Podcast
Questions and Answers
What percentage of people in the United States live in urban areas?
What percentage of people in the United States live in urban areas?
Which city has the highest office rent per square foot per year in 2022?
Which city has the highest office rent per square foot per year in 2022?
What is a key reason for high office rent in cities?
What is a key reason for high office rent in cities?
What is a common characteristic of cities in relation to economic activity?
What is a common characteristic of cities in relation to economic activity?
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Which factor is NOT mentioned as motivating for-profit firms to locate in cities?
Which factor is NOT mentioned as motivating for-profit firms to locate in cities?
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Which source discusses the relationship between cities and wages in 2001?
Which source discusses the relationship between cities and wages in 2001?
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What is one way cities can enhance productivity and profit?
What is one way cities can enhance productivity and profit?
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Why do companies prefer to be located in cities despite high costs?
Why do companies prefer to be located in cities despite high costs?
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What effect does having a retail anchor have on small retail firms?
What effect does having a retail anchor have on small retail firms?
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What is one key characteristic of own-industry anchor effects?
What is one key characteristic of own-industry anchor effects?
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How does the proximity of an anchor influence its attraction for small firms?
How does the proximity of an anchor influence its attraction for small firms?
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What does total transport costs consist of?
What does total transport costs consist of?
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Which of the following is true regarding small retail and finance firms?
Which of the following is true regarding small retail and finance firms?
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Which type of orientation do industries have that are located at the market?
Which type of orientation do industries have that are located at the market?
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What happens to the own-industry anchor effect across a street?
What happens to the own-industry anchor effect across a street?
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What happens to industry location if shipping costs are equal for inputs and products?
What happens to industry location if shipping costs are equal for inputs and products?
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What is meant by off-diagonal effects in this context?
What is meant by off-diagonal effects in this context?
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What can be said about the attraction to an anchor within the same industry?
What can be said about the attraction to an anchor within the same industry?
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Transportation cost oriented industries typically do not locate where?
Transportation cost oriented industries typically do not locate where?
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Which statement accurately describes the behavior of small finance firms?
Which statement accurately describes the behavior of small finance firms?
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Which of the following is an example of a Market Oriented industry?
Which of the following is an example of a Market Oriented industry?
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What kind of transportation costs are assumed in the previous analysis?
What kind of transportation costs are assumed in the previous analysis?
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In which scenario would an industry locate closer to the input source?
In which scenario would an industry locate closer to the input source?
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What is represented by the slope in the transportation cost context?
What is represented by the slope in the transportation cost context?
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What happens to the total distance traveled when moving away from the median location?
What happens to the total distance traveled when moving away from the median location?
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Which city would likely have a factory located to best serve its customers according to the Principle of Median Location?
Which city would likely have a factory located to best serve its customers according to the Principle of Median Location?
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What effect do median location cities have on their economic development?
What effect do median location cities have on their economic development?
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What indicates a market-oriented city according to the content?
What indicates a market-oriented city according to the content?
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Which of the following is a characteristic of large cities as mentioned in the content?
Which of the following is a characteristic of large cities as mentioned in the content?
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What is a potential result of cities forming around input sources?
What is a potential result of cities forming around input sources?
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What does 'internal economies of scale' refer to, based on the provided content?
What does 'internal economies of scale' refer to, based on the provided content?
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What implication is stated about countries with many small cities?
What implication is stated about countries with many small cities?
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How does substitution affect bid-rent as one moves closer to the city center?
How does substitution affect bid-rent as one moves closer to the city center?
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At what distance from the city center will bid-rent equal the values seen when all buildings are 4 floors in height?
At what distance from the city center will bid-rent equal the values seen when all buildings are 4 floors in height?
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What trend occurs as developers move further away from the city center?
What trend occurs as developers move further away from the city center?
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Why do developers choose to build taller buildings closer to the city center?
Why do developers choose to build taller buildings closer to the city center?
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What happens to bid-rent when there is a factor substitution between land and capital?
What happens to bid-rent when there is a factor substitution between land and capital?
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What is the relationship between building height and distance from the city center?
What is the relationship between building height and distance from the city center?
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What is the impact of land rent decline on construction decisions made by developers?
What is the impact of land rent decline on construction decisions made by developers?
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Which statement accurately reflects the status of bid-rent at x > 5?
Which statement accurately reflects the status of bid-rent at x > 5?
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Which market had the highest vacancy rate for office space in the 4th quarter of 2023?
Which market had the highest vacancy rate for office space in the 4th quarter of 2023?
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What was the vacancy rate for office space in Silicon Valley in the 4th quarter of 2023?
What was the vacancy rate for office space in Silicon Valley in the 4th quarter of 2023?
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Which city listed had a vacancy rate just above 20%?
Which city listed had a vacancy rate just above 20%?
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Identify the city with the lowest vacancy rate among the given options.
Identify the city with the lowest vacancy rate among the given options.
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What was the vacancy rate for office space in South Florida?
What was the vacancy rate for office space in South Florida?
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Which office market reported a vacancy rate of 18.1%?
Which office market reported a vacancy rate of 18.1%?
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Which market's vacancy rate was closest to 15%?
Which market's vacancy rate was closest to 15%?
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Which office market had a vacancy rate of 21.6%?
Which office market had a vacancy rate of 21.6%?
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Which of the following markets had a vacancy rate exceeding 30%?
Which of the following markets had a vacancy rate exceeding 30%?
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Which city had a vacancy rate of 18.4%?
Which city had a vacancy rate of 18.4%?
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Which market demonstrates a vacancy rate closest to 25%?
Which market demonstrates a vacancy rate closest to 25%?
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What was the office vacancy rate for Austin?
What was the office vacancy rate for Austin?
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Out of the cities listed, which one had a vacancy rate of 12.7%?
Out of the cities listed, which one had a vacancy rate of 12.7%?
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Which market had a vacancy rate of 30% or lower?
Which market had a vacancy rate of 30% or lower?
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Study Notes
Module 4: Why is Development Spatially Concentrated?
- Urbanization trends are a factor contributing to spatially concentrated development.
- Scale economies and transport costs influence where development occurs.
- Proximity within commercial and industrial real estate leads to concentrated development.
Variation in Real Estate Demand Across Cities and Neighborhoods
- Part 4-A: Urbanization trends play a role.
- Part 4-B: Scale economies and transport costs are key factors.
- Part 4-C: Proximity in commercial and industrial real estate is a factor.
The Paradox of Urbanization and the Future of Urban Real Estate Markets
- Despite declines in moving costs and communication technology, cities remain important to the global economy.
- The effects of COVID-19 on remote work affect cities and commercial real estate.
- Whether downtown real estate is a good investment now depends on ongoing trends.
The Decline of Costs of Moving Goods
- The cost of moving goods has decreased significantly over time, particularly since the late 1800s.
- Graph visually demonstrates the decline in railroad revenue per ton mile over the years.
Until Recently - About 100 Years Ago - Cities Were Unhealthy Places
- Survival rates in 19th century cities were lower in larger cities as compared to smaller cities.
- The penalty of mortality associated with living in cities began to diminish by 1940 as better sanitation emerged.
Sewer Systems and Clean Water Lower Urban Mortality Rates - Contributing to Urban Growth
- Sanitation improvements led to sharply decreased mortality rates in 19th century New York City, which subsequently fueled urban growth.
- A graph illustrates the timeline of New York City's mortality rate, showing a sharp and consistent decline over the 19th century.
- The improvement in sanitation is directly attributed to the introduction of sewer systems and clean water.
Urban Areas Are Booming
- Skyscrapers indicate the booming popularity of urban areas.
- A visual presentation of the tallest buildings in the world highlights the growth of urbanization.
Urbanization Has Become the Norm
- Economic activity is increasingly concentrated in cities.
- China's cities have experienced significant growth.
- Globally, 61% of the population in 2020 lived in cities.
- A chart depicts data on urban population percentages from 1980 onward.
Urbanization is Still Increasing
- Urban growth is prevalent across almost every region of the world.
- A graphic comparison illustrates how urban populations have grown in various regions.
Higher Income Countries Are More Heavily Urbanized
- A chart shows the relationship between gross national income per capita and percentage of urban population in different countries in 2018.
The Urbanization Gap Between High- and Lower-Income Countries is Narrowing
- A graph illustrates the difference in the urban population percentages of high-income, upper-middle income, lower-middle income, and low-income countries in the period 1950–2050.
Where Are the Most Heavily Urbanized Areas?
- A map identifies regions (countries) of dense urban populations in 2018.
The World has Been Experiencing a Boom in Tall Building Construction
- A notable increase is occurring in tall building constructions, as reported by the Council on Tall Buildings and Urban Habitat (CTBUH).
- Chart illustrates a rise in the number of tall building completions since 1980.
Among Tall Buildings, Mixed Use is Becoming More Common
- A chart depicts the growth of mixed-use structures in the top 100 tallest buildings.
Most People in the United States Live in Cities
- Over 80 percent of the U.S. population lives in urban areas.
- Cities occupy only about two percent of the land area.
- Questions about reasons for economic concentration in urban areas.
Cities Have High Office Rents
- Large global cities have very high office rents.
- Data charts the office rent values in top global cities.
Cities Also Have High Wages
- A graph shows the relationship between city size and average wages.
- There is a strong correlation between city population and wages.
Cities Are Expensive Places to Do Business
- For-profit firms locate in cities despite high space and labor costs.
- Cities must provide valuable characteristics to justify high costs.
- This high demand creates high desirability of city center office space.
Why Are Cities Productive Places?
- City productivity is tied to their capacity to attract new businesses and enhance their productivity.
- Cities serve as crucial hubs for business and economic operations.
Why Would Households Put Up with the Cost of Living in Cities?
- High levels of congestion, crime, pollution, and crowding together exist in city environments.
- High real wages in specific cities compensate for unfavorable characteristics.
- High amenity appeal to households is also a substantial aspect of city living.
Where Do Industries and Companies Choose to Locate?
- Export industries, particularly manufacturing, have a strong tendency to concentrate in specific locations.
- Specific factors, e.g., proximity to transportation corridors, and local features affect location choice.
Wine Production is Concentrated in Select Locations
- California and the Finger Lakes region have ideal growing conditions for grapes.
- The fragility of grapes drives producers to concentrate near where grapes are grown so that wine is produced nearby.
Computer Software Development is Concentrated in Select Locations
- Computer software development companies cluster in specific locations (Seattle, Silicon Valley, Boston Route 128, Austin, Texas, Salt Lake Utah).
Carpet Production is Concentrated in Dalton, Georgia
- Dalton, Georgia is the world center of carpet manufacturing/production.
- The historical aspects of carpet making, including relevant factors for producers and consumers drives specialization to this location.
Furniture Production is Concentrated in High Point, North Carolina
- High Point, North Carolina is a world hub for furniture manufacturing/production.
- The historical context, including factors driving companies to locate in this region, affects spatial characteristics.
Where Will Entrepreneurs Locate Their Companies?
- Two crucial questions are: Why do firms in a single industry tend to cluster together? And, where and why do industry clusters locate?
Industry Clusters
- Two primary factors cause firms in a single industry to cluster together : Transportation costs and natural advantages; Agglomeration economies (external economies of scale).
Where Do Industry Clusters Locate? (Production Cost Oriented)
- Location decisions are heavily influenced by factors like labor costs and input costs.
Where Do Industry Clusters Locate? (Transportation Cost Oriented)
- Shipping costs influence company decisions on where to locate to minimize transportation costs and maximize efficiency.
Transportation Cost Oriented Industries
- Firms should consider the cost of shipping inputs and output, and they may locate at the input source, the market, or somewhere between the input source and market to optimize the costs.
- Companies consider various factors to ascertain the most suitable location to minimize combined shipping costs.
Transportation Cost Oriented Industries
- Shipping costs across multiple input sources and markets affect company location decisions.
- Optimal location is the point that minimizes the accumulated distance from all related sources and destinations.
- The median location (point) minimizes the sum of the distances.
Implications: Different Types of Cities
- Resource orientation → Cities built around input sources (fishing villages, lumber towns, mining towns).
- Market orientation → Regional and national market centers (New York, Chicago, Los Angeles).
Implications: Many Small Cities and Few Very Large Cities
- Median location cities attract more companies, becoming larger compared to other cities nearby.
- Large cities tend to have a diverse array of industries.
Large Cities Have Diverse Economies
- Higher per-capita demand in large cities allow for more diverse economies, from, e.g., gas stations, to specialized hospitals.
- The diversity of enterprises in large cities leads to valuable agglomeration economies.
Large Cities Have Diverse Economies
- Economies of scale and diverse needs lead to the presence of multiple industries in large cities.
Large Cities Have Diverse Economies
- Economies of scale in certain industries are the driving mechanisms behind their presence.
- If economies of scale require a large population (low per-capita demands) only a single, big business will emerge, versus many smaller enterprises in a larger city.
Large Cities Have Diverse Economies
- Diversity in large cities leads to positive productivity spillovers that further encourage economic activities.
How Does the Declining Importance of Transport Costs Affect Where Industries Locate and Cities Form?
- Reduced shipping costs impact location choices, with firms being less sensitive to costs associated with shipping materials or people.
- Industries are becoming less tied to locations on the basis of physical shipping.
- Transport costs are no longer the predominant factor in shaping location decisions.
How Does the Declining Importance of Transport Costs Affect Where Industries Locate and Cities Form?
- Firms tend to locate where labor costs are cheaper and wages are higher.
- Wage differences should diminish across regions as local supply and demands for labor shift and change.
Regional Convergence in the Cost of Labor
- Wage convergence is a significant theme in the dynamic relationship between labor costs and regional development in the U.S.
- High wages should eventually converge with lower wages as labor relocates from places with lower wages to higher wages across different regions of the country.
Regional Convergence in the Cost of Labor
- An image depicts the trend of wage convergence across geographical locations in the U.S.
What Will Determine Industry Locations in the Future?
- With reduced transport costs, industrial locations become less sensitive to shipping costs and regional wage differences.
- The continued importance of transport hubs is notable, particularly harbors and major airports.
- Local amenities and worker preferences for location may become a more important factor in locating new businesses.
How Close Does Your Company Need to Be to Benefit from Nearby Economic Activity?
- Locating in proximity to other companies, (i.e., firms that deliver similar commodities) is a key factor in the productivity and profitability of manufacturing, retail, business services, and technological industries.
- Distance from other firms or similar economic activity may contribute less to the profitability and output of industries like agriculture.
The Focus in These Slides and the Following Slide Deck
- The material in this deck focuses on how quickly agglomeration economies diminish with distance between companies, especially for production-cost-oriented industries.
- These industries place a high premium on factors such as low-labor cost and close access to raw materials.
Geographic Scope and Attenuation of Spillovers
- Studies on agglomeration's geographic scope and attenuation and highlight areas such as region, metropolitan level, and neighborhood level studies that are related to attenuation (e.g., transport costs).
Geographic Scope and Attenuation of Spillovers
- Research about the impact of state-level policies and proximity to medical services on health outcomes as it pertains to area-level agglomeration.
- Examination of the effect of high-technology clusters on the productivity of top inventors across various metropolitan areas (MSAs).
- Study of agglomeration of R&D across various MSAs.
- The impact of the Carnegie Libraries across various neighborhoods and the innovative activities that occurred as a result.
- Evidence focusing on the extent of investment in higher education (related to spillover effects).
- Study of attenuation of human capital spillovers.
- Studies that cover neighborhood-level agglomeration with geographic scope.
- Studies that explore the economic scope of density on business and residential activity.
Geographic Scope and Attenuation of Spillovers
- A neighborhood-level study exploring agglomeration, industrial organization, and the implications for the economic activity of Chinese manufacturing firms.
- Studies considering the economic factors of business density based on the Berlin Wall.
- Exploration of the geography of entrepreneurship and its related economic, spatial impacts across metropolitan areas.
Geographic Scope and Attenuation of Spillovers
- Agglomeration economies and the built environment from specialized buildings and anchor tenants.
- Employment density and spillovers in tall buildings.
- Peer effects that exist within office and team environments at a building-level.
- Studies on sorting and agglomeration economies in French departments; and peer-to-peer effects in grocery stores.
Consider Some Stylized Facts
- Regional employment is highly concentrated in certain urban areas.
- Image shows the geography of regional employment for a selected region of the U.S.
Employment is More Concentrated Than Productivity
- A substantial amount of employment is spatially concentrated in larger urban areas even though productivity is not as concentrated relative to these locations.
- A city's population size is often a strong and significant factor that is correlated with higher productivity and wages.
Why is Employment More Spatially Concentrated Than Productivity?
- Competitive markets lead to firms clustering in locations with advantageous characteristics.
- This reinforces spatial variation in demand for real estate.
Don't Forget, Cities Are Expensive Places
- Doubling a zipcode's employment will increase the commercial rent by roughly 10.5%.
- Doubling nearby employment will increase wages by 2 to 5%.
Cities Have High Office Rents
- Top global cities have historically boasted very high office lease/rent costs.
Why Would Firms Locate Where the Cost of Space and Labor Is So High?
- To maintain profitability and output amid high cost and labor, firms must be unusually productive in their location to justify these costs.
- Entrepreneurs consider various factors in choosing a high-cost location.
Why Are Cities Unusually Productive?
- Local natural advantages help improve productivity, e.g., proximity to transportation corridors, skilled workers, and amenities.
- The clustering of skilled workers and talented individuals in large urban areas enhances their productivity, as does easy interaction with one another.
- The density of workers within cities may improve overall productivity.
Policy Options for How to Make a City More Productive
- Policies encouraging high-skill worker migration in urban areas may create highly productive cities.
- Local zoning laws that encourage the clustering of particular types of firms together in urban environments can effectively enhance productivity.
Hard to Measure Causal Productivity Spillovers from Cities
- Determining causal effects of density and urban locations on individual productivity is a challenge.
What will Determine Industry Locations in the Future?
- Reduced transport costs will increasingly favor worker and firm locational flexibility in a changing economy.
- Strong transport hubs, including harbors, major airports, and other logistical facilities may still be important to specific industries.
What Will Determine Industry Locations in the Future?
- Amenities, e.g., sunshine, weather, scenic views will play an increasingly important aspect in attracting workers.
The Spatial Reach of Agglomeration Economies
- How close geographically must firms be in order to benefit from agglomeration economies?
The Focus in These Slides and the Following Slide Deck
- The focus is now on how quickly agglomeration economies diminish with distance between companies, especially in production industries.
Geographic Scope and Attenuation of Spillovers
- The geographically relevant scope in economic studies of various types of spillovers, e.g., effects of state policy and proximity to medical services on health outcomes; high-technology clusters on the productivity of top inventors; and agglomeration of various types of R&D labs.
Geographic Scope and Attenuation of Spillovers
- Economic scope of density of business and residential activity at various spatial levels; the impact of the Berlin Wall; and geographic studies of entrepreneurship.
Geographic Scope and Attenuation of Spillovers
- Evidence across buildings on the topic of agglomeration economies and the built environment, including specialized buildings and anchor tenants.
- Related studies on employment density in tall buildings and peer effects within office and team settings.
Why Mix Anchor and Non-Anchor Tenants in a Building?
- Anchor establishments attract other companies in their own industry.
- Small companies will often choose to rent in a space (building) that has strong anchors as they pay a higher desirability premium. This may lead to a rent discount for the anchor firm.
Why Mix Anchor and Non-Anchor Tenants in a Building?
- Managers of commercial buildings balance the profitability aspect of having a large anchor present (high desirability premium) against the revenue loss from other tenant displacement.
Adjusting Tenant Mix to Maximize Returns
- The return from additional Type H tenants is usually greater than the return from additional Type L tenants.
- This maximizes profit!
To Confirm That Anchors Attract Other Companies
- We evaluate if the presence of an anchor tenant skews a building's tenant mix to the anchor's industry.
To Measure the Degree to which Anchors Attract Other Companies
- We evaluate several factors, e.g., the presence of an anchor in the building itself or in buildings on the same street, within the same city block, to capture the effect on surrounding tenants.
To Answer These Questions, We Use Various Statistical Methods
- Various regression analyses are considered to measure the effect of the presence of an anchor on tenants in the same building, and in buildings on the same block or street.
No Single Way to Define an Anchor Tenant
- Firm size is a key factor to categorize an establishment as an anchor.
Main Results: Anchors Attract Smaller Companies Primarily in Their Own Industry
- The presence of an anchor tenant in a building is associated with an increase in the share of smaller employment firms in the same industry.
Main Diagonal (Blue) is the Own-Industry Anchor Effect
- The main diagonal on a graph illustrating the anchor effect is directly related to the amount of attraction for like-industries.
Off-Diagonal (Gold) is the Other-Industry Anchor Effect
- The off-diagonal portion represents the industry-independent attraction/influence of the anchor on other unrelated industries within the building and its surroundings
Main Results: Attraction to an Anchor in Your Company's Industry Attenuates Rapidly
- Attract nearby organizations / firms in the same industry as the anchor within the same building, but the attraction falls quickly as one moves further away from the anchor building.
Main Results: Robust to Alternate Specifications
- The results that anchor firms attract similar firms are robust / consistent across different testing criteria, including the building's location, physical characteristics, and other buildings located in the same area.
Implications
- In the commercial sector, a tenant mixture is important.
- Within-industry productivity spillovers are relevant aspects of productivity.
- Managing an optimal tenant mix can enhance building value through higher rents and overall urban productivity.
Summary: Viability of Filtering
- Filtering is important for creating affordable housing, particularly when real house price inflation is relatively modest.
- Supporting voucher-type programs may be a preferred strategy where real home prices are increasing rapidly.
Three Types of Government Low-Income Housing Support
- Rent control—government restrictions on rent.
- Person-based vouchers—government paying a portion of the tenant's rent to be paid to landlords.
- Place-based subsidized construction— government subsidizing the construction of low-income housing projects.
Rent Control
- Outcomes arise from imposed price ceilings above or below the equilibrium price.
- Outcomes vary between non-binding prices (price ceiling set above market price) and binding housing prices (price ceiling set below market price). Binding price leads to a shortage.
Vouchers
- Voucher beneficiaries find affordable housing through the private market, via the market processes, instead of through a program directly setting housing and rent prices.
- The government pays a portion of the rent, thus impacting the housing market.
Subsidized Construction of Low-Income Housing
- The LIHTC program is the dominant source in the U.S. for the subsidized development of affordable housing.
- This program uses a "supply side" approach to create affordable housing for low-income households (as opposed to direct pricing controls).
- The success of such projects requires long-term commitment / subsidy from the government to ensure a housing supply for appropriate population.
Which Type of Housing Program Is Best?
- Rent control as housing policy is widely characterized as bad policy, but voucher payments and place-based subsidies are more debatable.
What Takes Place Within Tall Buildings
- Firms and other types of establishments sort vertically to maximize their profit and productivity via a variety of mechanisms.
- The access to street level and view amenities can directly impact companies' desires to be located in a specific part of the building.
Data Used to See Inside Tall Commercial Buildings
- OM: confidential offering memoranda from large commercial buildings.
- CS: commercial rent data from large commercial buildings.
- D&B: establishment-level data from large commercial buildings.
Data for the Analysis
- Many sources of data (e.g., confidential offering memorandums, commercial rent databases, establishment-level databases) are used to track commercial sectors in a wide range of US cities.
Summary Statistics on Rent and Building Height
- Several basic characteristics of rent and building height from several datasets are summarized in the data tables.
- Summaries of rent, rent percentiles, median height, percentages above some fixed height, are displayed in charts.
Vertical vs. Horizontal Rent Patterns: Interpretation?
- Vertical rent patterns are driven by competition / tension between street access and height-based amenities.
- Horizontal rent patterns are driven by factors that depend on the economic context (economic productivity, natural advantages, local government factors that impact development).
Evidence from Recent Research
- Recent literature provides evidence regarding the spatial structure of rent and employment patterns within cities to further emphasize the relationship among the building height, rent, and employment issues.
Findings: The Vertical Rent Gradient
- Rent generally diminishes with distance from street level in large commercial buildings.
Findings: Vertical Spatial Structure
- Retail establishments frequently occupy the ground level due to their access to customers.
- On the other hand, law firms and other higher productivity businesses often occupy higher floors to leverage the benefit of height/view amenities.
Evidence of Agglomeration Economies
- Doubling the employment in a zipcode usually increases commercial rent by 10%.
- Within-building employment has a much greater impact on rent than zipcode employment.
References
- References to relevant studies, articles, and papers are discussed that support the material included in the slide deck.
What if Firms and Households Have Different Preferences for Where to Locate?
- The variation in preferences between firms and households when choosing a location affects the nominal wage, the real estate values of land and homes, and the commercial lease rates.
Two Primary Questions
- How much do households value amenities in a specific city?
- How much do firms value business attributes in a specific city?
Mobility and Migration Are Sensitive to Differences in QH and QB Across Cities
- Families are mobile and migrate to locations that offer better amenities or a better cost of living, or both.
- Climate change is causing a relocation of people to higher ground than used to be the case.
- A diverse job market is an important driver toward urban areas.
Migration Affects Local Real Estate Markets
- Developers take account of potential migration and adjust their estimations when determining what is needed in a particular location across many cities.
Consider a Group of Cities Across Which Households and Firms Choose Locations
- For a spatial equilibrium in a collection of cities to exist, all firms (or companies in similar industries) must have roughly equal expected profits regardless of their location.
Consider a Group of Cities
- If firms and households' location choices are not identical, firms will gravitate to more profitable cities, and households will gravitate to more desirable places.
- If enough time (long run equilibrium) markets will adjust such that consistent equilibrium wage and rent prices exist and are locally consistent in each particular locale.
We'll Use Syracuse and Boston as an Example
- We use a comparative analysis of two cities to explore differences in housing market conditions driven by location preferences.
Equilibrium Wage and Land Rents in a System of Cities
- The equilibrium between wages and real estate prices will be observed where the iso-profit functions for firms and the iso-utility functions for households intersect.
Suppose Boston is More Attractive to Firms But Households Like Attributes of Boston and Syracuse Equally
- If firms value Boston substantially more than Syracuse, the firms' iso-profit function in Boston would shift favorably relative to the iso-profit function for Syracuse.
Suppose Boston Amenities Are Also More Attractive To Households. How Would the Iso-Utility Function Shift?
-If desirable amenities are substantial in Boston, preferences among households would incline toward Boston.
Measuring QH and QB
- Quality of life (QH) can be measured by the real wage households would give up to live in a particular location (taking account of the local cost of living).
- Quality of the business environment (QB) is the increase in input costs that firms would be willing to pay to add another worker to their operation given a site.
- This gives some indication of the relative attractiveness (or cost of living) in a particular locale / city.
Data Used to Measure QH and QB 1970-2000
- Data used to measure quality of life and quality of business environments for various geographical areas within the US across various decades.
Correlation Between QH and QB Across Decades
- Correlation coefficients of the quality-of-life and quality-of-business-environment measures (QH and QB) for a cross-section of metropolitan Statistical areas (MSAs) across various decades in the US provides a further measure of how the overall attractiveness of a place among workers can differ than its attractiveness among companies in different industries.
Top 25 QH Locations
- Results are displayed in a table in a top-25 ranking across various US locales, showing which are most attractive for households.
- These tables show the geographical variation across the U.S.
Bottom 25 QH Locations
- Results are displayed in a table in a bottom-25 ranking across various US locales, showing which are less attractive for households.
How Does Syracuse Compare Among 346 Locations?
- Statistical data for Syracuse is analyzed to determine its relative standing among the other study locations across different attributes like quality of life and quality of business environment.
Summary: Where Do Firms and Households Want to Locate?
- Households tend to prefer non-metropolitan or warm coastal locales.
- Firms tend to locate in large, growing metropolitan areas.
Work from Home (WFH) and Urban Real Estate Markets
- Analyzing the impact of work-from-home on local and inter-city patterns among various attributes within urban settings.
COVID-19 Accelerated Work From Home (WFH)
- WFH is associated with the COVID-19 pandemic.
- WFH patterns are not the same in all geographical areas.
- WFH patterns vary greatly among different professions and economic classes.
WFH Is More Common Among High-Skill Workers
- This research explores the differences in work-from-home patterns among different industries and economic groups.
WFH Is More Common Among High-Skill Workers
- The fraction of jobs that can be done remotely is considerably higher in high-skill professions and other industries.
- High-skill workers in certain industries are more likely to utilize WFH opportunities.
Share of Jobs That Can Be Done at Home by CBSA
- A map portraying the distribution of WFH activities across various cities.
- The spatial concentrations are largely in the Northeast and western coastal areas of the United States.
Share of Jobs That Can Be Done at Home by Metro Area
- Data in table format for various metropolitan areas within the US.
- Shows the percent of positions eligible to be filled remotely by various business type or industry and sector.
Share of Jobs That Can Be Done at Home by Country
- Analysis that compares the percentage of jobs by country.
- A scatterplot shows the relationship of GDP per capita and the share of employment jobs that can be performed remotely for a variety of countries.
Share Who Started Work from Home Due to COVID-19
- Graph displays how many of those surveyed or identified indicated to have started working from home due to the COVID-19 pandemic and its effect on their respective countries.
Intercity Spatial Equilibrium With a Mix of Fully Remote and in-Office Workers
- Analyzing the interplay between low and high amenity cities and similar productivity.
- The spatial equilibrium model considers a mix of both types of employment in cities with similar productivity.
Intercity Spatial Equilibrium With a Mix of Fully Remote and in-Office Workers
- Considering the relative attractiveness of similar cities by different worker types in regards to productivity and amenities and their impact on labor, costs, business environment, wages, and rents.
Estimates from Brueckner et al (2023)
- Between-city effects of WFH suggests downward pressure on housing prices in productive cities with high-income housing in the CBD.
- WFH changes could encourage out-migration from high-amenity / low-cost cities, while increasing housing values in high-amenity low-cost cities.
Intracity Effects of Partial WFH Workers
- Commuting and transportation are affected as a proportion of workers do some or most of their work from home.
- This can have a downward impact on the rent premium in cities that experience a large shift towards WFH workers.
Intercity Effects of Partial WFH
- Partial WFH impacts commuting costs for high-income workers.
- Limited impact on lower-income workers since their commute costs are already low in many locations.
- The impact of partial WFH could change the patterns among high-income and low-income neighborhoods in areas with high WFH potential.
Intracity Effects of Partial WFH
- Impacts on commuting costs will vary for businesses.
- Some areas may experience significant commuting cost reductions, and these could impact intra-city local housing bid-rent functions.
AMM Sorting of High and Low Income with WFH
- With WFH, the premium for living and/or working in high amenity areas may be weaker in the future.
AMM Sorting of High and Low Income with WFH
- Households' willingness to pay for higher wages relative to the cost of living or commuting costs can change as a consequence of WFH.
- The equilibrium locations for high and low-income workers shift as a consequence of the WFH trends.
AMM Sorting of High and Low Income with WFH
- Home prices change in different patterns (i.e., slower or faster than typical) and these are related to the factors mentioned earlier.
Estimates from Brueckner et al (2023)
- Intra-city effects of WFH tend to flatten intra-city house-price gradients, potentially weakening the price premium for being close to CBD jobs.
What Happens as Demand for Central City Commercial Space Declines Because of WFH?
- The implications of WFH and the related decline in demand for central-city commercial office space.
Commercial Rent Gradients in Cities
- Rent patterns and their relationship to access to public transit (e.g., subway stops).
- Rent declines may be affected by differences in the use of public transit.
- Rent pattern changes in a period of rapid migration (as may be associated with a pandemic like COVID-19) affect the overall demand for space and rents in cities.
Commercial Rent Gradients in Cities
- Patterns in rent are analyzed for a variety of cities (transit cities versus others, such as car cities) to better understand how they relate to accessibility to transit and other attributes.
- A period of COVID-19 affects rent/price gradients in areas with strong transit versus those with few transit stops.
Commercial Rent Gradients in Cities
- Rent premiums relative to proximity to rapid transit are reduced by COVID-19.
- Significant changes in rent patterns within three miles of transit stops are observed, in some cases as far away as 1/2 mile from transit stops (a 15-minute walk).
- The trends noted are consistent with the ideas presented here so far about how amenities (in this case, access to transit) affect real estate values, rent patterns, and overall local economic activities in geographical space.
Rent premium for proximity to a transit station
- A graph showing the change in rent premiums relative to distance from a transit station before and during the period of COVID-19.
WFH Will Change Real Estate Markets
- The impact of WFH on commercial and residential bid-rents from various spatial locations.
- The trends are dependent on the local preferences and amenities for locations.
WFH Will Also Change Patterns Within Cities
- The effect of WFH on central-city presence and a shift in demand of commercial establishments or higher income housing.
- The effect of WFH on the concentration of low-income housing, possibly shifting out from central cities.
Summary: Where Do Firms and Households Want to Locate?
- Households tend to prefer non-metropolitan areas or warm coastal locations.
- Firms tend to concentrate in larger metropolitan areas/centers.
Two Events Will Transform Syracuse
- Rt 81 highway to be removed through portion of downtown.
- Micron Technology is planning to invest in massive semiconductor chip plant.
Syracuse
- Economic history includes its location within the American "rust belt."
- A number of significant employers and firms left Syracuse in the past 25 years.
- Syracuse University and Lockheed Martin are important employers/employers in the area today.
Syracuse
- A change of location of a major industry in the area may impact the local housing/property markets in Syracuse.
- The area around the MOST and Armory Square has gentrified somewhat along with the rest of downtown.
Two Events Will Transform Syracuse
- The implications of removing Rt 81 (highway) and the Micron plant in Clay, NY on local communities and real estate markets must account for the potential for gentrification, relocation of income classes, business impacts, and local infrastructure shifts, and labor supply / demand effects.
Two Events Will Transform Syracuse
- The combination / interplay between the governmental and private sector decisions to establish a new large-scale industrial employer (Micron) in a location outside of the city's central business district (CBD) may cause various types of shifts in the local housing and real estate markets, affecting various demographics and income levels in the region.
Two Events Will Transform Syracuse
- The implications of these events requires considering factors including how these trends affect the economy, legal issues, social and economic history, and issues of supply and demand in different locations.
Appendix: References for Materials in This Slide Packet
- Relevant research papers with authors, dates, and journals or sources help establish the basis for understanding the various topics in the slide packet on transforming Syracuse.
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Test your knowledge on urban economics with this quiz focusing on factors influencing cities and office rents. Explore the relationship between urban locations and economic productivity, and the dynamics of small retail firms. Challenge yourself with questions about demographic statistics, industry motivations, and market orientations.
