John D. Weaver, El Pueblo Grande, Ward Ritchie Press, (Los Angeles: 1973); pp.38-39; Fogelson, op. cit., p. 222. 32 Greg Hise, Magnetic Los Angeles, The Johns Hopkins University Press, (Baltimore: 1997), pp. 10-11.

By the 1930s, large elements of this vision had been realized. Single family residences accounted for 93 percent of the city’s residential buildings, almost twice the rate for in Chicago. These houses spread over an area that made Los Angeles the world’s largest city in terms of space.33 Los Angeles also pioneered new forms of industrial, office and retail development. Businesses spread over vast distances --- entertainment, for example, moved first to Hollywood, a then distant suburb, and later both towards the beach and over the Santa Monica Mountains to the San Fernando Valley. Aerospace and other industries, which boomed during and after the Second World War, followed much the same dispersed pattern. Los Angeles also led the way to the de-concentration of retail activity away from the city center towards the suburban areas where people lived and worked. For instance, downtown’s share of retail sales in Los Angeles dropped from 30 percent in 1929 to barely one-third of that amount less than twenty years later. 34 At first the shift in trade went to “boulevard business lots” along the major thoroughfares of the city including Hollywood Boulevard and Wilshire,“the Fifth Avenue of the West” and the most spectacular. A grand street that ran from downtown to the beach, Wilshire, at its core and two miles from downtown, contained the sumptuous Bullock’s Department Store, elite boutiques and eateries.35 The next innovation was the retail mall. Although the first auto-dependent malls were developed in Kansas City ---- the Country Club Plaza created by J.C. Nichols in 1922 --- rapid growth in population, land area and auto use made Southern California an ideal place to develop large shopping malls. These early centers ranged from south Los Angeles’ Crenshaw Center to Valley Plaza in the suburban San Fernando Valley to the regional malls built in outer-ring communities such as Lakewood and Del Amo.36 Overall, Los Angeles presented to the world a new model of urban growth --- dispersed, multicentered and largely suburbanized. For modern cities, around the world as well as America, Southern California would soon become the model for the prevailing form of urbanity, the original, as one observer put it, in the Xerox machine. V.

Suburbia and the Metropolitan Response

The pace of suburbanization in America again accelerated after the Second World War, accounting for a remarkable 84 percent of the nation’s population increase during the 1950s.37 America, once a nation of farms and dense cities, was being transformed, primarily, into a suburban country. No longer confined to close-in “street car suburbs”, suburbanites increasingly

David Gebhard and Harriette von Bretton, Los Angeles in the Thirties: 1931-1941, Peregrine Smith, (Los Angeles: 1975), p. 26; Richard Longstreth, City Center to Regional Mall, MIT Press (Cambridge, MA: 1997), p. 13. 34 Fogelson, op. cit., p. 223. 35 Longstreth, op. cit, pp. 101-106. 36 Ibid., pp. 223-340. 37 Kenneth Jackson, Crabgrass Frontier: The Suburbanization of the United States, Oxford University Press, (New York: 1985), Crabgrass Frontier: The Suburbanization of the United States, Oxford University Press, (New York: 1985), p.7; Donaldson, op. cit., p. 4.

lived in ever more spread out new developments such as Levittown, which arose out of the Long Island flatlands in the late 1940s and early 1950s.38 Starting in the 1950s and 1960s, virtually all the fastest growing cities --- from Southern California to Atlanta, Houston, Dallas, Phoenix and Las Vegas --- were themselves primarily conglomerations of suburbs. For the most part, the older industrial cities continued to shrink, and what took place occurred almost exclusively on their peripheries. Employment, including those in manufacturing, followed suit, as plants shifted to be closer to airports and highway interchanges rather than near port facilities and train lines. 39 This outward trend was particularly marked in the new high technology industries, which, unlike financial services and traditional manufacturing, possessed few historic ties to the inner city. They went to the suburbs for many reasons including the building of large campus-like office parks, less crime, lower taxes and, most critically, access to educated workers. 40 Declustering: US Job Growth Remains Centered in Low- and Moderate-density Areas Average Employment Growth (%)1990-1998 25%

20%

15%

10%

0% Low

County Population Density

High

Source; Joint Center Tabulations of the Regional Economic Information System (REIS) database

The prototype for this new kind of development would be Stanford Research Park, opened in 1951 by Stanford University. Companies in the emerging field of electronics were attracted by the availability of land close to Stanford’s Department of Engineering. Over time the park and the surrounding area would grow into the nation’s leading center not only of industrial innovation but also venture capital finance. In the 1950s and 1960s, many other office park developments took place in cities around the country. Even in such a setting as Chicago, companies were deserting the downtown core for more bucolic settings in the outer suburbs, where many of their top executives and growing number of middle managers had also settled.

Fred Siegel, The Future Once Happened Here: New York, D.C., L,A, and the Fate of America’s Big Cities, (uncorrected proof), Free Press; New York, 1997, p. X. 39 Raymond Vernon, “The Economic Function of the Suburb” in C.E, Elias, Jr, James Gillies, Svend Riemer, editors, Metropolis: Values in Conflict, p. 87; “The Suburbanization of the Corporation”, in Louis H. Masotti and Jeffrey K. Hadden, Suburbia in Transition, New Viewpoints, (New York:1974), pp. 82-89: William Julius Wilson, When Work Disappears, Knopf, (New York: 1996), p. 37. 40 Martha O’Mara, “Strategy Location and the Changing Corporation: How Information Age Organizations Make Site Selection Decisions”, Real Estate Research Institute, pp. 21-28.

This pattern of dispersion has impacted downtown shopping districts for over a generation. Chicago’s loop, which controlled virtually all regional department store sales in the early 1920s, was struggling to keep half by the mid-1930s. Department stores themselves were not so much leaving, but branching out in the suburbs, taking valuable jobs and retail sales with them.41 The suburban trend presented cities --- and urban boosters --- with an unprecedented challenge. Many chafed against these spreading peripheral communities for turning America into “a placeless collection of subdivisions”, for “splintering” the nation’s identity and even helping to expand the nation’s waistlines. Real estate owners in central cities saw a direct economic peril; R.F. Hewitt of Seattle’s United Pacific Realty and Investment Corporation described decentralization as “a disease” that was threatening the future of downtown across the nation.42 Faced with both a rising suburban tide and increasing rancor among its largely impoverished residents, the central cities redoubled their efforts to secure their historic primacy. New construction technology, some suggested, now allowed for an unprecedented degree of urban concentration. The old city centers could be saved, they insisted, by replacing their old structures with something more thoroughly modern and functional. In the Swiss-born architect Charles Édouard Jeanneret, known more widely as Le Courbusier, this viewpoint found its most articulate advocate. Le Courbusier envisioned vistas of sixteen story apartment blocs, set amidst massive towers set aside for commerce. His ideal, published in his La ville radieuse, separated the functions of housing, commerce, recreation and transport, and provided for ample green space for the enjoyment of city residents. Le Courbusier’s vision was never fully realized, but his notion of bigger, higher, denser urban cores gained many adherents, particularly in the more successful urban cores. Between 1960 and 1972, office space in central Chicago expanded by 50 percent while New York’s soared an astonishing 74 percent, creating skylines that British author Emrys Jones described as “always dramatic and sometimes awe-inspiring.” Huge towers also arose in cities such as Boston, San Francisco, Houston and even Los Angeles.43 Houston, the penultimate Sunbelt city, is the home of over 300 high rises, the tallest being the JP Morgan Chase Tower. Although downtown Houston suffered along with the energy industry in the nineties, it is now vibrant, with over 140,000 workers and 3,500 companies. High-rise housing is also proving popular with those wanting a short commute, along with access to entertainment, shopping and restaurants. Some of these condo and apartment buildings are new developments; others are adaptive redevelopments of existing high rises. Such massive buildings, suggested Minoru Yamasaki, one of the world’s premier modern architects, reflected “a society such as ours, which is one of large-scale and grand achievements.” 44 Yet these “grand achievements” of concrete and glass structures also exacted a terrible price in already existing urban neighborhoods. Yamasaki’s ill-fated World Trade Center, 41

Fogelson, op. cit., pp. 222-224. Andres Duany, Elizabeth Player-Zybeck and Jeff Speck, Suburban Nation: The Rise of Sprawl and the Decline of the American Dream, North Point Press, (New York: 2000), p.xii, p.59; Fogelson, op. cit., pp. 228-229. 43 Emrys Jones Metropolis, Oxford University Press, Oxford (UK), 1990, p. 99. 44 Mariana Mogilevich, “Big Bad Buildings”, The Next American City, Issue 3, 2003; Robert W. Gilmer, “The Urban Consolidation of American Oil:The Case of Houston”, Federal Reserve Bank of Dallas, Houston branch, June 6, 1998. 42

constructed between 1966 and 1977, not only displaced as many as 33,000 small businesses centered around the old electrical district but also essentially cut off whole sections of New York’s Westside from each other.45 Although such massive redevelopment failed to halt the migration of people and businesses to the periphery, the continuing vitality of some downtowns still demonstrated the intrinsic strengths of highly concentrated central cores. With their unique concentrations of skilled people, transportation infrastructure and universities, a handful of American downtown business districts --- notably midtown Manhattan, Chicago, Minneapolis, Boston, Seattle, San Francisco and Houston --- continue to demonstrate their relevance in the post-industrial era.

Central City & Suburban Office Space Development, 1986-99 Millions of Square Feet

100 Downtown Suburban

80 60 40 20 0

86 87 88 89 90 91 92 93 94 95 96 97 98 99

Source: Milken Institute

VI.

Urban Trends at the Dawn of the 21st Century: Overall Demographic Outook

Development opportunities today may be greater than any time since at least the end of the Second World War. Indeed looking ahead, as the nation’s population grows from an estimated 300 million today to roughly 400 million in 2050, there will be ample opportunities in both urban and suburban areas. By 2030 alone, the nation will need to build an estimated 50% more industrial, commercial and residential space. The bulk of this growth, it seems certain, will take place in the south and west, as has been the case for nearly a half century. Moreover, the pattern will occur everywhere along the suburban and exurban hinterlands that are home today to roughly two out of every three people in metropolitan areas. Even among the 25 to 34 age group, considered the prime market for urban living, the balance has been two to one in favor of the periphery. 46

45 46

Robert Fitch, The Assassination of New York, Verso, (London:1993), p. Xi-Xiv. Arthur C. Nelson, “Toward a New Metropolis: The Opportunity to Rebuild America”, Brookings Institution, December 2004, p. 5.

More Crowding to Come: US Population Growth 1960-2050

Residential Unit Demand 58.9

Millions

400,000,000

58.9

New Housing Units Needed 2000-2030 60

350,000,000 50

300,000,000 250,000,000

25.7

200,000,000

16.1

150,000,000

10.7 100,000,000

50,000,000 10

0 1960

1970

1980

1990

2000

2010

2030

25.7

16.1

10.7

6.4

2050 0 Northeast Midwest Midwest Northeast

Source: Bureau of the Census, CensusScope

West West

South South

Total Total

New Units Needed (millions)

Source: Toward a New Metropolis: The Opportunity to Rebuild America, Table 2

More than 5,000 people move to Las Vegas every month, causing the median housing price to almost double every three years. High land prices and the large amount of land owned by the federal government are pushing development out beyond the Las Vegas valley to small towns like Pahrump. Las Vegas is also enjoying the highest job growth of any major city, causing a decrease in office building vacancies and encouraging new development. Las Vegas’ appeal has become remarkably diverse, attracting singles, educated workers, families, retirees and immigrants, as well as working-class migrants from other areas. 47 Perhaps most indicative of the future trends will be the location decisions of the two fastest growing large populations --- immigrants and baby boomers. Once largely confined to inner city neighborhoods, more immigrants now live in suburban locations than in core cities. These newcomers and their offspring are shaping the American future: By 2015, nearly one in three children in America will be an immigrant or child of an immigrant.48 Much the same can be said about the boomers. Most seem to sticking close to the suburbs even after their children retire, according to Sandi Rosenbloom, a professor of urban planning and gerontology at the University of Arizona.49 The reasons vary, Rosenbloom suggests, but most of all, these people are more accustomed to a suburban lifestyle and amenities, rather than to the density, congestion and noise of inner city life.50

http://www.realestatejournal.com/columnists_com/blueprint/20051110-blueprint.html; census figures analyzed by Bill Frey, Brookings Institution Senior Fellow. 48 “Into the Suburbs”, The Economist, March 11, 2004. 49 Jennifer Lisle, “Adult-Adult Builders Target Urban Locales”, Real Estate Journal, January 29, 2005. 50 Sandra Rosenbloom, “The Mobility Needs of Older Americans: Implications for Transportation Reauthorization”, Center on Urban and Metropolitan Policy, Brookings Institution, July 2003, pp. 1-11; Fast Facts: Baby Boomers Statistics on Empty Nesting and Retiring”, Del Webb Backrounder, Del Webb Corporation, 2005; Tracy M. Gordon, “Planned Developments in California: Private Communities and Public Life”, Public Policy Institute of California, 2004. p. Vii.

U.S. Population in Urban, Suburban, & Rural Areas

Millions

1950-1999

160 140

People (millions)

120 100 80 60 40 20 0 1950

1960

1970 Suburban

VII.

1980 Urban

1990

1999

Rural

Economic Trends

Employment trends seem to be following the same trajectory. Between 1961 and 1996, the percentage of American jobs located in the densest areas declined from 84 to 66 percent.51 By 2000, in the largest 100 metro areas, only 22 percent of people worked within three miles of the city center. In cities such as Chicago, Atlanta and Detroit more than 60 percent of all regional employment now ranges more than ten miles from the core.52 The shift towards the periphery can also be seen across virtually every size of company. At the mega-firm level, for example, only eleven percent of the nation’s largest companies in 1969 were headquartered in the suburbs; a quarter century later roughly half of these large companies had migrated to the suburbs. 53 Studies have shown this preference for the periphery also extends to a wider range of firms, including those with 2,500 employees and more during the 1990s.54

51 Gerald A. Carlino,” From Centralization to De-Concentration: People and Jobs Spread Out”, Federal Reserve Bank of Philadelphia, November/December 2000, p. 19. 52 The State of the Nation’s Housing”, Joint Center for Housing Studies of Harvard University, 2001, p. 8; Bruce Katz and Alan Berube, “Cities Rebound-Somewhat”, American Enterprise, June 2002. 53 Peter Muller, “The Surburban Transformation of the Globalizing American City”, Annals of the American Academy of Political and Social Science, May 1997; Jonathan Friedmann, The Prospect of Cities, University of Minnesota Press, (Minneapolis: tk), p. 41. 54 Thomas Klier and William Testa, “Location Trends of Large Company Headquarters During the 1990s”, Economic Perspectives, Federal Reserve Bank of Chicago, 2002; Ron Martin and Peter Sunley, “Deconstructing Clusters: Creative Concept or Policy Panacea”, Journal of Economic Geography, June 6, 2002.

Despite Some Back-to-the-City Movement, More People Are Still Leaving for the Suburbs 1,600 1,400 1,200 1,000 800 600 400 200 0 15-24

25-34

35-44

45-54

Central City to Suburb

55-64

65-74

Over 75

Suburb to Central City

Source: Center for Housing Studies at Harvard University.

The Research Triangle Park in North Carolina provides an example of how a non-urban setting can be attractive to many firms. It is located between Duke University in Durham, N.C. State University in Raleigh, and the University of North Carolina in Chapel Hill. The Park consists of 7,000 acres of pine forest with 1,100 acres for development. It houses more than 100 R&D facilities, employing 38,500 Triangle residents. The largest employers include IBM, GlaxoSmithKline, Cisco and Nortel.55 VIII. The Role of Technology America’s real estate geography will continue to be shaped by ongoing changes in transportation and information technology. Clearly, the location imperative that drove city development, such as access to rivers, ocean ports, and raw materials, are becoming relatively least critical to economic growth. As a result, work now can spread out in less concentrated nodes. Already more than twice as many people in the United States commute from suburb to suburb than to the city. 56 Trends in transportation appear almost certain to favor continued dispersed development over traditional downtowns. Despite the inauguration of new transit lines in several cities, the proportion of Americans riding buses or rails to work actually declined in the 1990s.57

http://www.rtp.org “The Clinton Administration’s National Urban Policy Report”, US Department of Housing and Urban Development, July 25, 1995, (draft); p. 13; Census Bureau estimates; Robyn Meredith, “Job Seekers Cannot Get to Where the Jobs Are”, New York Times, May 26, 1998; Michael M. Phillips, “Welfare’s Urban Poor Need a Lift---to Suburban Jobs”, The Wall Street Journal, June 12, 1997; Dennis R. Judd and Todd Swanstrom, City Politics: Private Power and Public Policy, Collins College Publishers, (New York: 1994), p. 191; William H. Frey, “Boomers and Seniors in the Suburbs: Aging Patterns in Census 2000”, Brookings Institution, January 2003; Pietro S. Nivola, Laws of the Landscape: How Politics Shape Cities in Europe and America, Brookings, (Washington, DC: 1999), p. 88; “The State of the Cities: Megaforces Shaping the Future of the Nation’s Cities”, US Department of Housing and Urban Development, June 2000, p. X. 57 “New Census Data Provides a Reality Check”, Innovation Briefs, Jul/Aug 2002. See also John Semmens, “Buses, Trains Automobiles: Finding the Right Transportation Mix for the Phoenix Metro Region,” Goldwater Institute Policy Report #188, January 8, 2004, http://www.goldwaterinstitute.org/pdf/materials/399.pdf. 56

It has been argued that rising energy prices may tend to make such conveyances relatively more expensive and lead people back to concentrated employment centers. The experience of the 1970s oil shock and the continued dispersion occurring in Europe and Japan --- places with already high energy prices and excellent public transportation --- belie this assertion.58 Advanced telecommunications may also have a major impact on the evolution of commercial centers. These technologies allow businesses to shift their operations over an ever-widening spatial dynamic and, increasingly, towards the use of home-based telecommuting. Over the 1990s, telecommuting experienced the most rapid increase of any way of getting to work. In many American cities, particularly in the fast growing Sunbelt, there are now more people working full-time or part-time from home than taking mass transit. 59 The home-based workforce has grown 23% over the past decade according to the U.S. Census, and this trend will likely have a sizable impact on future development patterns. Clearly, the “extra room” critical for such businesses tends to be far more likely to be found in a suburban, as opposed to a traditional, dense, urban setting. Indeed, some new suburban developments, such as Ladera Ranch in Southern Orange County, have incorporated such mixed use in their floor plans, with separate entrances for business clients. Suburban historian Tom Martinson believes the Ladera plan will “be in the history books in twenty years” because it anticipates “an incredible change in the way we live and work.” 60 IX.

The Urban Opportunity: A Potentially Lucrative Niche

Ironically, as historian Robert Bruegmann has pointed out, the shift of work and population towards the hinterland has allowed for the emergence of a new, and potentially successful, form of urbanism. This urbanism will have less to do with traditional job creation and mass production economics than in the past. Instead, its success will depend on lifestyle choices by certain sociological groups, notably wealthy individuals, couples without children and young singles. Although most downtowns have been declining for over a half century, patterns since the 1990s suggest they may well be reinventing themselves. In the 1990s, according to a recent Brookings study of 45 downtowns, central core populations, after decades of decline, grew by 10 percent. Their population growth came primarily from well-educated, affluent, childless people, many of them young. Although the total number of new housing units --- some 35,000 --- pales in comparison to the over 13 million constructed in the surrounding suburbs, the trends suggest a positive future for some urban cores.61 Certainly even for the most challenged cities, the worst may now be over and, with population growth; prospects for at least some positive development could be in the offing as well for some better maintained inner ring areas.

Demographia; Edward L. Glaeser abd Matthew E.Kahn, “Sprawl and Urban Growth”, Harvard Institute of Economic Research, May 2003, pp. 4-5. 59 Ted Balaker, “The Quiet Success: Telecommuting’s Impact on Transportation and Beyond”, Reason Public Policy Institute, November 2005. 60 “Sidelights”, The American Enterprise, January-February 2005; Employment Policy Foundation, “The Balancing Act: Telework: Part of the Work Life Balance Equation”, March 11, 2004; Daniel Yi, “My Other Front Door Is For My Customers”, Los Angeles Times, November 22, 2003. 61 Eugenie L. Birch, “Who Lives Downtown?”, Metropolitan Policy Program, Brookings Institution, November 2005.

But no matter what happens, there is little doubt we are witnessing a historic shift in the functions of central cities. With economic growth, even in high-end services, shifting elsewhere, it is increasingly clear that the era of rapid growth in new high-rise office development in major cities is close to an end. This pattern of decline in downtown office building became evident initially in the 1990s construction boom, which became the first in the 20th Century to take place with little high-rise office construction in the major urban centers. This trend is exemplified by a shift in land uses, e.g., the conversion of older industrial and office buildings towards residential housing. Residents of these buildings, tilted heavily to the affluent, young and well-educated, may allow certain cities to occupy specific niches at the upper end of the economy, in fields like entertainment, media, financial and business services, and also through the expansion of their tourism industry. One classic case may well be the old financial center of lower Manhattan. Even before the events of 9-ll, the area did not appear likely to return to its former status as premier business center. But it may find new life, notes Robert Bruegmann, as a full- or part-time home for “wealthy cosmopolites wishing to enjoy urban amenities in the elegantly recycled shell of a former business center.” 62 It seems all but certain such strategies could work not only in New York but also in high amenity cities such as Boston, Portland, Seattle, Chicago and San Francisco. Other cities like Cleveland increasingly are staking their future on mimicking the success of these cities in promoting loft developments, good restaurants, clubs, museums and a sizable, visible gay and single population to revive and reinvigorate fading urban neighborhoods.63

Robert Bruegmann, “The American City: Urban Aberration or Glimpse of the Future”, in Michael A. Cohen, Blair A. Ruble, Joseph S. Tulchin and Allison M. Garland, Preparing for the Urban Future: Global Pressures and Local Forces, Johns Hopkins University Press, (Baltimore: 1996), p. 59; The Wall Street Journal, April 7, 2004. 63 Alan Cowell, “Manchester Rising”, New York Times, June 24, 2001; Bruce Weber, “Arts Sapling Bears Fruit in Downtown US”, New York Times, November 19, 1997; Ben Craft, “City of Brotherly Love Bets on the Arts”, The Wall Street Journal, June 24, 1998; “In London’s Shadow”, The Economist, August 1, 1998; Shahid Yusuf and Weiping Wu, “Pathways to a World City: Shanghai Rising in an Era of Globalization”, Urban Studies, Volume 39, No. 7, 2002.

Downtown Chicago leads the country in the revival of downtown living, with the population increasing by a third in the nineties to 72,843.64 Forty percent of these downtown residents own their own home. Homeownership may be the key to sustaining downtown revitalization. After all, homeowners have the strongest interest in keeping their neighborhood clean and safe and provide an environment in which certain businesses can thrive. Renters tend to more transitory, perhaps moving to the suburbs if their circumstances change. In Chicago, buildings such as a cold storage facility, a department store, a hotel and a produce market, along with high-rise office buildings are being converted to residential units, taking advantage of the tax breaks offered to promote adaptive reuse.65 Whatever their level of success, it is certain that the core cities of the 21st Century will be as different from their 20th Century antecedents as the industrial downtown was to the town centers of early 19th Century America. They will, for the most part, perform far less essential economic roles, and be home to relatively few middle-class families. Yet, by catering to a relatively narrow, albeit expanding niche of well-educated, affluent and childless people, downtown areas could present substantial investment opportunities --- particularly in residential and retail --- for investors, builders and developers.

Declustering: Job Growth 1999-2004 17.39%

Riverside-San Bernardino

0.86%

Los Angeles Phoenix Boise Chicago Reno San Jose Boston

27.00%

New York Orange County Houston New Orleans San Francisco New York

-15%

-10%

-5%

10%

15%

20%

25%

30%

Source: U.S. Census

The Dominant Trend: The Suburbanized Future

The largest play for real estate development in the early 21st Century will likely lie with the suburbs. Yet like the city, suburbia’s future is also evolving, and in what can best be described as an “urban direction”. In short, many suburbs, including many of the fastest growing ones, are getting “crammed”. Not only are they becoming denser, but also these areas are more diverse in their population, economy and culture.

64 65

Eugenie L. Birch, “Who Lives Downtown?”, Brookings Institution, November 2005. John Handley, “An extreme makeover; Housing demand creates another cycle for recycling buildings”, Chicago Tribune, November 7, 2004.

Paradigm Shift: Median Population Growth By Decade 35%

30% 25%

20% 15% 10%

5% 0% -5% 1900s

1910s

1920s

1930s

1940s

Cities

1950s

1960s

1970s

1980s

1990s

Suburbs

Source: US Census - Rappaport

This emerging pattern is due in part to environmental laws that emphasize open space preservation, along with a declining stock of undeveloped space and rising land costs. As a result, apartments and townhouses, once associated with city living, now co-exist with the traditional tracts. Cities like Los Angeles and Phoenix, once considered bastions of low density housing, are growing more concentrated at a more rapid rate than cities in more traditional “urban” centers.66 Increasingly, it makes little sense to view suburbia (as many urbanites have done) as the “anticity”. Instead, we are witnessing the evolution of a very different kind of community. The early precursors of this new form of suburban development can be seen in developments such as Reston, Virginia, Columbia, Maryland and Valencia, California. In contrast to the prototypical “production suburb” of the 1950s, there has been a shift towards building communities that, in the words of James Rouse, the developer of Columbia that opened in 1967, develop “a sense of place at each level of community in which a person can feel a sense of belonging”.67

66 Matthew C. Quinn, “Townhouses find a home in the suburbs”, Atlanta Journal Constitution, September 20, 2004; Robert E. Lang, “The Boomburgs at Buildout: Future Development in Large Fast Growing Suburbs”, Metropolitan Institute at Virginia Tech, January 2005. 67 James Rouse, “Building a Sense of Place”, in Donald C, Klein, Psychology of the Planned Community: The New Town Experience, Human Science Press (New York: 1978), pp. 51-57; Malcolm Tait, “Urban Villages as self-sufficient, integrated communities: a case study in London’s Docklands” Urban Design International, 2003; Robert Cervero, “Planned Communities, Self Containment and Commuting: A Cross National Perspective”, Urban Studies, Volume 32, No. 7, 1995; Jeffry M. Doefendorf, “The West German Debate on Urban Planning”, The American Impact on Western Europe: Americanization and Westernization in Transatlantic Perspective, Conference of the German Historical Institute, Washington, DC March 25-27, 1999; www.lib.umd.edu/NTL/postwar.html#columbia; Daniel Akst, “He Built It and They Came”, The Wall Street Journal, August 19, 2004.

Population Change by Area Type and U.S. Region, 2000–2004 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% Northeast

Midwest

Large Metro

Small Metro

South

Micro

West

Other Nonmetro

Source: William H. Frey

Following the pioneering work of visionaries like Rouse, suburban development today increasingly encompasses not just homes and mall-like shopping, but also offices including live/work opportunities. This mix can be seen in the rise of what may be called “suburban villages”. Reflecting the old notion of the “garden city”, these developments --- over sixty developed just during the 1990s --- emphasize retail walking districts, biking and parks as well as the clustering of offices near residential areas. Population Change In Central Cities and Suburbs of Large Metropolitan Areas, 2000–2004 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% Northeast Source: William H. Frey

Midwest Central Cities

South

West

Suburbs

In some cases, developments which once strictly separated uses such as Irvine in Southern California, have now decided to develop mixed uses and even a dense “downtown core”. In many cases, there is an increased emphasis on apartments, townhouses and, in some places, even “lofts”. In some cases, employers, eager to attract younger workers, are initiating such developments.68

68 Nancy Sarnoff, “Urban Style Living”, Houston Chronicle, January 28, 2005; Haya El Nasser, “Suburban office parks get urban injection”, USA Today, September 13, 2004.

Playa Vista, a $6 billion mixed-use development on the west side of Los Angeles, features homes, shops, recreation areas and businesses. The homes are a mix of apartments, condos and single-family homes, with some set aside as workforce housing. Early on in the development, DreamWorks SKG, a Hollywood studio and animation company, planned to build a new studio complex at Playa Vista, hoping to attract the animators and other creative workers who are critical to their business. Although DreamWorks later pulled out, Electronic Arts, one of the largest videogame developers, will locate its new studio on a 6.5 acre site in Playa Vista, hoping that the opportunity to live within walking distance of work will prove attractive to the young game designers and software developers they need to hire and retain. These developments are coming at a time when suburbs are also developing new public spaces, notably cultural institutions, town plazas and farmers’ markets. Increasingly, suburban political and economic leaders see this as key to addressing a perceived lack of a civic focus. “There’s a rush of amenity rising in suburbia,” said the McKnight Foundation researcher Neil Cuthbert. “They are trying to find an identity for themselves.”69 Even Tysons Corner, one of the nation’s leading high-tech business centers long criticized for lacking a sense of place, may soon be transformed. A group of architects, planners and economic development experts have proposed a plan to make Tysons Corner more “city-like”, assuming that the Metro transit system is extended through the center as planned. Plans call for the streetscape to be changed to create a new “Main Street”, and public plazas and parks would be added. Multi-level parking garages would replace the sprawling parking lots of today. More housing would be added to redress the housing-jobs balance that causes much of today’s congestion.70 Even with the less bold Fairfax County plan, county planners expect that the residential population will triple to around 40,000 over the next decade.71 Already, residents include young professionals wishing to avoid traffic and live close to work, along with retirees and executives that have traded their single-family homes for a maintenance-free luxury condo.

Interview with author Roger K. Lewis, “Tysons Corner’s Unique Character Requires Bold Plan for Transformation”, Washington Post, October 29, 2005. 71 Lisa Rein, “In the Center of It All; Tysons Residents Say They Like Living Amid Offices, Stores and Cars”, Washington Post, July 28, 2005. 70

Suburbs may have had their start as locations for living, but they are rapidly evolving as places for work, shopping and even culture. Their evolution does not suggest the end of cities, but the opening of a new chapter in the development of our ever-changing urban landscape.