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The Next Silicon Valley? Part Three
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August 31, 2006
How To Prepare For The Property Bubble
Posted by Joel Kotkin at 2:39 PM
All but the most stubborn optimist knows that the property bubble of the 2000s is now deflating. This is a cause for concern for just about everyone since so much of our economy - roughly one in four jobs since 2003 --- has come from housing related employment.
But as in any downturn there are greater and lesser losers. My take is that the biggest downturns will be felt in those areas with the highest concentration of high-end houses, the biggest percentage of speculators and second home buyers. I'd watch out for overhyped markets like downtowns, such as in Los Angeles, where there has been a lot of new construction but a continued erosion of jobs. In 1995 624,000 people worked downtown, according to the LA Economic Development Corporation. Today there are 445,000. Even in the last fhree years, when almost everywhere else in the region was gaining employment, the trend is negative.
LA is not unique. Other hyper-inflated markets with poor job growth include central Philadelphia, Chicago and Miami, all much celebrated centers of condomania. Almost every day or so you hear of projects being pulled or delayed. Expect more.
The suburbs won't be immune, of course. Large new developments of single family homes are being quietly put aside for the time being, according to industry sources. The impacts may be severe in some of the fastest growing markets like Phoenix, Reno and Las Vegas.
So whose safest? I would argue places where prices are somewhat reasonable like Dallas and Houston. I would also focus on areas where there are new jobs being created. People with jobs, and families, are less likely to pull up stakes and leave a mortgage behind than short-term flippers or nomadic second home buyers.
This is why I would look for growth in markets -- say in Great Plains, Texas and even parts of the southwest -- where prices are moderate and job growth is taking place. For the red-hot stars of condomania, it will be a time of readjustment, but with a possible silver lining. As speculators and developers are forced to price their units down, perhaps there will be new housing opportunities for mid-income workers and families. That would be a welcome development indeed for employers, particularly in the big cities on both coasts,who have had trouble attracting or retaining middle class, middle aged workers.
August 24, 2006
What About the Diaspora?
Posted by Joel Kotkin at 12:27 PM
One critical part of the post-Katrina debate should be on the half-million or so people still living in exile, many of them former residents of New Orleans. In discussing this with evacuees in Houston, the largest diaspora city, I have found many of those are beginning to realize that their best hopes lie elsewhere.
Some of the reasons lie with what New Orleans is now likely to become. Many are skeptical about rebuilding plans that seem not to be focusing on working class or even middle class African Americans, except, of course, for those who happen to musicians or artists.
Indeed, rather than seeking to diversify the economy and create new entrepreneurial opportunities, most current plans for New Orleans reconstruction seem focused mainly on reemphasizing the city’s role as a touristic center and a lure to upper-class, affluent whites. There has been little talk of reviving the port, trade, and industrial functions that might offer high-wage positions for local residents.
Continue reading "What About the Diaspora?"
August 17, 2006
A Future for San Francisco
Posted by Joel Kotkin at 9:15 AM
For years, my take on San Francisco has been less enthusiastic than many who hold it up as an information-age
role model. This is based on many factors -- its extremely high costs, anti-business politics -- that have driven away many businesses, large and small, and almost wiped out the city's middle class families. Most of all San Francisco has a dismal record of job creation; according to the most recent Inc. "best places" issue, the city ranked a dismal #358 out of 393 places we ranked.
Yet, when I speak up there, or talk to friends, many of them ask -- OK, but what about the future of the city? And in many ways it might be better than its ranking would suggest. The reason, more than anything else, is that the city continues to attract and retain a uniquely talented group of people who love the place and are unlikely to leave. Many of these people own or work in small business. This is one reason why the city survived the dot-com downturn, which wiped out more than 10% of its jobs, without collapsing a la Detroit or like New York in the 1970s.
This was one of the finding of a new study commissioned by local insurance entrepreneur, Scott Hauge. The study found that smaller firms -- those with less than a 100 employees -- lost jobs between 2000 and 2004 at half the rate of larger employers. The actual number of small businesses, amazingly enough, even increased.
Consultant Leslie Parks, who is working on a new strategy for the city,agrees that small firms represent the future for the city. Certainly it's not the big business that used to dominate; their percentage of city employment has dropped from over 20% in 1977 to almost half that today."The
majority of the business opportunities are being generated by small firms," she observes. "It's the smaller firms that make the place go."
The key issue for the future, she think, is what type of small businesses grow. Many, she says, are "neighborhood servng" firms -- restaurants, shops, copy shops -- that add jobs, but do not bring in money from the outside, except for tourists. Tourism is not generally a generator of high-wage jobs. The key to the future, she suggests, lies with those specialty firms who contract with companies from outside the city, including globally. Many of these firms could be even home-based; she estimates 70,000 such businesses in the city -- a remarkable number for a place wth just over 700,000 residents.
This may be the future not only for San Francisco but for other ultra-expensive, very liberal cities which can no longer compete for many middle-income jobs and families. It's an idea I explored for Inc. over a decade ago in a piece called "A City of Artisans" which profiled several small and micro-businesses in the city. Like pre-industrial Venice or Amsterdam, a place like San Francisco may be able to carve out its future by selling the peculiar, specialized skills of its unique and often very talented population. It may not be the city of big banks and companies it was in the 1970s, but San Francisco may be still be a success, securing its niche as an agglomeration of very small enterprises.
August 9, 2006
Here's a Nice Problem
Posted by Joel Kotkin at 5:57 PM
Mike Levsen has a problem most mayors would love to have -- he's got jobs galore coming to his tiny town of Aberdeen, South Dakota, and isn't sure he has the workers to fill them. The attraction of Aberdeen might not be obvious to all, but it must be to some, with companies like 3M and Wells Fargo adding hundreds of new jobs. New and expanding ethanol plants are likely to add further to the demand for new workers.
Aberdeen is not alone in this. Other towns in the Great Plains are seeing growth. People are moving to small towns, as anyone looking at recent Census numbers can see.
The issue of recruiting people is a hot one for Levsen. He had planned a major marketing campaign to attract companies, but with so many jobs, the real question is not where's the beef -- South Dakota has lots of that already -- but where will the workers come from. One refreshing thing about Levsen is his sense of reality: he's not trying to get the "hip and cool" to his town of 25,000. The big attraction of small towns like Aberdeen is low crime, good schools, lot of churches, and nice people. In other words, it is a place to attract families.
"We are looking at all this as an opportunity to atract families mostly," Levsen says. "It's a nice problem to have. People are coming here from places like Minneapolis to find a nice middle class life. And you can do it here for $50,000 to $60,000 a year."
August 3, 2006
Do Entrepreneurs Need a Middle Class?
Posted by Joel Kotkin at 1:40 PM
The New York Times and other big city boosters don't know whether to laugh or cry. In large part due to a massive increase in merger activity and property prices, the city is going through yet another of its cyclical booms. Yet as we noted in the Inc. Best Places survey, this has not meant much in the way of new jobs in New York or, for that matter, other fashionable big cities like Chicago, Boston, San Francisco, or New York.
At the same time The Times has made a big pout about New York's "shedding" of its middle class and its growing extreme class divisions. The Bronx, the city’s most heavily Latino borough, roughly one in three households lives in poverty, the highest rate of any urban county in the nation. At the other extreme, Manhattan, where the rich are concentrated, the disparities between the classes have been rising steadily. In 1980, it ranked seventeenth among the nation’s counties for social inequality; today it ranks first, with the top fifth of wage earners earning 52 times that of the lowest fifth, a disparity roughly comparable to that of Namibia.
Mayor Bloomberg celebrates all this when he calls his city "a luxury product." And he's 's not too far off. A recent Brookings Institution report spelled this out in considerable detail. The study lays out the case that we are becoming more segrated by class today in almost areas, but most particularly in big cities.
And to be sure, the city -- and presumably The Times -- makes money in booms caused by asset inflation. Look at the Real Estate ads and the endless stories relating to high-end consumption. So what if this kind of growth exacerbates class extremes and drives out the middle class? And does it matter for entrepreneurs?
History would argue yes. A place that is too costly for the upwardly mobile middle class is not likely to nurture companies that feed off the energies of ambitious people of all kinds. This is why New York is no longer the entrepreneurial hotbed it was a half century ago; that role has been taken by the suburbs and lower-cost sunbelt cities . Those benefiting from big mergers -- investment bankers, high end consultants, corporate top guns -- can party on until prices crash, but it's not exactly ideal for bootstrapping smaller firms.
In a previous study I did with Jonathan Bowles at the Center for an Urban Future we found that while immigrants started businesses at about the same rate in New York as in Houston or Los Angeles, they had a harder time growing them. Real estate prices and a constant flow of upwardly mobile workers to the suburbs were among the reasons stated.
It may well be that cities, particularly dense high-priced places like New York, can thrive largely as places for high-end business -- lawyers, financial and media corporations -- which will contract most of their work abroad or to less expensive locales around the country. The rest of us will continue, as demographers like Wendell Cox suggest, to head out to suburbs and smaller cities.
This can constitute a kind of urban future, but the historic role of cities as incubators of upward mobility would be largely a thing of the past.
July 24, 2006
A Different Side of Fargo
Posted by Joel Kotkin at 10:38 AM
I just came back from Fargo, North Dakota. On the coasts, that's usually enough to elicit some sneers. Yet Fargo is not quite what people think. Not just a bunch of freezing yokels who speak like Canadians.
The place is booming. The local economy is going on all cylinders. The agricultural business is benefiting from the shift to ethanol and other-grain based fuels. This is aiding the local farm machinery business. Then, there's an expanding tech center, anchored by Microsoft Business Systems, formerly Great Plains Software, but now including scores of diverse tech-oriented companies.
As entrepreneurial activity expands, the place is changing. When I first started going to Fargo nearly a decade ago, it was just another fading Great Plains town. The downtown was a mess, and the coffee so bad, I brought my own from California. Now Fargo-Moorhead (the Minnesota town across the river) boasts several decent restaurants. Downtown even has a clothing store aimed at metrosexuals and a great boutique hotel -- the Hotel Donaldson -- that reminds me of the Muse Hotel in Manhattan.
This should tell us something about how cities evolve, and develop amenities. Acolytes of the Richard Florida school tend to see amenities as what brings in the talent and the companies. But in Fargo, and I think most places, ias President Clinton once pointed out, it's the economy, stupid. You get a couple of thousand techies with good educations and salaries - many of whom have lived previously in Chicago, Minneapolis or the Bay Area - and they will create a market for amenities. That's the way it works -- economy first, amenities second. If it worked the other way around, New Orleans would have become a high-tech mecca.
One other thing that is often overlooked in the rush by cities and regions to be "hip and cool": many techies have kids and family ties. Mike Chambers, president of Aldevron says he has stacks of resumes for every new job posting. Many of these are 30 something who either want to return home to Fargo, or think they can offer a better life for their family there. It's great, he says, for people to live in fast paced big cities in their 20s. They learn things, make contacts, perhaps find a spouse.
But after all that, there's much to reccommend a Fargo, particularly if you are settling down. I will have more on what is happening in the Plains states in future posts. There's additional material on my website.
June 8, 2006
New Energy Boomtowns
Posted by Joel Kotkin at 10:43 AM
Economists and businesses around the nation are rightly worried about the impact of high energy prices. But there may be an upside for places who are positioned to take advantage of an emerging energy boom.
As I travel around the US and the world, I will try to continue to give you more examples of the winners and losers of the new energy paradigm. Some of the clearest winners, of course, will be outside the country, places like Dubai, UAE, Calgary, Alberta and Perth in Western Australia.
But there’s also some big winners shaping up already inside the United States. This shift can be seen already in the energy-producing areas like Wyoming which sat at the bottom of income growth in 1990s but now are getting richer faster than any part of the country. One clear example which emerged in this years Best Cities list was #11 ranked Casper, where energy related jobs have jumped almost 70% since 2002.
But perhaps the biggest long-term winner could be Texas, where job growth had languished under the Presidency of its former Governor. Until recently , West Texas oil exploration firms , notes Midland oilman Mike Bradford, held back because they feared that high prices would not last.
Now they are convinced the energy market has broken free of OPEC control and prices will remain inflated. “People held back and held back,” suggests Bradford , who also sits on the Midland County Commission. “But now we think the high prices are for real and now we’re going nuts”.
Bradford points out that there barely 100 houses on the market in the city, down from 500 just a year or two ago ; unemployment, once well above the national average, is virtually non-existent. Office vacancy rates, hovering at near 50% just a few years back, has dropped to roughly 10%.
Texas--- including big energy cities like Houston and Dallas -- seems certain to begin benefiting, asit did in the 1970s, from a looming energy crisis. The rest of us can find lots of people to blame for this -- our own wastrel selves, the Bush Administration's disdain for conservation and alternative fuels as well as the largely Democratic opposition to domestic energy development.
But whatever the cause, I’d look closely at opportunities down there in the coming years. Energy, plus low taxes and housing prices, could prove a powerful economic elixir. The Bush sun may be setting, but the Lone Star may only now be ready to shine.
June 5, 2006
The Next Silicon Valley? Part Three
Posted by Joel Kotkin at 10:22 AM
The Next Silicon Valley Part 3 --- The Future
Since the fall of the dotcoms at the end of the millenium, the Valley and places like Boston have entered yet another phase which does, to some extent, reflect Paul Graham’s notions of a convergence of elite nerds and rich people . As such, tech centers such as Boston and the Bay Area also are inreasingly unable to create large numbers of new jobs , as the employment numbers and low growth rankings on Inc.’s “Best Places” list indicate . The absurd cost of housing, the aging infrastructure, and an almost reflexively anti-business politcial climate make the prospects for building large new companies --- in terms of local employment at least --- somewhat limited in these regons.
Clearly, places like Silicon Valley can no longer provide a job-creation role model for other regions --- as it was when I was covering it in back in the 70s, 80s and 90s . Instead Silicon Valley and Boston will evolve something like a gilded incubators and will also serve as a kind of Wall Street for the tech industry. Companies may be conceived and financed there, but won’t be able to grow much. It’s unlikely we will see many more Hewlett-Packards, with tens of thousands of local employees, emerge from this environment.
This 21st Century version of Silicon Valley won’t provide much opportunity for an upwardly mobile middle class. Instead they will nurture a select cadre of super- bright graduate students and a small group of well-heeled adults . These elite groups will be served by others, mostly apartment dwelling young people and immigrants, who will strive to meet their expansive needs.
The inertia of past glories and accummulated capital , as in the 1990s, will alow these areas to nurture some new and innovative companies. But the bulk of the high tech work and the big benefits for communities likely will accrue elsewhere, as work shifts to places with more reasonable costs – and inhabited by techies and entrepreneurs somewhat less burdened by a lofty attitude about themselves.
So the issue for places seeking to grow their tech economies should no longer be learning how to become "the next Silicon Valley", but using their own assets to advantage. Basic message: stop mimicking, and start innovating at your own grassroots.
June 1, 2006
The Next Silicon Valley? Part Two
Posted by Joel Kotkin at 4:55 PM
People around the world want to be the next Silicon Valley but today's version may not be the kind of job-generating machine that people expect. This was the old Silicon Valley which in the late 70s through the early 1990s reated all sort of jobs and spread the wealth. That Valley barely lives today.
Paul Graham is correct when he states that the area did not grow because it had industrial parks; it was clearly a question of money, people and timing. But the people who made the place magical extended beyond Stanford Phds or scions of great families--- Graham’s core of nerds and rich. Instead many of the founders were nerdy Midwesterners like Robert Noyce , brash New Yorkers such as legendary venture capitalist n Valentine, a graduate of Fordham, as well as growing legions of people from India, China, Israel, Iran, the United Kingdom and a host of other places.
Why did they come? Clearly not for the “hip and cool” urban charms of the Valley which, to be blunt, didn’t much exist then, or today for that matter. To connect the rise of the Valley with the Bohemian culture of San Francisco, as both Graham and Richard Florida do, always seemed to me a real stretch; for most techies back then, San Fransciso was not a business center but someplace to eat dinner or take the relatives out when they made it to the Coast. Even today even the “capital of Silicon Valley”, San Jose, seems more like Modesto by the Sea than San Francisco.
When I was reporting on the Valley back in the 70s and 80s, it certainly did NOT display the ambiance preferred by “the creative class” . Coffee came in styrofoam cups and lunch was often tasteless sandwiches wrapped in cellophane. But it was also a place that created hundreds of thousands of jobs for all kinds of people , not only for academic hotshots. Much of its hidden strength lay in a remarkable concentration of sub-contractors, many of them run by recent immigrants from East Asia
Even the Valley’s origins are lost in the current technorati myth. A dirty little secret is that, for most of its first decades of development, much of the Santa Clara Valley’s growth, as in Los Angeles, came from defense contractors . For much of the time, Lockheed Missiles and Space constituted the real cornerstone of the economy . Like the defense engineers who flocked to LA in the 1950s , the people who populated and firms like H-P the area largely came for the weather and to buy that ranch house on a cul-de-sac.
The lack of hip amenities did not stop the Valley of that time from producing an exemplar of democratic capitalism at its best, creating not only millionaires but also many simply successful middle and working class careers. Unfortunately, this idyll could not last. By the 1980s the Japanese, Korean and Chinese were beginning to tear holes in this version of the Valley. The alchemy of making semiconductors and computer systems was no longer the exclusive province of Americans, much less Californians.
When the place resurfaced from its early 1990s downturn, it did so in a dramatically different form --- more software oriented, less engineer-centric and far more dominated by Ivy League MBAs. Heavily hyped by an adoring east coast media, the new Valley elite also was much more “creative” culturally than the plastic pen holder types who built it in the first place. Some even opted for “personality” and moved to San Francisco, at least part-time.
But the key to making the whole reinvention work lay in the pool of venture capital that accummulated during the industrial period, and the insistence by the venture capitalist that the new dotcoms locate close by .The factory-free Yahoos, Googles and Ebays emerged squarely on the shoulders of industrial giants, the National Semiconductors, the Intels, the HPs, the Tandems, the Apples and the even the Lockheeds. This is something often forgotten today.
Does history matter in such things? I think so, do you?
"Next WeeK: The Next Silicon Valley? Part Three"
May 30, 2006
The Next Silicon Valley? Part 1
Posted by Joel Kotkin at 6:58 PM
Sometimes an article comes out that is so wrong headed, even delusional, that someone has to respond. In a recent piece posted on the Planetizen website, software guru Paul Graham addressed the issue of "How to be Silicon Valley,” which alleged that to become a high-tech hotbed “you only need two kinds of people… rich people and nerds.”
This reflects the conceit of a small, but influential group of elite techies and their supporting claque of pundits. According to these worthies, the “right people” only congregate in certain places with “well preserved old neighborhoods instead of cookie cutter suburbs, and locally-owned shops and restaurants instead of national chains”. Unlike the rest of us, the chosen will cluster in places “with personality.”
Places, in other words, like Cambridge, Massachusetts, where Graham got his Ph.d, as well as San Francisco, Palo Alto, and other favored burgs. Towns where, he asserts, “people are walking around smiling”.
In many ways this is a retread of Richard Florida’s "creative class" theory. But at least Richard attempts to apply some social science to his construct, albeit using questionable barometers like numbers of gay people, artists, and overall ethnic diversity to prop up his theory. Graham’s insight is instead pure assertion and, from my point of view, it only gets the present, the past, and likely the future wrong.
The Present. In terms of the present, our work with Inc.'s “Best Places” looks not only at job growth, but also at key sectors like information and professional business services. Our numbers, taken from Bureau of Labor statistics data by economist Mike Shires, shows that rather than booming, most of Graham’s places with “personality” are stagnating. If you don’t like our take, you can see a remarkably similar list at the Milken Institute site.
Certainly, Graham’s metro role models have not had a very good decade so far. In fact, Boston, San Francisco and San Jose have been among the worst performers in both overall employment and high-end jobs for the past five years.. These places also, according to the most recent Census numbers, have among the highest rates of domestic out-migration in the nation. The cities of Boston and San Francisco, those places with the most “personality,” have been losing population.
Maybe I am missing something here. Is a successful place one that actually loses residents? Perhaps if people in these places seem “happy” -- which I have not noticed particularly on my own visits -- it may be because many are still living off past stock windfalls or trust funds, or perhaps it’s just that smug contentment that tends to cling to the “anointed” ones.
Indeed even with the current bubble around firms like Google, the San Jose area’s information sector has grown only marginally over the past year or so, and is not close to making up the enormous losses of the post-1999 period. Whose region has been growing? Places like Provo, Utah, Boise, Idaho, and, in professional business services, cities like Orlando, Las Vegas, and Reno. Maybe it’s just that they are finally getting a personality. Can the happiness bug be far behind?
There may be another explanation. For one thing, places like the Bay Area and Boston are now too expensive for young people, particularly those with families. A recent McKinsey Bay Area economic forum reported that the median regional professional salary there, $70.000, leaves no surplus. In contrast, the median $62,000 salary in Denver will leave the same worker a nifty $22,000 in discretionary spending.
Like Florida and other creative-class theorists, Graham also doesn’t make much of children in his argument. But most engineers I know want to have kids eventually. As my friend Tory Gattis at Houston Strategies suggests, they may put it off for another decade than in the past, allowing the “hip” towns a little more breathing room, but at some point, most people want to start a family.
I agree with Graham that most techies may well prefer places “with personality” (who doesn’t?) but they also like good schools, affordable housing, and a lot of other things as well. If they can get both -- which is sometimes possible -- they will take it. If the choice is between a nice, albeit somewhat non-descript suburb good for families or a “funky” mega-priced urban center that is not, most will opt for outer ring Nerdistan. At least that’s what they have been doing for the past 50 years.
As for the startups, Graham really talks about one kind of startup -- the ones backed by venture capital, which represent a tiny percentage of startups. Yet, even these kind of companies are produced in more than a couple of regions, as new capital networks develop in new places, from the Sierra Nevadas to St. Louis and south Florida. And given the costs, even when a classic Silicon Valley-type company does get launched, there’s a growing tendency to shift much of their employment quickly to other places such as India, China, or even, as Yahoo just did, to pleasant small towns like Wenatchee, Washington.
(Later this week: The Next Silicon Valley? Part 2)
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