Playing from Strength: The Market Power of Cities

Franklin D. Raines
Franklin D. Raines Chairman and CEO of Fannie Mae

June 1, 2000

Before the mid-20th century no one would have thought to ask such a question. The market power of cities was manifest. Places like New York and Chicago dominated the U.S. economy. Mid-sized and smaller cities hummed with people and industry. But over the past 50 years things have changed. The American metropolis has shifted toward low-density development that is less dependent on the urban core, and the market power of cities is now contested. Still, the answer to whether cities have a future in the marketplace is a resounding “yes.” Cities retain surprising strength regarding their density, infrastructure, and central location that will position many of them to compete effectively in the new metropolitan economy.

Fully understanding the market potential of cities, however, requires recognizing their diversity and the complex nature of the markets within them. By “cities” I mean places of moderate to high density that lie at or near the core of their region. Their unique characteristics cannot easily be replicated in the suburbs.

For this analysis, I identify three classes of central cities: global, national, and regional. Each classification is based on a particular city’s unique relationship to world markets, the national economy, and local or regional market activity. I also identify three market types (based on their performance relative to the national market average) that are generally found in central cities: supercharged, vibrant, and emerging. An individual city may contain all three markets, and any type of market can exist in any level of city (see figure 1).

Breaking down the complex functions of cities and their markets in this way makes it possible to understand better the market power of cities—and also to suggest appropriate strategies for promoting that power.

Three Classes of Cities

Cities vary in size and function. The typology of global, national, and regional cities is adapted from Peter Hall’s Globalization and the World Cities. Hall groups cities by the role they play in the international, national, and local economies—a good way to understand how the various markets operate within them. Because today’s economy is global, every city is part of a functional world city system. But global cities are at the apex of the world urban order and are qualitatively different from national or regional cities.

Global cities are epicenters of human activity that help drive the global economy. Their businesses focus mainly on specialized information services, such as financial services, medical services, educational and health services, and tourism. They are also centers of cultural innovation, much of which finds its way into commerce. The global city is a place of very high density in terms of buildings and population. Businesses that thrive in a global city’s downtown are information intensive and benefit from the proximity of similar businesses. Few cities are large and important enough to be considered global cities. New York, London, and Tokyo are among them.

National cities are political, commercial, or cultural capitals. For example, Washington, D.C., is a center for government, Los Angeles for entertainment, Atlanta for media services. Most resemble global cities but operate at a smaller scale or only in selected sectors of commerce. Some national cities, such as Los Angeles, are at the edge of being global cities. The difference is one of degree and range of functions. The global city is so large, dense, and diverse that it facilitates the most innovative urban industries and lifestyles. National cities approach, but do not quite match, the uniqueness of global cities. A national city can act as a global city in a limited sphere—as Chicago does with its internationally important commodities exchange or Los Angeles with its vast entertainment industry—but does not offer global-level specialized services across multiple sectors.

Regional cities—smaller in size and sphere of influence than national cities—are the traditional cores of local regions: Cleveland; Syracuse; Kansas City, Missouri. Again, occasionally a regional city maintains national-level specialization, such as the concentration of breweries in Milwaukee, but generally they do not operate at the national level. Historically, regional cities were the banking, retail, entertainment, and market centers through which all local goods and products flowed. While still important, these types of cities now have the most competition from newer suburban development. They are no longer the sole hub of a region. For example, the downtowns of regional cities sometimes contain less office space than a good-sized suburban or edge city. But they often continue to lead their regions in tourism (because they are older and more historically significant) and they also supply housing for certain lifestyle niches?vital, pedestrian-friendly urban cores that offer an antidote to the standardized, sprawling, newer suburbs.

Three Kinds of Markets

The economic power of cities is also determined by the three kinds of markets that flourish within them.

The supercharged market is an area of a city whose market valuations exceed the national market average for metropolitan America. Supercharged markets are also characterized by the speed at which market values are repriced—also at rates greater than the national market average for metropolitan America. Supercharged markets tend to be more affluent, contain a greater diversity of consumer demand, and feature trend-setting lifestyles. Supercharged business markets, such as those found in a city’s core commercial district, tend to lead their suburban counterparts in terms of innovation, productivity, and specialized services. Supercharged markets typically feature booming housing demand with escalating prices.

Some of America’s best known supercharged markets are in global or national cities such as New York, San Francisco, Chicago, and Boston. For example, New York’s Silicon Alley, originally built around the city’s graphic and advertising businesses, now features a growing number of multimedia firms. In the past two and a half years, the number of companies engaged in website development, e-commerce, and marketing has doubled, and this rate of growth is expected to continue.

Not all supercharged markets are in our largest cities. For example, the regional supercharged market of Lower Downtown (LoDo) in Denver’s historic core is perhaps the oldest urban environment in the Intermountain West. Because most buildings in the region were constructed after World War II, LoDo’s historic buildings take on greater value. LoDo’s converted warehouses contrast sharply with new housing in metropolitan Denver’s many master-planned suburbs. The niche serves LoDo well. Since 1990, its residences have appreciated in value faster than most suburban homes. Premium loft space that several years ago would have been hard to sell for $50 a square foot now easily fetches $250 and more.

Vibrant markets feature moderate to high price appreciation, enjoy a unique subculture, or possess physical attributes or entertainment centers that attract tourists as well as residents throughout their respective metropolitan areas. Vibrant markets are often, but not necessarily, upscale. Examples include Richmond’s Carytown, an area of shops and restaurants that attracts people from all over the city and region. New York City’s Astoria, another vibrant market, is one of the most ethnically diverse neighborhoods in the country. While by no means upscale, it is a thriving community packed with retail, restaurants, services, and affordable (compared with the rest of the city) housing. Finally, in Newark’s Ironbound District, a Portuguese and Brazilian working-class neighborhood, housing prices now reach or even exceed the regional average for the New York metropolitan area. The Ironbound District shows that even an under-performing city can have a vibrant market.

Emerging markets perform below the national market average and have the longest road to reach their full potential. But if they do, the gains will be large. LeDroit Park in Washington, D.C., is an example of an emerging market whose many overlooked assets could be used to lure significant investment back into the neighborhood. The MacMillan Reservoir—a park designed by the famous landscape architect Frederick Law Olmsted, Jr.—borders the neighborhood but is now unused and in disrepair. LeDroit Park has an abundant stock of historic homes and is 10 minutes’ drive from the National Mall. It is served by at least two subway stations and is within walking distance of Howard University, one of the most distinguished historically black universities in the country. This community, with its many assets and deep cultural resources, is a highly marketable resource for the city of Washington.

The Future of Cities

As the typology of cities outlined above demonstrates, each city has a unique role within a global, national, and regional context and each has its own distinct mix of markets. Each city’s future depends on a complex set of influences related to its local, national, or global economic and social role. Much has been written about New York as a world center. But what about Baltimore, Newark, Albuquerque? All these cities play important roles in their individual markets. For each to achieve its full potential, however, policies and strategies should be considered in the context of its distinct attributes and circumstances. Building sports complexes or harbor places because other cities have them can be a costly mistake. An oversized sports stadium, for example, in a small regional city primarily filled with emerging markets could bankrupt the city. Financing attractions that require a national market in a city that serves only a unique local role could also be a disaster. Similarly, stripping away a regional city’s older structures to build a downtown mall may forfeit its comparative advantage in historical look and feel. All cities should adopt strategies that reinforce their role in the economy and build on the distinctive markets that thrive within.

The market power of cities continues to be strong because of the unique role they play at all levels. The biggest cities (global and large national) possess core markets that are so large, dense, and diverse that even large suburban commercial clusters cannot generally replicate them. The infrastructure of the new high-tech economy also favors global and national cities. For example, “Points of Presence” (POPs), which provide high-volume access to the Internet, can theoretically go anywhere. But they tend to concentrate in places where business and population density is high because of cost savings associated with shorter distances between intensive users.

Smaller, or regional, cities also have their strengths. They are often more subtle and grow out of their uniqueness of place. The suburbs of Seattle and Minneapolis, or even Dallas, differ little from each other. North, south, east, and west, routine suburban development patterns with their accompanying strip commercial development and national franchise stores are much the same. By contrast, the cities of Seattle, Minneapolis, and Dallas differ from each other in many ways. Indeed, they are repositories of regional differences and vernacular culture. In a world of monotonous and lookalike suburbs, cities’ uniqueness provides a valuable market signature. The mix of buildings, people, and culture are mostly nonreplicable by formula. Regional cities are therefore well positioned to benefit from the expanding “experience economy” of tourism, entertainment, and lifestyle consumption, which increasingly favors unique places and products over generic ones.

Supercharged markets, as the name implies, have obvious market potential. They maintain the advantage that cities have always held in the economy. Supercharged markets are information rich, and are at the leading edge of new lifestyle trends. Even more modest cities have their supercharged potential, especially those that maintain some quality—often a mixture of arts, architecture, and amenity—that distinguishes them as desirable places to live. Thus, the market power of Santa Fe and Charleston is assured.

Vibrant markets also have their edge, derived from their distinctiveness, in both population and environment, from the suburbs. As such, they represent a market niche that the suburbs cannot fill. Developers of suburban retail and master-planned communities are facing an increasingly difficult task of distinguishing their projects from every other similar-looking suburban development. This may be even more true of newer regions where virtually the entire built environment dates from the past several decades. This may explain why some older central cities have recently become so desirable. Vibrant markets often have a strong tourism and entertainment component. The shops and restaurants in these markets draw people from the suburbs and other regions.

The suburbs are not just generic?they are overbuilt. Therein lies the potential for emerging markets. Consider Anacostia in Washington, D.C., where more than 50,000 people are served by only two supermarkets. Understanding and meeting the needs and preferences of consumers in this market could result in a booming business for a grocery store that locates there. In a region where the suburbs are saturated, emerging markets offer enormous opportunity to the retail or housing pioneer.

The evolution of the American metropolis may provide additional support for central cities. Research by the Fannie Mae Foundation shows that growth within regions is no longer contained within central cities or even within edge cities. The new urban form is in many ways “edgeless,” where vast patches of urban space contain all the elements of the city spread across open fields and woods. In this environment, core cities may emerge as the only real centers left in the region, providing a competitive advantage for functions that perform best when clustered.

Different Cities, Different Futures

The market has been quite efficient at sorting out the types of workplaces that need to be downtown and those that do not. Work processes that are highly innovative, require multiple, specialized inputs, and are considered high risk will continue to demand personal interaction with other firms and specialists. Higher-order, specialized employment will continue to gravitate to downtowns.

But no two downtowns (or neighborhoods, for that matter) are exactly alike. Using the typologies of city scale and markets can help policymakers identify more precisely the potential of each city and neighborhood. The future of all cities will not be the same, but by better understanding their individual strengths, we can help them achieve their most productive roles.