Wednesday, March 06, 2013

Expensive Rust Belt Cities

An "expensive Rust Belt city" rings like an oxymoron. But that's exactly what Pittsburgh is. Pittsburgh is also an inexpensive Rust Belt city, which is the dominant geographic stereotype for the region. I was made aware of this paradox way back in November of 2010:

Pittsburgh, a shrinking city, has a shortage of supply. With all the vacancy and blight, this may come as a shock to some. Perhaps the population is robustly growing.

I think the rush of people is yet to come. There's a bump, for sure. Newcomers are trying to cram into all the same places. In late 2010, I was on a cityLIVE! panel with Luis von Ahn. I recall him mentioning that Pittsburgh was expensive. Moderator Jesse Schell agreed. When all costs were considered, real estate was comparable to Los Angeles. The best talent liked only a few neighborhood. Supply was dear. Affordable Pittsburgh was a myth.

The economic health of metros paints with very broad brush strokes. Whereas the forces of globalization acting on an urban geography are almost hyperlocal. Our metrics tend to be too coarse to pick up on this transformation. Thus, a hot real estate market in "Southwestern Pennsylvania" jumps out of nowhere.

Emphasis added. Highly mobile tech talent expects Pittsburgh to offer considerable geographic arbitrage opportunities. The realty is ironic.

Aaron Renn (Urbanophile) emailed me a link to an article that makes this exact point, leading to a shocking conclusion. It's cheaper to grow a tech company in Chicago than in Pittsburgh:

He says the cost of living for employees – high-skilled, experience knowledge workers -- is 20 percent lower than in Pittsburgh. Before you go rushing to the online cost-of-living calculator, read on.

“The typical cost-of-living comparison makes Pittsburgh look 15 to 20 percent cheaper,” said Mr. Lowe, an economist by training, in an email. “But that analysis assumes a basket of goods that does not reflect the preferences of top engineering talent. Top talent, on average, lives in an urban environment and seeks out diverse experiences, from classic cocktail lounges to independent music festivals, as well as takes reliable public transit to one's office. Changing the basket to compare the preferences of our target talent pool, and its' the other way: Chicago is actually 20 percent cheaper.

“There has been a lot of discussion about building an economic ecosystem to encourage technology entrepreneurship. Our research reflects this important point in an apples-to-apples comparison,” he says.

Other costs are lower, too. Office rent is about 17 percent cheaper, too, because of a shortage of Class A office space in Pittsburgh.

“This was by far the biggest surprise,” said Mr. Lowe, who grew up in northwest suburban Palatine and attended to the University of Michigan before returning to Chicago to work at Boston Consulting Group, consulting on strategy for pharma and health care companies. That's where he got interested in innovation and R&D. So he earned a master's and doctorate in corporate strategy and entrepreneurship at the University of California at Berkeley. He was teaching at Carnegie Mellon when he launched his company in 2003.

Even the talent is more expensive in Pittsburgh than it is in Chicago. What gives? The source of the conundrum is the way we abstract cities.The geographic unit of analysis we employ can hide more than it reveals. The second issue are the mesofacts. Pittsburgh is shrinking. Of course the real estate will be cheap. Population growth is what fuels greater demand for space.

Downtown Pittsburgh is dying. Then how come office space there is more expensive than in Chicago? Better yet, why does parking cost so damn much? Chris Briem (Null Space) with some answers:

I've said this before, but time series of jobs located in the City proper are about as stable as any economic metric in the region, or in any other Northeastern US urban core, over many decades.  In 1958, the late Edgar Hoover and his team studying the Pittsburgh economy counted 294,000 jobs located in the city proper and 107,000 in the Golden Triangle specifically.  1958!  So well before the collapse of heavy industry in town.  Those numbers are virtually identical today which tells me there is a certain limit to how many jobs can efficiently be located in what are some relatively (very) constrained areas.  So those jobs 'forced' out of the city are if anything, being forced out by the jobs that want to be located here, or are fairly immediately replaced.  Not exactly a bad situation to have and one that has persisted through some very good and very bad economic times for the region.

I know from firsthand experience that this history lesson confounds the dominant view of Pittsburgh, even within the region. The physical geography informs a very constrained economic geography. It's also partly to blame for the bizarre Balkanization of the urban political geography. But does it promote the exodus of tech companies? The answer would seem to be yes, Pittsburgh doesn't have the room for them and that a tax-exempt UPMC is ready to fill the void left by any firm that leaves.

1 comment:

DBR96A said...

Well then, it looks like it's time to renovate houses and open businesses in Greenfield to reduce the price pressure in Squirrel Hill, and start renovating houses in Garfield and keep opening businesses in East Liberty to reduce the price pressure in Shadyside. Maybe even get serious about building another skyscraper or two downtown to open up some desperately-needed Class A office space.