Rise of Secondary Cities & SubUrbia
This is Part 2 of a multi-part series on the Top Trends and Market Opportunities for the 2020s. See Part 1 here, which explains the project.
Amazon just cancelled its plans to co-locate an “HQ2” in Long Island City, Queens; a decision that has set off a firestorm of debate and politically fueled anger at those who championed its demise. I am personally disappointed for all New Yorkers, it would have been a great catalyst for growth and change in some of the most “left behind” parts of metro New York. However, as a real estate economist, I feel somewhat vindicated as I did not think Amazon would ever choose a site within a major coastal metro area like New York City. The entire search process, as well as broad sweeping trends, always made believe the best choice would be a Secondary City or a semi-SubUrban area near a major metro. In fact, see this article on GlobeSt.com I published in late 2017 where I specifically call out Detroit (a Secondary City) and Newark (a form of a sub-Urban/Secondary City) as logical choices. Further, I casually suggest locations like New York City and San Francisco would be off the table as they have the same issues as Seattle (technically a Secondary City). Thus, I feel Amazon’s final decisions of Arlington (a SubUrban location) for its now sole HQ2 and Nashville (a Secondary City) for the smaller hub are fully in line with my analyses and predictions for future growth in the United States.
What is a Secondary City?
A Secondary City is any major metropolitan area of generally more than one million in population but not one of the major international hub cities of the US. Real Capital Analytics defines the 6 Major Metros as Boston, Chicago, Los Angeles, New York, San Francisco, and Washington D.C.; others could broaden this list to a “Top Ten” by adding Dallas, Houston, Atlanta, and Miami. Regardless of how one ranks the metros, the concept is easy to see. A Secondary City is one that has a large population and business center but is not one of the largest; examples include Nashville, Austin, Orlando, Charlotte, and Portland. For my purposes, it is important to define the minimum threshold to be a Secondary City and not a smaller market; while there are notable exceptions, having a major league sports franchise is probably the easiest way to decide when a city has grown large enough to be “Secondary” and not a small or medium market.
What is a SubUrban market?
The key distinction is the capitalized “U” in SubUrbia, which is meant to indicate a city that is technically in the ring of a major metro (Top 6/Top 10 or even Secondary) but has a dense urban core (or revitalizing downtown) that could be classified as a Central Business District. These tend to be associated with the greater MSA, but have their own economic standing and growth potential. For example, the NYC area has many due to its regional, commuter rail system including Newark, White Plains, New Rochelle, Stamford, as well as many similar areas in Northern New Jersey and Long Island. The key factor here is connection to a major job base (even if by car or rail) and a local set of urban amenities.
Why are Secondary Cities and SubUrban markets poised for growth?
Many of these cities and markets have the advantage of high standards of living, relatively lower cost of living, better maintained or less defunct infrastructure, and governments and electorates that are perceived as being “open for business.” The results tell the tale, the top metros for growth in the US have been Secondary Cities and SubUrban locations. Orlando (featured in the photo) was the number one MSA for job growth in 2018; in fact, at times it experienced growth faster than China. There are many ways to score growth from job creation, population growth, and indices that mix such metrics; click the links, all show scores of Secondary Cities and SubUrban markets as the winners. This trend is only going to intensify in the 2020s for three key reasons. First, the relative lower costs and ease of doing business will propel companies to locate in such markets for expansion; this factor is increasing as housing costs rise and taxes go up for most of the Top 6 markets. Second, quality of life in many Secondary Cities and SubUrban markets is drastically improving; better connectivity and investments in arts and education are starting to pay off for many smaller cities. And third, infrastructure failures in major, congested metros will only get worse, and state and local governments lack the leadership and financial resources to tackle these challenges in a timely manner. It is this final point that will get substantially more noticeable in the 2020s.
Can Infrastructure Failures in Major Markets Propel Secondary Cities and SubUrbia?
If a business cannot house its employees in close proximity to the workplace, they must commute. If the commute is too long, too unreliable, and/or too costly, then the business loses productivity and maybe even the best employees as their personal quality life suffers as well. This is the danger facing cities such as many listed in the Top 6 above; the dual forces of high rents and long/costly/unreliable commutes is getting worse by the year. For me, the defining point in the failure of the Long Island City Amazon HQ2 was the plan for much maligned helipad Amazon was planning to use to shuttle executives in and out of the campus. The local residents decried this as the ultimate show of wealth and excess, and worse, a sign that Amazon was not in touch with the problems of the locals. In this way, the protesters were right to a point (but the ultimate outcome is still a major failure). It is unclear if the subways and roads could have handled the growth of +25,000 Amazon employees plus all the indirect and induced jobs the multiplier effect could cause. Especially considering other major projects in Brooklyn and Manhattan (such as Hudson Yards) would rely on some of the same transit lines. I fear many of the major metros in that Top 6 list are adding too much physical space and people while transit services and roadways deteriorate in condition and speed.
Does Innovation and Technology Factor as well?
Of course innovation and technology matters greatly as well. But again, I see Secondary Cities and SubUrban markets getting relative advantages by these factors also. In the main picture of this article, Interstate 4 is in the process of a major reconstruction and expansion project called Ultimate I-4, which will help keep the whole metro ahead in mobility as it grows. Because of these types of projects, cities like Orlando are more likely to find integration with new technology like driverless cars and trucks easier than congested roads like in metro New York. Further, Secondary Cities (and many SubUrban markets) are getting better and better global connectivity via their airports, a key driver of city growth. In January of 2019, the Airbus A220 was certified to fly up to 3,200 nautical miles. This aircraft, a relatively small regional jet with passenger capacity in the low to mid 100s, can now fly from the east coast of the US to Europe. The implication is that airlines, if demand dictates, can now operate profitable long-haul routes from smaller markets better than ever. For many US Secondary Cities this could a huge game changer as residents and business people were historically forced to change plans at major air hubs like Atlanta or Charlotte, a deterrent to many executives when selecting corporate locations.
Finally, I am in no way predicting death or significant decline in major markets, there is a reason many, many people and firms must locate in such mega markets. What I am saying, is that the rate of growth and value creation will occur much faster in Secondary Markets and certain SubUrban over the next ten years at least. From a risk-adjusted perspective, I think that makes such markets relatively better candidates for investment and business expansion.