Boom-bust cycles. They’re occurring more frequently than ever. The most notorious ones impact financial markets, but they also impact nations, healthcare, food, energy, education, technology and many other areas as well. Vikram Mansharamani, the bestselling author of Boombustology, is expert at helping audiences recognize and manage the risk of “bubble trouble.” He steps back from complex market dynamics and uses a multiple-lens framework to look at disparate data to provide actionable insights and indispensable information. Vikram wrote the column below on America’s flourishing cities:
The dominant housing story of the last century was an exodus of those with means from cities to suburbs. The American Dream consisted of a white-picket fence around a private yard, 2.4 children in the home, and a nice car or two. Today, the Dream is changing. Sure, the suburbs still offer a great deal, but there’s a powerful countertrend that is increasingly hard to ignore: a renaissance in cities, as they draw empty nesters and young professionals alike to a vibrant urban lifestyle.
According to FiveThirtyEight.com, over 250,000 people reach retirement age in the United States every month. And although the share of baby boomers living in urban areas has decreased since 2000 on an aggregate basis, an important subset of empty nesters is flocking back to choice American cities.
Take Boston, for example. According to realtor.com, the northeastern city is the most in-demand urban destination for buyers between the ages of 65 and 74, a range that includes the oldest five years of boomers. That demographic is buying more homes overall than every segment besides Millennials and Generation X, and Beantown is their first choice among cities. Some former suburbanites have even formed ‘expat’ groups, according to the Boston Globe. Incidentally, this dynamic risks pushing suburban real estate prices down as the number of homes for sale rises. Indeed, in 2016, suburban home prices have been weak, while Boston real estate values have surged.
But it’s not just about retirees flocking to cities. Young professionals are also increasingly working and living downtown, drawn by exciting employment opportunities. Between 2010 and 2014, half of new business growth in the US came from 20 urban counties, and half of all job growth in that period came from 73 counties. And according to a recent Wall Street Journal story, one factor behind the Beantown boom has been an influx of people choosing to live in the city. Between 2010 and 2014, for instance, the population of Boston grew by 6%, double the national rate.
Many of America’s best-performing cities are, unsurprisingly, science and tech hubs: the usual suspects like San Francisco, New York, and Seattle, but also lesser known ones like Raleigh. It’s not just science and tech, though—just look to the Lone Star State. Despite the drop in oil prices, Austin and Dallas have enjoyed resilient economies fueled not just by high-tech industry, but also festivals, logistics, financial services, and a general business-friendly environment.
This urban renaissance has generated a strong real estate market in America’s boom towns. Rents have risen and prices are increasing. In 2011, high-end urban apartment rent growth peaked at 8% per year and remains well north of inflation. Rental increases are higher for large, in-demand cities like New York, Boston, and San Francisco—and even higher for the most expensive units within these markets.
I worry about the sustainability of these dynamics, in large part because when markets work well, higher prices stimulate supply. And that’s exactly what we’re seeing in many cities. According to the Wall Street Journal, “In 25 of the largest U.S. cities, multifamily permits in urban areas were up 39% in 2015 compared with a year earlier.” Major cities like New York, Philadelphia, and Boston are all expecting housing supply growth between 2 and 3 times the historical average in the next year. Although demand in these cities is robust, it’s nevertheless worth watching to see if today’s boom turns into tomorrow’s bust.
The most recent issue of Worth magazine highlighted some of the cities that have benefited from—and actively helped to stimulate—the urban boom. Worth’s selection of dynamic American cities includes San Diego, Dallas, Charleston, Nashville, New Orleans, San Francisco, and New York, among others. What unites these cities? AsWorth editor Richard Bradley summarized, successful cities have used effective public policy to make downtowns both livable and business-friendly, while embracing existing assets—like Nashville’s music scene or San Diego’s science infrastructure.
Yet the cities that Worth profiled are not homogenous. They’re each vibrant in their own ways. San Diego, for example, has ample human capital, support for startups, and a commitment to infrastructure investment. Dallas has transformed into a booming cultural center. Charleston, home to an important port, has attracted global manufacturers without losing its historic charm. To Worth’s list I’d add Boston, whose Seaport District alone has managed to attract everything from tech startups to General Electric in recent years.
Unfortunately, an influx of wealthy young people tends to make attractive cities like these less affordable. So what’s the best way to sustain the urban renaissance? New construction—via relaxed zoning restrictions—may be a partial solution. For this reason, as Matthew Yglesias put it, “the elevator could be the next great disruptive technology.” Increasing density can push down prices without generating sprawl.
But just as technology could bolster the urban renaissance, it could also endanger it. The Wall Street Journal’s Christopher Mims suggests that the rise of self-driving cars might take the new urban enthusiasts to the suburbs. It’s not hard to imagine young affluent Millennials being wooed by futuristic vehicles conveniently escorting them to and from the spacious suburbs.
For now, as noted by Worth’s Bradley, “we are living in a golden era of American cities.” And the trends don’t show signs of reversing. Boston, for instance, is expecting 90,000 new residents in the next 14 years. Especially in this time of general global instability, with Brexit, choppy asset markets, and falling commodities prices increasing fear across the board, there are some things worth celebrating. The flourishing of our cities is one of them.
Vikram Mansharamani/July, 2016