The New Opportunity Boomtowns

A century ago Detroit was a boomtown and Los Angeles a sleepy refuge for sun-seeking Midwesterners. A half-century later, L.A. was the fastest-growing big city in the high-income world, while Detroit was beginning its long tailspin. In the ’70s, New York was the “rotten apple” and seemed destined for further decline. But for the past 20 years it has enjoyed an enormous surge of wealth, as have many of the countries’ dense, culturally creative cities.

In other words, when it comes to the death and life of American cities, things change, often in unpredictable, once unthinkable ways. Now, high prices and a lean to the left in the nation’s coastal metropolises could spell new opportunity for more business-friendly, less costly regions like Dallas-Fort Worth and Salt Lake City. If current trends continue, there may be new hope not only for Midwestern cities like Columbus, Indianapolis and Kansas City, but even for some long down-on-their-luck metros, like Detroit and Cleveland.

The post-recession economy favored many dense urban centers like New York, Boston, San Francisco and Seattle, which just a quarter century ago seemed unable to grow jobs or population. Even less successful big metros, such as Chicago and Los Angeles, experienced something of a surge in the central core, despite substandard overall economic performance.

Several factors paced the growth of the “superstars,” notably the surge in the number of educated millennials headed for dense urban areas. The extreme concentration of venture capital in a handful of cities, led by the Bay Area, which on its own accounts for nearly half of the VC world, followed by New York, Boston and Southern California, helped these places dominate growth in tech over the past decade. A post-recession boom in the stock market also paced growth, particularly in New York, but also in the affluent suburban regions surrounding these cities.

This has created something of a celebratory meme that suggests only elite cities can compete successfully in a globalized economy, leaving the rest to lag behind. Yet, as longtime urban booster Richard Florida and others note, the big city boom may be coming to an end.

FALLING STARS?
In some ways this tapering effect reflects the extent of their success. Virtually all the superstars, with the exception of Chicago, have seen a rapid ascent in housing prices, chasing people out of these metros. In the Bay Area, for example, 74 percent of millennials plan to leave, according to the Urban Land Institute. Even in Seattle, still a major lure for young people, many younger residents are now looking outside the city as they get ready to buy houses or raise families. Chicago is also facing an exodus, exacerbated by crime and a desultory economy.

This demographic challenge will grow as more millennials enter their 30s. The fastest growth in millennial migration is taking place not in New York, Washington and Los Angeles, but in cities like Charlotte, Houston and Austin. Immigrants, too, may be looking elsewhere; Los Angeles, long a major center for entrants, has seen its annual immigration rate fall by nearly two-thirds this decade.

These trends are likely to grow as job growth and startups slow in places like the Bay Area and New York. Since 2010, for example, Manhattan and Brooklyn’s population growth has dropped 90 percent. No surprise then that many of those leaving New York, California and other blue havens are people in their mid-30s to their early 50s, precisely the age when people start families, buy houses and launch businesses.

To these issues, add strong progressive politics in many of the nation’s biggest cities, including higher minimum wages, threats of new wealth taxes and an ever more stringent regulatory environment. This could prompt many firms to seek other locations. The Amazon search for a second headquarters (I am working on Kansas City’s bid) may presage expansion to other locales, even among firms that may remain headquartered in the superstars.

THE RISE OF THE OPPORTUNITY BOOMTOWNS
So where is the next generation of talented people and innovative companies most likely to go? The fastest growth in educated millennials today is taking place not in New York, Washington or San Francisco, but in opportunity cities like Nashville, Denver, Charlotte, Raleigh and Orlando, as well as the Texas metros outside of Houston, which has been slowed, at least for now, by low oil prices and hurricane Harvey.

Growth in tech and professional services in these areas suggest a new trend. At a time when tech growth has slowed in the Bay Area—down by 80 percent over the past two years, according to Chapman University economist Jim Doti—it has been surging in many of these cities. Since 2014, says Mark Schill, vice president of the Praxis Strategy Group, the fastest growth in tech jobs has taken place not in San Francisco, but in Charlotte. Nashville, Raleigh, Indianapolis, Phoenix, Denver and Salt Lake City all grew their tech ranks faster than such superstars as New York, Los Angeles and Chicago.

Despite the much-ballyhooed shift in small executive headquarters to some core cities, the fastest growth in professional services is increasingly not Chicago and New York but up-and-comers like Nashville, Austin, Charlotte and San Antonio. In financial services, there is a rapid “decentralization” from high-cost markets like San Francisco and New York to more affordable places like Nashville, Dallas, Salt Lake, Charlotte and Phoenix.

Demographic trends could drive this further as millennials and young families struggle with ultra-high costs. In New York City, millennial incomes (ages 18–29) have dropped in real terms compared with the same age cohort in 2000—despite considerably higher education levels—while rents increased 75 percent. New York, Los Angeles and San Francisco have three of the nation’s four lowest home-ownership rates for young people and among the lowest birthrates.

According to Zillow, for workers between 22 and 34, rent costs claim up to 45 percent of income in the Los Angeles, San Francisco, New York and Miami metropolitan areas, compared with closer to 30 percent of income in metros like Dallas-Fort Worth and Houston. Even more stark is the difference in home prices. In Dallas-Fort Worth (the nation’s fastest-growing housing market) as well as Houston, San Antonio and Charlotte, prices can be just one-third of those in the superstar cities.

Urbanist author Derek Thompson suggests that cities like New York are wonderful for new immigrants, hipsters and the ultra-rich, but “not a great place for middle-class families.” Yet young families, not single hipsters, will now be increasingly critical to urban success. The opportunity cities are also bolstering their appeal to millennials and young families by focusing on urban amenities and walkable suburban areas while maintaining policies that keep housing prices relatively low.

THE NEW WANNABES
As cities in Texas, the Intermountain West and even the Southeast grow, they become more exposed to higher housing prices and, in some cases, stronger anti-business sentiment. This could prove good news for a host of cities, many of them long-time economic laggards that could become the next opportunity cities.

Many of these cities, largely in the Midwest, enjoy significant advantages. Their large, but still affordable central cores and suburbs, notes Chicago-based analyst Pete Saunders, attract millennials. These metro regions often boast great legacy resources, such as universities (Ohio State), hospitals (Cleveland Clinic) and high concentrations of engineering talent, such as that found in Detroit. These, in turn, are attracting educated millennials from urban cities like New York to places like Ohio’s Cuyahoga County, which now enjoys a net surplus in educated millennials from Kings County, home to Brooklyn, New York.

This is beginning to occur with tech jobs. Cities such as Detroit, Kansas City and Indianapolis are all growing tech employment faster than New York or Los Angeles and enjoy more employment in this critical sector per capita. In professional service growth, Kansas City ranks second among the largest metros. Superstar cities like to brag about being “ideopolises,” but both talent and innovation are mobile and capable of heading to less congested, costly and far less celebrated environments.

Midwestern cities increasingly also offer companies a business-friendly environment, including “right to work” laws that limit unionization. Virtually all, except for laggard Illinois, are run by Republican governors and legislators. These places are not likely to impose the kind of regulatory or tax policies that flourish in the superstars and even some opportunity cities. The ability to accommodate young families could also prove crucial. Metropolitan areas such as Kansas City, Columbus, and Indianapolis combine strong economic growth with low costs.

The pro-manufacturing agenda of the Trump Administration, as epitomized by the Foxconn plant being built in southeastern Wisconsin, could be a plus in places like Detroit and Cleveland, devastated by the erosion of factory jobs and straining to cope with severe social dysfunction, most notably high crime. What the wannabes offer companies and individuals is a place where one can live decently in the urban core, and then later find an affordable home in a nice suburb, which two-thirds of millennials prefer—the youth to middle-aged life cycle, once common in places like the Bay Area, Southern California and many parts of the Northeast.

LEFT BEHIND?
Not all metros have a clear path to recovery, much less any prospect of ascending towards superstar status. Many smaller towns across the country, largely in the Midwest, have lost much of their economic base, a trend that includes the movement of firms like Caterpillar from cities like Peoria, Illinois, to the suburbs of Chicago. These parts of Trump’s America, notes analyst Aaron Renn, himself a native of southern Indiana, continue to lose population, becoming ever older and whiter as their ambitious young head elsewhere.

But not all smaller metros are hurting. Some smaller towns are benefiting from “on-shoring” of services that were once in East Asia and India. Places that have retained their largest companies—for example the Fayetteville, AR-MO region that is home to Walmart—continue to gain new migrants and jobs at among the highest rates in the country.

Price pressures and aging millennial populations, as well as advances in telecommunications, could make some smaller cities more attractive over time. What is certain is change. Just as places like New York arose from decades of torpor, so too may many other places around the country; even unlikely metros in the Midwest could re-emerge.

America’s typology of prosperity is protean and will continue to be so, forcing CEOs, investors, workers and policy-makers to re-examine their models to fit ever-changing conditions.

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