Looking Ahead: Demographics, Economics and the Future of U.S. Real Estate

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Looking Ahead Demographics, Economics and the
Future of U.S. Real Estate

• Presentation by Joel Kotkin
• Irvine Senior Fellow, New America Foundation
• BOMA Conference, Las Vegas, NV
• January 27, 2007

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Long Term Fundamentals

• U.S. has healthier long-term demographics than
  most competitors
• U.S. only advanced country with large, growing
  population
• North America second largest energy resource base
  in world
• Economic system most resilient among advanced
  countries

3
Healthier Long Term Demographicsa Younger
Future
Population Growth Rates, 2004

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Getting Older Slower
Population Over 65
Source CIA
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Room to Grow Total Arable Land
6
Arable Land Per Capita
Hectares
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Economic Dynamism Countries of Opportunity
Inflation-adjusted GDP growth 2002- 2005

• Source CIA

8
More Crowding to Come US Population Growth
1960-2050
Source Bureau of the Census, CensusScope
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In 2030, about half of the buildings in which
Americans live, work, and shop will have been
built after 2000.
58.9
25.7
6.4
Northeast
West
Total
Midwest
South
Source Toward a New Metropolis The Opportunity
to Rebuild America, p.v
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Inside America Where is Growth Headed?

• Suburban dominance growing
• Continued shift of people to regions of
  opportunity
• Educated migration and immigration following this
  pattern, not primarily seeking hip and cool
• Affordability is becoming key factor
• Jobs follow same pattern

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In Most of Urban California the Single Family
Home Predominated as The Universal Aspiration

• The suburban house is the idealization of
  every immigrants dream--- the vassals dream of
  his own castle. Europeans who come here are
  delighted by our suburbs. Not to live in an
  apartment! It is a universal aspiration to own
  your own home.

Los Angeles urbanist Edgardo Contini
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U.S. Population in Urban, Suburban, Rural
Areas
Millions
1950-1999
People (millions)
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Paradigm Shift Median Population Growth By Decade
Source US Census - Rappaport
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Growth City vs Suburb
US Metropolitan Central City Population
2000-2005

• This should be a chart showing how little of
  2000-5 growth was in cores

Demographia
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Declustering US Job Growth Remains Centered in
Low- and Moderate-density Areas
Average Employment Growth ()1990-1998
County Population Density
Low
High
Source Joint Center Tabulations of the Regional
Economic Information System (REIS) database
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Central City Suburban Office SpaceDevelopment,
1986-99
Millions of Square Feet
100
Downtown
Suburban
80
60
40
20
0
99
98
97
96
95
94
93
92
91
90
89
88
87
86
Source Milken Institute
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National Office Construction
Sq. Ft. x Millions
Source cbre
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Jobs Head out
Percentage of Metropolitan area employment
Source Edward Glaeser, Matthew Kahn and
Chenghuan Chu, Job Sprawl Employment in US
Metropolitan Areas, Brookings Center on Urban
and Metropolitan Policy, May 2001
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Despite Some Back-to-the-City Movement, More
People Are Still Leaving for the Suburbs
Source Center for Housing Studies at Harvard
University.
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Minorities to Suburbs
Percentage of Population Residing In Suburbs by
Race/Ethnicity 1990-2000
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Another Kind of DiversitySuburb and Central
City Household Change by Household Type,
1990-2000
Metro Areas with Population Over 500,000
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Downtown Population Growth 1998-2010 vs. San
Bernardino Riverside California 2003-2004
Selected CitiesHouston Cleveland Denver Seattle
Dallas New York Portland Milwaukee Chicago St.
Louis Philadelphia San Antonio Baltimore Detroit L
os Angeles Atlanta
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Declustering A Global Perspective
Percentage Change in Population 1965 - 2000
Source Demographia
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Focus on What People Want There are small
specialized niches and larger ones

• 83 percent want this kind of dwelling (National
  Association of Home Builders)
• 86 percent in California (PPIC)
• 70 or more of downshifting boomers retiring in
  place or staying suburban study
• Latest study -7.9 net movement out of city by
  empty nesters
• About as many empty nesters heading to
  countryside as headed to city
• 40 expect kids to move back at some point
• Latinos highest percentage ethnicity to prefer
  single family home
• Focus suburbs,exurbs, safe neighborhoods in
  closer, attractive areas

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Where Americans Would Like To Live
Fannie Mae, 1998
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What People Want
Public Policy Institute of California, 20002
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Roots of Current Urban Problems

• Difficult city administration forces businesses
  to periphery
• Inattention to basic urban infrastructure
• Overemphasis of public spending on ephemeral
  projects
• Lack of focus on middle class
• Factors accelerate suburban growth

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The Ephemeral City The Future of the Core?
a bazaar, a great gallery of shops and places of
concourse and rendezvous.
H.G. Wells description of urban centers in the
future
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Thoughts on Ephemeral Cities A Model for
American cities?
Poor but sexy."

• Mayor Klaus Wowereit on Berlin

A cross between Carmel and Calcutta
Kevin Starr on San Francisco
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Cities without Children
Percent Less than 18 Years, Select Major U.S.
Cities
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Arts and Culture Cause or Result?

• Great Cultural Centers generally rest upon
  commercial success
• Venice, Florence, Amsterdam, London, New York,
  Los Angeles all became cultural centers after
  developing an expanding economy and strong middle
  class
• Patrons of arts, not the public, key to
  development of cultural institutions from Macenas
  to the Medici, Carnegie and the Rockefellers of
  the 20th Century to todays multi-billionaires

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A Useful Insight

• If you need a campaign to prove youre hip
  and cool, youre not.

Michigan talk radio host on Governor Jennifer
Granholms Cool Cities initiative
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Rethinking the Urban Future Back to Basics

• Inner city economies need to produce real wealth
  or become irrelevant
• The key remains creating jobs and strong middle
  class neighborhoodswith high degree of
  livability
• Culture comes after commerce not the other way
  around

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Identifying Next Growth Regions

• No simple formula and there are almost always
  exceptions to every rule
• Affordability seems to be the big driver as a
  result of massive shift in property prices
• Movement of educated and immigrants may prove
  canaries in the coal mine for the next
  generation
• Shift from superstar to opportunity regions

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Competition Between Cities and Regions is a Fact
of Life and has been for over two millennia

• Every city is in a natural state of war with
  every other, not indeed proclaimed by heralds,
  but everlasting.

Plato, 4th Century BC
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Beyond elitism Jane Jacobs on the proper role of
an urban economy
A metropolitan economy, if it is working well,
is constantly transforming many poor people into
middle class people ...greenhorns into competent
citizens... Cities dont lure the middle class,
they create it
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Housing Price Rises a New Driver

• Housing costs and quality by far the largest
  reason why people move
• Particularly important for people 30 to 44
• High rents, housing prices are likely to continue

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Affordability Index Between Leading Dynamic
Regions
(median price for median family)
Source National Association of Homebuilders
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Perceptions of Affordable Housing as a Major
Problem
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1960 Fortune 500 Headquarters
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2006 Fortune 500 Headquarters
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Job Growth Over Past 15 Years Helps to Identify
Opportunity Areas
Non-farm Job Growth, Selected MSAs, 1990 - 2006
Las Vegas
Boise
Phoenix
Riverside-San Bernardino
Charlotte
Atlanta
Dallas-Fort Worth
San Diego
Houston
Cincinnati
Pittsburgh
Chicago
San Francisco Bay Area
Boston
Los Angeles - Orange
New York City
Detroit
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Source BLS Data, Smoothed 3rd quarter average
data, various years.
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Recent Job Growth Shows the Momentum and
Direction of These Areas
Non-farm Job Growth, Selected MSAs, 2000 - 2006
San Francisco Bay Area
Detroit
Boston
New York City
Chicago
Dallas-Fort Worth
Pittsburgh
Atlanta
Los Angeles - Orange
Cincinnati
Houston
Charlotte
San Diego
Boise
Phoenix
Riverside-San Bern
Las Vegas
-15
-10
-5
0
5
10
15
20
25
30
Source BLS Data, Smoothed 3rd quarter average
data, various years.
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Opportunity Areas Often Have Lower Taxes Than
Other Jurisdictions
Taxes Paid by Family of Four, 2003
0
2,000
4,000
6,000
8,000
10,000
12,000
New York City NY
Philadelphia PA
Portland OR
Milwaukee WI
Atlanta GA
Detroit MI
Boston MA
Chicago IL
Washington DC
Income
Los Angeles CA
Property
Boise ID
Sales
MEDIAN
Auto
Phoenix AZ
Houston TX
Las Vegas NV
Source Big City Taxes, CNNMoney.com, 2003,
compiled by District of Columbia.
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Growth in Professional Business Services
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Adjusted Median Earnings of Selected Occupations,
2005
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Growth by both Domestic and International
Migration
Circle size Growth rate ()
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Migration of Educated Workers 1995-2005
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Looking Ahead

• Digital Revolution will change nature of place
• Growth of Population/smaller households put more
  pressure on demand
• Price Pressure will resume after end of current
  bubble
• The Key Challenge Reconciling desire for
  low/moderate density with affordability and
  environment

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Town and city will be in truth, terms as
obsolete as mail coach.
-H.G. Wells, Anticipations of the Mechanical
Scientific Progress Upon Human Life and Thought
(1902)
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Virtuality is Coming
I leave my house in the country and drive 17
miles through the blue grass. But when I open my
computer I am at my center, it feels like I am
back in San Jose. It's a kind of virtual Silicon
Valley. Alan Hawse Director of CAD
Development, Cypress Semiconductor
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Examples of This New Reality

• Jefferies SecuritiesOnly one-third of New York
  area employees in Manhattan. Key operations
  people in Stamford, Los Angeles, San Francisco,
  Boston and Chicago.
• Cypress SemiconductorMajority of researchers in
  India, UK or small town US locations (Lexington,
  KY Starkeville, Ms Nashua, New Hampshire.)
• TMNGOnly 35 out of 450 employees at HQ in
  Overland Park, KS.
• Killdeer Mountain Manufacturing Employees in
  towns of 800 and smaller in rural North Dakota

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The Future Beckons Towards an Archipelago of
Villages

• The dispersed, multi-polar city is here to stay
• The biggest opportunity for community building
  and economic growth will lie in suburban in-fill
  and the periphery
• Time to stop complaining about historical trends,
  and learn to adapt to them
• Digital technology offers huge, long-term
  opportunities for dispersed, livable cities

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The Great Insight The Garden City

• Town and country must be married and out of this
  joyous union will spring a new hope, a new life,
  a new civilization.

Ebenezer Howard
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Visions of Suburbia

• The brain dead land ofDesperate Housewives
• A new kind of sprawling dystopia
• What people want, a place that can adapt to
  change

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Plenty of dreary lives are lived in the suburbs.
But most of them might be worse in other
surroundings
A More Balanced View of Suburban Life

Hugh Stretton Ideas for Australian Cities, 1970
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Traffic Will Drive Demand for Change
Average Hours Per Year Stuck in Traffic
Source California Dept. of Education, Healthy
California Progress Initiative, California
Highway Patrol, Surface Transportation Policy
Project
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Transit is nice but no real solution
Los Angeles Red Line Subway Current Ridership
Projection, Actual and Corrections
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The Big Trend Digital Impact
Percent change by mode, journey to work 1980-2000
Source US Decennial Census
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The Valencia, California, Survey 2001
Would you take a pay cut to work in the
immediate area where you live?50 of workers
said they would take a20 pay cut to a take a
job in their local area.
Source The Newhall Land Company
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What We Lost the Pre-industrial City

• The biggest jolt the Industrial Revolution
  administered to the Western family was the
  progressive removal of work from the home.

Dr. Peter N. Stearns, historian
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Back to the Future The Post-Industrial City

• If the electronic cottage was to spread, a
  chain of consequences of great importance would
  flow through society. Many of these consequences
  would please the most ardent environmentalist or
  techno-rebel, while at the same time opening up
  new options for business entrepreneurship

Alvin Toffler,The Third Wave
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Building the Post-Industrial Community

• Housing by itself does not accomplish very
  much, its not a panacea.

Robert Simon, 1966, Founder of Reston, Virginia
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Examples of New Suburbanism

• Naperville, Illinois
• Downtown Fullerton
• The Woodlands, TX
• Valencia, CA

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New Poles for Economic Activity

• Office, Commercial alongside or near houses
• Placing Work near concentrations of skilled
  workers
• Selling Convenience --- a return to the vision of
  the Garden City

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A Key Component Bringing Culture to the Burbs
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The Sacred Space
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Ultimately solving our problems depends on
developing a sense of community.

• People do not live together merely to be
  together. They live together to do something
  together.
• -Ortega y Gasset.

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Questions and Comment