By N. David Milder

Introduction

Many of our most successful large cities are also ailing and fragile in very essential ways, whether or not their leaders and stakeholders are open to acknowledging that reality.

Yes, by many economic measures, lots of our major cities such as NYC, San Francisco, Seattle and Washington, DC,, and especially their CBDs, are more successful than ever. The value of their real estate continues to soar. As do their employment levels and their ability to attract large numbers of the creative/knowledge workers that are so essential to economic growth and success. Affluent people are eager to live in and near their flourishing downtowns. Pedestrian flows are strong. Tourist are flocking to their arts, entertainment and cultural venues as well as their hotels, restaurants and shops. Their streets are active at least 18 hours a day.

Yet, in 2017, Richard Florida published a book with a very revealing title: ” The New Urban Crisis: How Our Cities Are Increasing Inequality, Deepening Segregation, and Failing the Middle Class—and What We Can Do about It.”  Increasingly, the core areas of our major cities have become places where only the very wealthy can live and play. The middle class can still work there, but even those with $1 million to spend on housing too often cannot find desirable units.  Affordable housing is a major issue in these cities. Dinners for two in their restaurants can easily cost hundreds of dollars. While movie tickets may cost about $9 to $13, admission at their museums can run about $25, and tickets to prime arts event venues can run over $125 in the primary market, and over a thousand in the secondary market. Their downtowns are no longer everyone’s neighborhood, but devoted to very wealthy locals and affluent tourists. If NYC is any indicator, half of the most expensive new residential units are unsold, and the other half of the units are occupied by part-time residents, and usually vacant.¹  For most city residents, their city’s downtown is no longer really theirs.

Added to the financial and spatial equity issues are the very significant return of problems of public disorder, such as homeless vagrancy and aggressive panhandling. The situation in downtown San Francisco  has grown quite out of hand, with many sidewalks being blocked and pedestrians forced to run a narrow gauntlet of aggressive panhandlers, reclining/sitting vagrants, litter and human feces.² Similar, if less egregious situations can be found in several other large West Coast cities. Closer to home, one BID manager in Manhattan recently told me that dealing with problems of disorder was now his organization’s highest priority and that this also is the case with many other BIDs in the borough. Center City in Philadelphia is also making a renewed effort to deal with the problems of disorder.³ Those of us who were around to see how the problems of disorder strangled downtowns during the 1970s and 1980s are very concerned about these flare ups of the problems of disorder. Will their resurgence strengthen? Have the tools we used to successfully cope with them in the recent past now lost their efficacy? Do local politicians and public at large have the required political will to do what must be done?

Also, the very success of our downtowns is causing several other problems. One that goes unnoticed until it isn’t, is that our pedestrian densities often have reached such high levels that they have significant adverse impacts on the pleasure of walking, i.e., they diminish an area’s walkability. Measures to relieve auto congestion have in some places, e.g., Midtown Manhattan, provided some pedestrian decompression by converting traffic lanes to pedestrian use. The potentially disruptive impacts of small vehicles – e-scooters, e-bikes, delivery robots,  etc. — and AVs are on a rapidly closing-in horizon. For all their wealth, many downtown retail corridors in these superstar downtowns have surprisingly high vacancy rates reaching sometimes over 30%.

Creative Job Growth and Affordable Housing.

For some time now, economic development professionals have known that affordable housing is a serious and growing problem, especially those active in our large and successful cities – see table above.

Nationally, the relationship between the strong growth of high paying high tech employment and the seriousness of the affordable housing problem was also well-known. Large increases in highly paid creative workers leads to rising housing prices. The new housing products sparked by that increased demand will be largely upscale market rate. The emergence of the affordability issue suggests that one way or another the demand of upscale creatives is pushing up the costs of housing in what were middle income units.

The situation in San Francisco has already reached such severity that $1 million might buy you a home constructed from a former cargo shipping crate. An attempt even  was made to smother office growth in the city in order to shift more resources to housing development. Several high tech firms have committed billions to solving this problem: Google will invest $1billion, as will Facebook, and Apple recently said it would commit $2.5 billion to the issue.⁴  I doubt they would be making these investments if the problem was not very serious.

Seattle shows what can happen to the housing market when there is a very large infusion of creative jobs by just one firm. By 2017 Amazon had eight million square feet of office space, occupying 19% of Seattle’s office space, and tens of thousands of office workers. While other major national high tech firms were also adding employees, an article by Mike Rosenberg  and Ángel González in the Settle Times proclaimed: “Thanks to Amazon, Seattle is now America’s biggest company town.”⁵  It’s huge presence and growing workforce had fostered the following conditions:

• By 2017, apartment rents were 63 percent higher than in 2010, and Seattle  became the fastest-growing city in the country.
• Home costs rose faster in Seattle than anywhere in the nation, doubling in five years, and pushing the middle class to surrounding, less expensive towns.
• Seattle had the nation’s third-highest concentration of mega-commuters — people traveling at least 90 minutes each way to work. Their numbers  grew 72 percent in five years.
• Buses were more packed than ever, and lines running along the Amazon campus often were standing-room-only during rush hour. Metro drivers at times have to leave commuters waiting outside an Amazon office because their buses were full. Local officials even added buses to accommodate the crush of Amazon interns that arrived during the summer.⁶

Even the mere announcement of a big development project that will bring thousands of new creative workers into an area can raise prices by attracting real estate speculators and convincing homeowners to keep their homes off of the market so they can benefit more fully from the rising values of their homes. For example, Amazon’s impact on the housing market in and around Arlington, VA, it’s remaining HQ2 town, was swift, starting with the announcement of the deal. A year after the deal, with no construction completed and much not even started, Redfin reported home prices in Arlington were up nearly 18% year-over-year. That far outpaced the 2.7% price change in the D.C. metro area.⁷ 

Will New Expensive Housing for the New Creative Workers Help Make Housing More Affordable for Middle and Lower Income Households? One possible counter argument that has been offered by some colleagues is that the expensive new housing triggered by the new creative job holders will increase overall supply and thus help  lower housing costs throughout the city. That has the prima facie validity of reflecting very basic economic principles, and there are some recent economic studies that at first blush seem to support that argument. However, I think that when you look more closely at their analyses and conclusions, their ability to really support this top down path to housing affordability becomes far less certain.

Evan Mast, in an interesting recent study using migration data found that:

• Migrants “to new central city multifamily buildings come from neighborhoods with slightly lower incomes, and migrants into these neighborhoods come from areas with still lower incomes, and so forth.”
• “Using a simulation model, (he found) that 100 new market-rate units ultimately create 70 vacancies in middle-income neighborhoods. New construction opens the housing market in low-income areas by reducing demand. A simulation model suggests that building 100 new market-rate units sparks a chain of moves that eventually leads 70 people to move out of neighborhoods from the bottom half of the income distribution, and 39 people to move out of neighborhoods from the bottom fifth. This effect should occur within five years of the new units’ completion.
• These openings should lower prices, but the effect may be small in the least expensive areas where prices are close to the marginal cost of providing housing” (Italics added).⁸

Looking at Mast’s findings from the perspective of cities with severe housing affordability problems, the issue of the marginal cost of providing housing raises questions. In these cities the problem is precisely that the marginal cost of providing housing is beyond what middle income households can afford, not just the lowest income households. Moreover, the new units are not just market rate, but relatively high market rate. Consequently,  one might reasonably ask if these cities were looked at separately, would “the effect” also be found weaker further up on the income scale? My reasoning suggests the answer is very probably yes.

In another very interesting recent study, Liyi Liu, Doug McManus, and Elias Yannopoulos at Freddie Mac looked at filtering,  “the process by which properties, as they age, depreciate in quality and hence price and thus tend to be purchased by lower-income households. This is the primary mechanism by which competitive markets supply low-income housing.”⁹ They found that:

• “(T)here is a wide range of filtering rates both across and within metropolitan statistical areas (MSAs) for owner-occupied properties. Notably, in some markets, properties ‘filter up’ to higher-income households”
• “After 40 years, average real incomes increased by 12% for Washington, DC (implying an average annual increase of 0.28%) and by 14.5% for Los Angeles (implying an average annual increase of 0.34%). Thus, properties in these markets were filtering up to higher- income households as homes aged. It is not surprising that these markets are ones with affordable housing challenges (italics added). In contrast, Detroit and Chicago show rapid downward filtering rates. For Detroit, the income index level drops 34.5% over 40 years (implying a rate of filtering of -1.1% per year). In Chicago the income index level drops by 23.7% over 40 years (implying a rate of filtering of -0.67% per year).” ¹⁰

These findings suggest the dynamics of residential real estate in markets with affordable housing challenges diverge from what basic economic theory might suggest. The size of the upper income housing deficit then is an important determinant of the degree to which new upscale housing just goes to upscale residents or does add to units filtering down to less affluent households. If the deficit is large, then there are more units filtering up, not down. If the deficit is small, and more easily met by new construction, additional units can filter down. Reducing large deficits require comparably large amounts of appropriate new housing, and until that is achieved, unit filtration will be upward in direction.   It is reasonable to conclude that the entry of 25,000 new high income workers into an area probably will significantly increase the upscale housing deficit. It is sort of like a garter snake trying to swallow a bullfrog – it can be digwested, but the snake is literally stretched to the breaking point and very exposed to its predators. What happened in Seattle and Arlington provides some evidence to support that conclusion. In Arlington. just Amazon’s announcement significantly raised housing prices and reduced the number of units for sale.

Another more general relevant national trend is the fact that while the number of middle-income households has shrunk over the past decade, the number of more affluent households has increased (the number of low income households also increased).

To my mind, the above suggests that in our cities where affordability is a serious problem, a very large amount of new upscale housing is needed for them to reduce price pressures in less expensive areas and reduce the upward filtration of units. Moreover, the constant recruitment/creation of new highly paid creative workers only adds to the amount of new upscale housing that must be built in order to foster general housing affordability. Large upscale housing deficits, by reversing the normal downward filtration of units,  creates a significant demand for the construction of so-called “affordable” units. That demand is real and felt, and politically can take on a life if its own. Local citizens may not want to wait, at best, five years for affordability to trickle down from the top, or even much longer when the upscale housing deficit is large and not quickly being reduced.

Billionaire Row type housing projects that are at the top of the price ladder with units that are either largely unsold or usually unoccupied do not help reduce the upscale housing deficit. They are not targeted to be purchased by the creative/knowledge workers. To the contrary, they make it more difficult by absorbing desirable development sites and diverting investment funds and entrepreneurial talents from the construction of the more needed “normal” upscale units.

The situation in Seattle suggests there is some merit to my analysis. After Amazon shifted its office growth to Bellevue, 15,000 new jobs, the growth of housing costs in the city plateaued, though costs did not decline. Successful downtowns and their nearby neighborhoods may need to be sure that they, like the snake eating the bullfrog, have fully digested any large influx of highly paid workers so they can move on again to ingest more creative/knowledge workers.

Furthermore, this is perhaps the regional creative job growth path that other ailing successful cities should follow until their upscale housing deficits are sufficiently reduced.

Also, while the top down, trickle down approach may sound good to economic theorists, from a politician’s point of view it’s probably useless. It has no immediate concrete visibility. It’s more like mumbo jumbo economics for a whole lot of their voters. It takes too much time to produce real, observable affordable housing units on a sufficient scale.

ENDNOTES

1. Derek Thompson. “Why Manhattan’s Skyscrapers Are Empty.”   The Atlantic, January 16, 2020https://www.theatlantic.com/ideas/archive/2020/01/american-housing-has-gone-insane/605005/

2. Heather Mac Donald, “San Francisco, Hostage to the Homeless.” City Journal, Autumn 2019.https://www.city-journal.org/san-francisco-homelessness

3. Paul Levy. “Two-Handed Solutions,: Center City Digest. Winter 2019. https://centercityphila.org/uploads/attachments/ck3op2c300jze01qd29bjoghw-ccdigest-winter-2019-web-2.pdf

4. Natalie Sherman. “Why US tech giants are putting billions into housing.” BBC News, 17 November 2019, https://www.bbc.com/news/business-50295130

5. Mike Rosenberg  and Ángel González.   Thanks to Amazon, Seattle is now America’s biggest company town  Seattle Times. August 23, 2017 at 5:00 am Updated November 30, 2017https://www.seattletimes.com/business/amazon/thanks-to-amazon-seattle-is-now-americas-biggest-company-town/

6. ibid.

7. David McCabe, Erica Pandey, “Arlington sees housing boom before Amazon HQ2 even arrives AXIOS May 24, 2019 https://www.axios.com/arlington-virginia-sees-housing-boom-ahead-of-amazon-hq2-cf7bfffc-9ea7-4c76-ade4-b12355cbd463.html

8. Evan Mast, “The Effect of New Market-Rate Housing Construction on the Low-Income Housing Market.” Policy Brief. July 2019. W.E. Upjohn Institute. Pp 51. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3426103

9.  Liyi Liu, Doug McManus, and Elias Yannopoulos. “Geographic and Temporal Variation in Housing Filtering Rates.”    Freddie Mac, January 2020. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3527800

10. ibid.