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Middle Market Magic

October 30, 2012

Every Commercial Real Estate Broker knows the equation: if you want to increase demand, you need more jobs. Simple, right? Not really, especially not in this economy. Yet some cities are outpacing their neighbors — adding the good jobs that fuel demand for office, retail, and multifamily. What secrets do these mid-sized cities (1.5 to 2.5 million in population) share?

Get the Economy In Focus

If there is one thing that sets top job-growth cities apart, it’s that their public and private leadership focuses intentionally on their economies, says Bruce Katz, vice president of the Brookings Institution and founding director of the Brookings Metropolitan Policy Program. The key, says Katz, is recognizing the trade sectors that already exist within a city’s economy and then building on those strengths. Trade sectors, first defined by Harvard’s Michael E. Porter 15 years ago, are groups of related industries that sell most of their products outside a city’s geographic area. Trade sectors, or clusters, can be anything from traditional manufacturing to software development to music, but they are the key drivers of economic growth and prosperity. While a smart city doesn’t limit itself to one economic sector (see Detroit), focusing on a few can help build a city’s economic brand and create a synergy that will attract more companies in the same field, says Katz. “Each city has to ask, ‘What is our special role?’,” he says. Case in point: Austin. Once a hub of semi-conductor manufacturing, the city lost 25,000 manufacturing jobs between 2000 and 2003 thanks to globalization and the dot.com bust. Today, the more than 100,000 tech jobs in Austin focus on design of games, semi-conductors, and mobile apps — all trade jobs. “Technology companies like to be around other technology companies. Plus it’s easier to recruit a new hire if there are other companies with similar needs nearby,” says Dave Porter, senior vice president of the Austin Chamber of Commerce.

Get and Keep the Best and the Brightest

Once you have your focus, you need “a reliable supply of skilled workers that match the needs of your target economic clusters, says Katz. The presence of major universities plays a critical role, both in attracting young educated workers and in research to support key economic clusters. Case in point: Pittsburgh, with 36 colleges and universities in the region, synergies between universities and researchers at the National Energy Technology Lab, the world headquarters of Westinghouse’s nuclear division, and PP&G’s advanced research into materials for solar and energy conservation complement regional resources in coal and natural gas. The combination gives Pittsburgh a competitive edge in attracting energy-related businesses, explains Dewitt Peart, president of the Pittsburgh Regional Alliance.

Demand for space is so strong that Pittsburgh’s Class A space in the CBD is almost fully occupied, and office rents rose 7 percent annually between 2010 and 2012, reports Jeremy Kronman, CCIM, SIOR, executive vice president of CBRE in Pittsburgh. Universities are “a key anchor,” says Katz, but just as essential for continued job growth are good K-12 and technical schools that supply workers at all levels. Case in point: Nashville. Although it saw a 42.4 percent increase in college-educated residents between 2000 and 2010 (to 19.5 percent of the population), the city’s mayor, Karl Dean, has made better education at all levels one of his principal goals. One result: The Academies of Nashville, which pairs the local business community and high schools to create specialized career-oriented courses such as the Academy of Digital Design and Communications, sponsored by the Country Music Television, and a network of alternative high schools funded by a grant from the National League of Cities. With office vacancies at 9 percent and a new 1.5 million square foot convention center with a green roof scheduled to open in 2013, “We are running out of space downtown, and I can look out of my office and see six cranes,” says Terry Smith, CCIM, SIOR, executive vice president at Colliers International.

Form a Private/Public Partnership

The cooperation between private, public, and philanthropic in Nashville’s education program highlights another key to sustained economic growth — a shared vision and a cooperative outlook, says Chris Leinberger, president of LOCUS, professor at George Washington University School of Business, and nonresident senior fellow at Brookings. “The private sector has to take the leadership role,” he says. Case in point: Opportunity Austin, a private economic development initiative coordinated by the Chamber of Commerce and completely funded by the private sector. “City councils can be slow to act. Sometimes you just need to make a decision and get on a plane,” says Jerry Heare, SIOR, senior vice president at NAI REOC. Also key: Getting buy-in from all communities in the region.

In Denver, each of the 70 mayors of cities in the seven-county region has veto power on proposals, and all sign a Code of Ethics, “which basically says you will sell the region first and not sell against your neighbor,” says Tom Clark, executive vice president of the MetroDenver Economic Development Corporation. The cooperation is a big reason the area has “a world class infrastructure,” says Clark. Another must do: Be willing to pay for the improvements you want. Denver citizens voted a sales tax increase to fund FasTracks, an expansion that will add 122 miles of commuter and light rail throughout the metro area. Nashville recently voted in a property tax that will add $100 million over seven years to the city’s education budget. Another tip: Lower costs of capital and labor during recessions make slow times ideal for investing in infrastructure projects, says Paul Washington, executive director of Denver’s Office of Economic Development.

Buy Into 21st Century Transit

Denver’s willingness to fund rapid transit has put it on the path to be a 21st century city,” say Leinberger. The 2014 completion of the Union Station transit hub will increase connections region-wide. The redevelopment of the historic structure, which will also have a new boutique hotel and 76,000 square feet of retail and restaurants, has already helped increase leasing activity in the area, says R.C. Myles, CCIM, SIOR, senior vice president, capital markets with Cassidy Turley Fuller Real Estate.

Most other fast-growing cities lag behind in transit, but they know they have to catch up or lose out. Nashville just passed a bus rapid transit plan with support from the Greater Nashville Association of REALTORS®. In 2011, GNAR used a $10,000 Smart Growth Grant from NAR to create the Transit Citizen Leadership Academy with the goal of educating key community leaders about the value of transit, says Kendra Cooke, 2012 GNAR president. Attendees included mayors from all 10 counties in the metro and helped create the critical mass of support to pass the $174 million project.

Boost Your Quality of Life

While quality-of-life improvements without job growth may just be window dressing, a great place to live will keep top workers in town, says Leinberger. What makes a great place? Density and walkability, he says. Cityspanning greenways like those in Nashville and transitoriented developments in Denver encourage walkability and cut pollution. Sufficient density also lets a city support vibrant public spaces and cultural institutions. Case in point: In Pittsburgh, the city’s Urban Redevelopment Authority spent $5 million to turn a decaying square full of drug deals and bus fumes into vibrant 24/7 piazza for the city’s workers and 8,000 residents. URA offered low-interest loans that helped merchants renovate.

Today, the Market Square area has 30 restaurants, 500 fully occupied apartments, and, soon, a luxury hotel. The city has also launched a 10-year plan to reconnect its riverfronts to neighborhoods. “That connection creates added value and tax revenues beyond the actual development into the community,” says Robert Rubinstein, URA’s acting executive director. No city has it all, and all have room for improvement. But with a vision and a will to implement that vision, many more cities have the potential to become economic leaders in the 21st century.