In this issue: real estate futures, asset geographic realignment, rest not rising.
Welcome back to Heartland Intelligence. Next month, this newsletter splits into two: a short, free version for everyone and an in-depth briefing for paid subscribers only. To make sure you don’t miss anything, please sign up, because it’s valuable info, a great way to support my work, and only $5/month.
Highlights of my work last month:
I was quoted in a Financial Times article on “Biden Republicans” - those Republicans so alienated by Trump they plan to vote Democratic. “Trump is kryptonite to a small segment of traditional metropolitan business Republicans, who have defected to the Democrats. With Trump having such razor thin margins of victory in key states, and some of his senior citizen voters having passed away over the past four years, he can’t afford to lose too many people from his coalition if he hopes to win re-election.”
A have a report with the American Enterprise Institute on the culture of cities and economic dynamism.
I am back as a regular columnist for the newly relaunched Governing. My latest column is about how cities lost control of the urban tech revolution.
Heartland Studies and Events
Economic Innovation Group: Searching for a Heartland Revival - A look at South Bend.
Brookings: Metro Monitor 2020
The New Cities Foundation is holding an event April 15-16 to reimagine the future of St. Louis. It’s hosted in that city.
Real Estate Outlook
This post by Larry Littlefield is long but highly recommended and worthwhile reading on various macrotrends and how they will affect the residential, office, and retail real estate markets in coming years. It cites the Heartland example of Dan Gilbert’s Detroit investments as a potential model.
Littlefield is a curmudgeonly writer with a negative outlook in general, but is extremely knowledgeable and his takes are valuable to prompt us to engage with these topics. Some excerpts:
Broadly speaking the U.S. economy is becoming an unstable inverted pyramid, with investment and development directed toward a limited, high-end slice of the housing market, a limited, high-end slice of the retail market, a small number of growing retail companies, a limited number of fast-growing, oligopolistic firms in a small number of industries, a limited number of “superstar cities” and booming metro areas, and special niche markets driven by the availability of debt-supported spending (student housing) and/or government-funded spending (medical office). The result has been soaring property values in a limited number of locations, and limited interest elsewhere….
Investors appear to value suburban office buildings, in effect, at zero, basing what they will pay for a property almost exclusively on the value of the current lease(s), amortized as a bond, and the creditworthiness of the tenant(s). Not only in Frostbelt metros with stagnant populations, but also in Plano, one of the fastest growing suburbs in the fastest growing metro area in the country, the DFW Metroplex….
Like suburban office buildings, retail shopping centers are now apparently valued almost exclusively based on the capitalized value of existing leases, and the creditworthiness of the tenants, as if the buildings themselves have no value, and the land they sit on is not worth very much. This is a product of decades of overbuilding new shopping centers, to the point where there is far more retail space per capita in the U.S. than elsewhere. And, recently, the growth of e-commerce. The single tenant everyone wants is a super-drug store, because most of its money will be coming from the federal government via Medicare and Medicaid, and not from increasingly constrained consumer demand. Specifically Walgreens, the most successful super-drug chain, which has used its real estate muscle to control more and more of the market by building stores, and then selling them in leaseback deals. For years it has been common for years for one, two or three of the largest single-property retail investment deals in a metro area over the prior 12 months to have been a 10,000- to 12,000-square-foot Walgreens. Those Walgreens, or rather those Walgreens leases, have often sold for more than one million-square-foot shopping centers.
Geographically Realigning Knowledge Economy Assets
The shift from an industrial to a post-industrial economy has left many Heartland states with significant knowledge economy assets, but often ones that are geographically fragmented or not optimally aligned to reap the full benefit.
In particular, the Heartland has a number of major research universities locked in college towns where their ability generate maximum economic benefit is limited by the small scale of their city. No place illustrates this more than Illinois, where the renowned University of Illinois engineering program is located two and a half hours from the city’s major economic engine in Chicago. Similar disconnects between a state’s higher ed centers and major economic hub exist in Indiana, Iowa, and Missouri. Wisconsin and Kentucky have flagship schools in a major city but not the state’s largest city.
These institutions have been taking steps toward realigning their assets for the 21st century. The Cornell Tech project in NYC was a signature example of this. Illinois has a similar project called Discovery Partners Institute (DPI) located in Chicago. I wrote a City Journal article on this last year.
The governor’s office switched hands from R to D in the fall, and new Gov. JB Pritzker put DPI on hold to review it. But he just released the $500 million in state funds previously appropriated to support the project. Chicago VC Jeff Carter posts more on this development. And John Pletz examines the potential of this project. This is a big development for Chicago.
I previously noted that Michigan State moved its medical school HQ to Grand Rapids. Even the University of Michigan has opened a Detroit Center for Innovation in that city. Heartland states that are trailing behind the nation must optimize the geographic deployment of their knowledge economy assets to help catch up.
Rest Not Rising
A new report from AEI finds that digital jobs are in fact concentrating not spreading to the center of the country.
Notwithstanding Case’s admirable heartland bus trips, pitch competitions, and investments, and notwithstanding the fervor of scores of local startup scenes in heartland downtowns, it does not look like the rise of the rest is actually happening at scale. Or at least, it is not happening as a matter of economic statistics, meaning as a matter of scores of smaller-market midwestern or southern cities increasing their tech-sector market share and changing the nation’s tech geography.
To be sure, scores of snappy startups and hundreds of new tech jobs are popping up in towns such as Akron, Ohio; Memphis, Tennessee; and Tulsa, Oklahoma. Yet the energy is more often arithmetic than exponential, superficial rather than profound—at least by the numbers. In fact, our close scrutiny of trends in key portions of the US tech sector continues to show that while tech employment is growing, including with added employment in most inland metros, it really is not “spreading out” in terms of heartland cities’ share shifts. Instead, tech-sector employment has been concentrating, meaning that the tech-employment “rich”—namely, California’s San Francisco and San Jose—are getting richer while everyone else drifts or loses ground.
And in this lies a larger story. Drill down, and the stubborn facts of America’s winner-take-most economy are, if anything, getting tougher.
However, several Heartland cities managed to buck the trend. From 2010-2017, Chicago increased its share of digital services employment by 0.2 percentage point (8th in the country). Madison, Indianapolis, and Kansas City were #10-#12 with a 0.1 point increase each. Pittsburgh and Akron were slightly positive.
Also, there are now startups founded to advise coastal companies on inland expansions, per the WSJ. Indianapolis, Pittsburgh, and Columbus were mentioned in that piece.
Even if the promise is not yet realized, there are some indications that select Heartland locales are starting to make progress.
Chicago Mag: Chicago and the Oscars: a Long, Loveless Marriage
Chicago might have run up a better cinematic record if not for the obduracy of Mayor Richard J. Daley, who made it difficult to film in the city because of his displeasure over Medium Cool’s portrayal of the 1968 Democratic National Convention. Mayor Jane Byrne invited filmmakers back, even allowing The Blues Brothers to drive through the plate glass windows of the Richard J. Daley Center, as long as they cleaned up after themselves.
Chicago Sun-Tims: The Standard Club to close - Yet another city club closes, this one the traditional Jewish club in Chicago, founded in an era when Jews couldn’t join the city’s other clubs.
Twin Cities Business: Last Call - A new book chronicles the heyday and decline of the Twin Cities tavern.
Detroit News: Royal rubble: Demolition begins at Palace of Auburn Hills - former home of the Pistons
Netflix is soon to release its series based on the life of Madame CJ Walker, America’s first self-made black female millionaire who build a hair care empire in Indianapolis. Watch the trailer.
City Journal: The Rust Belt’s Untapped Potential
Belt Mag: The Great Rust Belt Property Tax Dilemma
WaPo: Some of the most affordable cities in the U.S. may be the toughest places to buy a home - includes Buffalo, Rochester, Columbus, and Milwaukee.
Detroit Free Press: Surprise executive shake-up at Ford
Detroit News: Lordstown Motors building 'Voltage Valley' in Ohio
Heartland Cities and States
NYT: Here Are the Cities Homeowners Never Leave - Several Midwest cities on this yet. Implies future population loss is likely baked in as these aging in place residents pass on.
Buffalo News: Buffalo apartment boom prompts question: Time for condos? - “If all of the apartment projects that have been proposed but haven't started construction are completed, it will increase the Central Business District's supply of apartments by another third, giving the district more than three times as many units as it had in 2009.”
Pete Saunders’ tweetstorm on Chicago’s economic and cultural fault lines.
NYT: Black families came to Chicago by the thousands. Why are they leaving? - “The steady exodus of African-Americans has caused alarm and grief in Chicago, the nation’s third largest city, where black people have shaped the history, culture and political life. The population of 2.7 million is still nearly split in thirds among whites, blacks and Latinos, but the balance is shifting. Chicago saw its population decline in 2018, the fourth year in a row. Since 2015, almost 50,000 black residents have left.”
Crain’s Chicago Business forum on taxes.
The Center Square: Is bankruptcy the best option for Illinois?
Cleveland Plain Dealer: Sherwin-Williams to open downtown Cleveland HQ
Michigan NPR: Hey Chicago, Grand Rapids is trying to take your businesses - An unwise approach. Chicago and GR are more complements than competitors. Midwest cities and states need to move beyond the “raid Illinois” mentality that generally yields only low value jobs even when it works.
St. Louis Post-Dispatch: New Town booming as St. Louis region grows at its edges - both the city of St. Louis and St. Louis County are declining in population.
Transit guru Alon Levy tweets his analysis showing that a Chicago-centered high speed rail network is a surprisingly poor performer. Problems included sizes of cities and that they are not laid out linearly as on the East Coast. Levy is a serious person and Midwest rail advocates should take this seriously.
NYT: The struggle to mend America’s rural roads - Roads are being returned to gravel in some places, and that’s the right option for many shrinking rural counties. I say this as someone who used to live on a gravel road.
Indy Star: Indianapolis to build extensions to the Cultural Trail. More: The Project for Public Spaces praises the Cultural Trail
Inside Indiana Business: Indianapolis to study future of downtown interstates
Next some general national news, but first, don’t forget to subscribe.
McKinsey: The social contract in the 21st century
Governing: How Much Diversity Does a Modern City Need?
Paul Romer (Nobel Prize winning economist): The Dismal Kingdom: Do Economists Have Too Much Power?
Writing in 2018, the economists David Colander and Craig Freedman proposed one such correction. Over the course of the twentieth century, they contended, economists had built more and more sophisticated models to guide public policy, and many succumbed to hubris in the process. To regain the public’s trust, economists should return to the humility of their nineteenth-century forebears, who emphasized the limits of their knowledge and welcomed others—experts, political leaders, and voters—to fill in the gaps. Economists today should recommit to that approach, even if it requires them to publicly expel from their ranks any member of the community who habitually overreaches.”…
Simply put, a system that delegates to economists the responsibility for answering normative questions may yield many reasonable decisions when the stakes are low, but it will fail and cause enormous damage when powerful industries are brought into the mix. And it takes only a few huge failures to offset whatever positive difference smaller, successful interventions have made….
In their attempt to answer normative questions that the science of economics could not address, economists opened the door to economic ideologues who lacked any commitment to scientific integrity. Among these pretend economists, the ones who prized supposed freedom (especially freedom from regulation) over all other concerns proved most useful—not to society at large but to companies that wanted the leeway to generate a profit even if they did pervasive harm in the process. When the stakes were high, firms sought out these ideologues to act as their representatives and further their agenda. And just like their more reputable peers, these pretend economists used the unfamiliar language of economics to obscure the moral judgments that undergirded their advice.
But prospective residents aren’t the only ones who want in. The world’s richest investors do too. As older owners of mobile-home parks are retiring and selling up, big-name investors — from real estate investment trusts such as Equity Lifestyle Properties (ELS) to the Singaporean sovereign wealth fund GIC and large private equity funds such as The Carlyle Group and Apollo — have all begun buying mobile-home parks…
But as big money has entered the sector, so have high-profile complaints: from tenants and activists concerned about rent spikes and poor maintenance under their new owners, to lower-income people, forced to choose between paying rent or medical costs….
While local owners have an incentive to deal with maintenance, cost and safety issues, remote landlords are, well, remote. When private equity first moved into investing in single family homes after property prices dropped off a cliff following the 2008 crisis, there were also complaints about neglect and property price rises.
WaPo: Americans say they feel like this is the best economy since the late 1990s - “Americans increasingly rate this as the best economy since the late 1990s, with a recent surge in optimism, even though many economic metrics show striking similarities to the final years of the Obama administration.”
WSJ: For Growing Numbers of Struggling U.S. Cities, the Downturn Has Arrived - “A decade of growth in the U.S. economy allowed cities to patch fiscal holes left by the financial crisis and recession. A surprising number now see new signs of trouble. The proportion of American cities expecting general-fund revenue to drop more than 3% when the books close on the 2019 fiscal year increased to 27% from 17% in fiscal 2018, when adjusted for inflation.”
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