Time to Think Small?
By Joel Kotkin
John Shaw sits in the very midst of the beating heart of New York City, on the busy trading floor of a midtown financial firm. President of Jefferies and Company, a Wall Street trading business, he’s a prototypical New Yorker—fast-talking, smart, quick on his feet, and, for now, worried about his city’s future.
Like many, if not most, top executives in New York, Shaw lives elsewhere, in his case tony Westport, Connecticut. Now he notices that many of his top-drawer colleagues are giving up their second residences in Manhattan in favor of the suburbs, and that even some of his younger traders are pressing him—often at their wives’ insistence—to work in offices elsewhere in the region. Thirty-five people from his Manhattan office are already getting transfers to the company’s Stamford, Connecticut facility.
Some of this, he notes, is residue from September 11. “It tipped many people over the fence toward moving to the suburbs,” Shaw maintains. “Now people are thinking about living a different way of life.”
But other longer-term factors are also having an influence. Shaw notes that with new telecom technology a firm like Jefferies (with 538 employees in the New York City area, but only a third of them in Manhattan) no longer has a classic hub and spoke hierarchy. “None of our offices is a branch,” he explains. “Each is interactive and equal within the firm.” Instead of all heavy hitters concentrated in New York, the company’s talent is scattered. The chief strategist resides in Boston. The chairman lives in Los Angeles. The CEO is in Stamford.
This is not merely an effect of the Twin Towers attack. It reflects lifestyle choices of people to live elsewhere, including far from New York City. Jefferies has long had a policy of allowing most of its top executives to work outside the confines of Manhattan, and the firm maintains large offices in places ranging from Short Hills, New Jersey to Nashville, Los Angeles, Richmond, San Francisco, and Dallas.
“There are a lot of people who love this business but want to be elsewhere,” Shaw says. “They don’t want to schlep to New York City. We get people to work for us who we couldn’t get otherwise by giving them other living options.”
For many Americans, particularly the young, single, and culturally active, New York City remains an entrancing locale. Because of this magnetic effect, Manhattan boasts one of the nation’s most educated populations (a sharp contrast to the demographics of the surrounding boroughs). These infusions of outside talent remain an essential economic asset of the city.
But while intelligence still gathers in New York, moving to Mecca is no longer necessary for the majority of America’s most talented people. Back in mid-century, a trader at a firm like Jefferies, or anyone with ambitions in advertising, communications, fashion, publishing, or a host of other professions, had no choice but to live in New York. That is no longer the case. Levels of education in many regions—from northern Virginia to Boulder, Colorado—now exceed those in Manhattan.
The same is true for companies. Many which historically gravitated to Wall Street and midtown Manhattan now can operate just as well from elsewhere. Some urban theorists, such as Susan Fainstein and Saskia Sassen, maintain that “global cities” like New York may be able to resist this scattering trend. They argue that the rising importance of transnational information of various sorts, such as legal, accounting, and management services, increases the need for “centralized command and control,” from a geographic epicenter.
Recent experience and today’s technological revolution, however, make such assumptions somewhat dubious. Throughout the 1990s, high-end services, particularly finance, have continued to see employment shifts toward the periphery. Even New York City’s expensive decision to spend an estimated $900 million on a new stock trading complex won’t guarantee Gotham’s long-term domination of the financial service industry.
And financial services is one area where New York is best equipped to stay competitive. In many other economic undertakings the case is closed on New York’s advantages. The nation’s largest corporation, Wal-Mart, operates flawlessly out of Bentonville, Arkansas. Virtually all dominant American high-tech companies—Microsoft, Apple, Dell, Cisco, Hewlett-Packard, Intel—are based on the West Coast or in Texas. The nation’s largest port is now Los Angeles, which is also home to the nation’s biggest garment industry. And the creative focus of entertainment worldwide lies in the Big Orange, not the Big Apple.
Increasingly, for more and more industries, it can no longer be assumed that the key players will locate in New York. Instead of migrating to critical physical institutions like exchanges, the prime economic imperative of many companies will be to find individual employees with the necessary knowledge and work habits, regardless of their location. In our post-industrial era, skilled jobs across a wide range of creative fields are essentially becoming artisan work, which can, and will, often be done from remote locales.
Post-9/11 security concerns, soaring insurance premiums for high-rise buildings, and a growing reluctance of workers with families to locate in downtown districts are accelerating the trend. Finally, there are the longstanding discouragements of heavy taxes, inflexible regulation, and age-old urban social problems. The cumulative result can be seen in the recent moves of several major investment banks like Goldman Sachs, Marsh & McLennan, and Morgan Stanley to settings outside New York City.
Jonathan Bowles, research director at the Manhattan-based Center for an Urban Future, suggests that all of this will require a new, more humble mindset on the part of New York City’s leaders. In particular, the city needs a greater focus on the fundamental issues that attract or repel people and companies. He suggests that the vainglorious fixation of many New Yorkers on their city’s position as “capital of the world” should be one of the first things to go. “The arrogance has to change,” Bowles believes. “For a long time we assumed that every major financial company needed to be in New York. Now that’s not true. New York cannot afford to lay back.”
New York City’s hubris grows out of its past greatness and the remarkable ability of the city to maintain much of its status even in the face of the dispersing trends that dominated the last 50 years of American life. The heart of the city’s greatness is that it has always been, first and foremost, a capitalist city. From its origins, New York has been a supremely commercial city (much like its original namesake, Amsterdam). New York was described by one observer in the early eighteenth century as “infatuated with trade.” In contrast to Puritan Boston and Quaker Philadelphia, New York’s social system was dominated early on by a high-spending pleasure-minded acquisitive class devoted to material accumulation.
New York’s other great endowment was its magnificent harbor location and connection to the Hudson River, which after the opening of the Erie Canal in 1825 provided easy access to the great American hinterland to the west and north. No other eastern city save Baltimore had anything remotely as ideal for commerce. The port of New York became the nation’s busiest in 1800, and by 1860 accounted for two-thirds of all imports to America.
This trade quickly transformed New York into the nation’s commercial capital, and, by 1803, its most populated city. The city’s merchant class congregated close to the wharves, and in the nearby area around Wall Street there grew “a veritable congregation of businessmen”—traders, financiers, insurers—clustered together in packed streets where they could arbitrage not only goods but also critical information. This provided the seedbed for the city’s development into the nation’s commercial front door.
These predominantly commercial—as opposed to industrial—origins helped New York adapt more successfully to post-industrial realities than other American cities. Although it also developed a powerful manufacturing economy, which once employed millions, the economic soul of the metropolis remained concentrated in the transactional and informational as-pects of the economy. As a result, as the new millennium opened, New York still dominated many key sectors like financial services, law, advertising, and media.
Today, four of the top six accounting firms, six of the ten biggest consulting companies, five of the largest insurance companies, and all ten top securities firms are still headquartered in Manhattan. New York remains home base for two of the three largest television networks and the biggest media company (AOL-Time Warner), as well as the news operations of most of the others. These clusters of high-end services—as well as tourism, which has grown into a massive industry—have helped the city find a new role. That was badly needed in the face of a mass exodus of other large corporations from New York over the past three decades. In 1970, New York accounted for 131 of the Fortune 500; in the twenty-first century, the city claims little more than a quarter of the firms it had 32 years ago.
But this economic evolution has not come without a price. New York City’s growing dependence on a handful of service industries has created an unusually bifurcated economy that offers great riches in some areas yet relatively little opportunity for vast portions of the city’s population. The outer boroughs, once bastions of the white middle and working classes, have retained a preponderance of poor families. In Brooklyn and The Bronx, notes economist Robert Fitch, per capita family income is currently closer to the levels seen in inner Detroit than to the levels in Manhattan. As high as Manhattan stands in national income and education rankings, The Bronx sits close to the bottom.
New York’s 1990s boom ameliorated some aspects of this “tale of two cities,” while worsening others. The Wall Street bull market and the wild expansion of Internet firms created so much disposable wealth and drove housing prices so high that some neighborhoods in the outer boroughs—Williamsburg, Long Island City, Astoria—had tremendous increases in property values, and more new commercial development than had been seen in generations. Although New York’s loud and dominant liberal intelligensia liked to portray Giuliani-era prosperity as “class warfare,” the reality is that most poor and minority residents benefited from the growth. In neighborhoods such as heavily black Fort Green near the notorious Bedford-Stuyvesant slums, homeowners reaped huge benefits in higher real estate values. And driven both by new immigrants and aspiring young transplants, New York’s total population soared by almost 700,000—the first big increase after decades of stagnation and decline.
Up until the 1950s and ’60s, lower Manhattan boasted one of the nation’s most vibrant collections of small industrial firms. These diverse enterprises, many of them employing 30 people or less, were involved in servicing local markets or processing imports and exports. The city’s major industry, textiles and garments, was especially dominated by smaller firms. (Apparel manufacturing was never characterized by the kind of giantism associated with industries like steel or automobiles.) Collectively, these small firms kept New York City alive as a manufacturing metropolis, even as centers of mass assembly such as Detroit fell into decline, and they were a key employer of non-college-educated workers and recently arrived immigrants.
But by the 1970s there were clear signs of stress. Rising taxes, unfriendly regulation, declining public services, crime, and a general indifference to small businesses in New York were slowly undermining these firms. As recently as 1960, New York City’s manufacturing industries employed over 900,000 workers. By 1974 that number had dropped to 610,000. Two decades later it was down to around 280,000. The manufacturing losses were most profound in the outlying boroughs—The Bronx, Brooklyn, and Queens—but large swaths of lower Manhattan were also affected.
For landlords in certain locations who were stuck with these dying industries as tenants, the broad urban recovery of the 1990s was like manna from heaven. With rents rising in elite business districts such as Wall Street and midtown, new employers and would-be residents sought out (initially low-cost) space carved from former industrial zones. (The barriers to fresh building are so massive in New York that most real estate expansion comes from adaptive re-use of existing structures.) And so the former workshops of blue-collar New Yorkers were converted into commercial offices and expensive residences.
As many New Economy companies chose locations in old industrial areas rather than traditional locations, the supply could not keep up with the demand, and prices rose precipitously—from as low as $8 per square foot to as much as $50. Even the legendary garment district has been transformed—and hit by soaring rents. Just since 1993, the proportion of Manhattan’s private workforce employed in garment-making dropped by roughly a quarter.
For garment-makers, printers, and some other industrial users, the newfound passion for these older buildings has been less a blessing than a scourge. “We’ve been hit with rent inflation that is driving industries like printing out of town,” laments Vicky Kennan, vice president of public affairs for the 600-member Association of Graphic Communications. Many of the Internet-related companies that drove the demand for new space have now crashed and disappeared. (Whereas Internet firms accounted for a full quarter of all new leases executed in Manhattan in early 2000, today they are the largest source of fresh vacancies.) Nonetheless, the real estate conversion process seems to have proceeded too far to be reversed.
Even amidst today’s glut of vacated space available for re-lease, there will be no return of industrial tenants in most places. Landlords now used to getting $35 per square foot will never accept the $8 to $15 rents most industrial users can afford, believes Jim Stein, a leading commercial broker at Cushman and Wakefield’s New York offices. The Manhattan industrial buildings now deserted by the dot-coms have been so heavily upgraded there will be “no going back” to industrial uses, he predicts.
Ironically, there remain vast tracts of abandoned industrial buildings throughout New York, particularly along the waterfront. Many of these cry out for adaptive re-use, and getting them back into productivity—whether as residences, offices, or workshops—would be highly desirable. Unfortunately, New York’s fractious neighborhood politics and gridlocked regulatory process have repeatedly blocked many proposed adaptations. And so the Brooklyn shoreline molders, while over in New Jersey construction cranes define the sky.
The budding struggle over redevelopment of the World Trade Center site encapsulates many of the issues discussed above. Ground Zero provides a rare opportunity to reinvent lower Manhattan, and parts of the broader city itself. Unfortunately, much of the initial focus has been on recreating the earlier paradigm of high-rise office buildings occupied primarily by large corporations. Large-scale incentives, financed by federal aid, are being offered to financial giants in order to keep the towers filled. “They are not talking about small businesses,” complains Bowles of the Center for an Urban Future. “No one is talking about making the city, or lower Manhattan, a place that’s good for growth companies.”
This needs to change, and quickly. Ultimately, the “next” New York has to become a bit more like the rest of the country. In New York’s archrival, Los Angeles, business activity is dispersing from a centralized downtown to numerous smaller, decentralized sub-locales (many of them self-governing as independent towns within the larger city) such as Pasadena, Glendale, Beverly Hills, West Los Angeles, Santa Monica, and Burbank. New York needs to become more multi-polar by encouraging thriving districts—including many in the outer boroughs—that have their own geographic centers, their own history and culture, their own workforces. These smaller localized centers will naturally enjoy a wider range of rent levels and local service options than are found in the official commercial districts in lower Manhattan and midtown.
“We need to look more at accommodating a small firm with 110 employees, rather than expecting large employers who are going to buy huge amounts of space,” urges John Gilbert of Rudin Management, a leading Manhattan landlord controlling some 2 million square feet of space. This means a strong focus on maintaining basic city services, and on efficient regulation so start-ups and small companies aren’t priced out of New York. Clean and safe cityscapes are important, as are good restaurants, shops, and festivals which make people want to live and work in the area. “You have to, first and foremost, make lower Manhattan livable,” Gilbert says.
This will require a change in the city’s consciousness, says Allison O’Rourke, president of the New York New Media Association. “There has to be an appreciation of the importance of entrepreneurial infrastructure,” she urges. “The city has become so super-sized and dominated by a handful of giant corporations.” The often-ignored reality is that New York’s economy depends heavily on what happens to its smaller firms. Today, 89 percent of New York City companies have less than 20 employees, and in recent years small firms have created four to five times as many new jobs as big firms. City administrators must present a friendlier face to these small companies, and allow a more grassroots-based economy to grow.
In order to thrive in the future, New York City must find a way to blend its intrinsic strengths with a new sense of reality. It should forget about being the “capital of world,” with the arrogance and massive white elephant projects (like the Twin Towers) that go along with that. Instead, Gotham needs to return to an earlier, more life-size version of itself, not only in lower Manhattan but throughout the city. Like any place in the digital age, New York can have a great future only if enough ambitious and talented people choose to be there instead of somewhere else. New York will remain great only if it continues to reinvent itself as a good place to live, and to work.
