Category Archives: Business and Economy

Ikea as suburban economic engine and sign of suburban change

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The wealthy Indianapolis suburb of Fishers now has an Ikea and the community hopes it spurs economic growth:

When Ikea opens Wednesday, it could alter the character of this northern suburb city from a drowsy residential nook into a dynamic regional shopping mecca. The giant Swedish furniture retailer’s gravitational pull has already attracted other businesses nearby and prompted major highway and road work.

Which is why city officials expect the residents to get along just fine with the new kid. For one thing, Ikea has cache, even if the store is three times the size of a Walmart. For another, Ikea’s guests are quiet and well-behaved. And most importantly, Ikea will contribute millions of dollars to the local economy in sales taxes and in-town spending at other stores…

But for Mayor Scott Fadness and the City Council, the wave of development is the cornerstone to expanding and defining the city. It follows a similarly aggressive flurry of construction just blocks away, across I-69 in downtown proper, now called the Nickel Plate District. Over a five-year period, the city encouraged residential and business development to get people living and working downtown. Two high-rent apartment buildings with first-floor restaurants and shops were built next to City Hall and several high-tech firms set up shop nearby, earning Fishers the reputation as a technology hub…

Ikea asserts, and experts agree, that it’s 44 U.S. stores draw customers from as far as 200 miles, and they spend money at more places than just the furniture store.

It is not enough for many places to be well-regarded bedroom suburbs: many of these communities now want more.

  1. An expanded tax base. Bringing in businesses means more money for local services and a reduced tax burden for residents.
  2. Excitement about the community. Many postwar suburbs have experienced decades of development. Newer suburbs or exciting urban neighborhoods offer new options. How will a high-status suburb stay on the radar screens of people within the region and elsewhere? New development always brings excitement.
  3. A new vision for the future. What will the suburb look like in the 21st century? Can they develop new plans and visions? The postwar suburban era is over; what will these suburbs look like by 2050?
  4. Number two and number three above are linked to attracting young professionals. These are high-status people who can contribute to the tax base, provide employees that high-end employers want, and bring energy to the community.

The moves in Fishers echo those of many other suburbs across the United States. Some, like Fishers, are well-positioned with their wealth and location to take advantage of possible opportunities. Others will pursue some of these options but ultimately lack the ability and/or resources to carry them out.

New possible Georgia city just for Amazon

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The race is on between cities and communities to put forward an appealing pitch to Amazon regarding its second headquarters. One Georgia community has a unique approach: make a new city just for Amazon.

The Stonecrest City Council voted 4-2 on Monday to de-annex 345 acres of land if the e-commerce giant picks the area for what the company calls HQ2, a corporate hub where Seattle-based Amazon says it will one day house 50,000 jobs…

“There are several major U.S. cities that want Amazon, but none has the branding opportunity we are now offering this visionary company,” said Stonecrest Mayor Jason Lary. “How could you not want your 21st century headquarters to be located in a city named Amazon?”

Amazon is seeking a 175-acre site located near an international airport, public transit and high quality of living. Lary said he hopes MARTA expands rail service to Stonecrest.

The proposed city of Amazon could enter into an agreement with the city of Stonecrest to provide city services, he said.

This would indeed present a unique opportunity for any large company. I could imagine a few stumbling blocks:

  1. Naming a community after your company could have some cool features but also might have drawbacks. If something goes wrong in Amazon, Georgia, is it automatically the company’s fault?
  2. Would Amazon want its own community that is still beholden to its neighbor for city services? Providing all of your own infrastructure could be very expensive but working out deals for essential needs is not necessarily easy.
  3. Would Amazon want the perception of running a company town? This has tended not to work out well in the past. See Pullman as an older example or Facebook as a more recent effort.

I imagine there will be additional creative options proposed by other cities and places. Stay tuned.

The suburban expansion strategy of Sears in the 1920s

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In an intriguing article comparing the rise of Sears and Amazon, Derek Thompson explains how Sears expanded from a mail-order business to physical stores:

In the early 1920s, Sears found itself in an economy that was coming off a harsh post-World War recession, according to Daniel M. G. Graff and Peter Temin’s essay “Sears, Roebuck in the Twentieth Century.” The company was also dealing with a more lasting challenge: the rise of chain stores. To guide their corporate makeover, the company tapped a retired World War I general named Robert Wood, who turned to the U.S. Census and Statistical Abstract of the United States as a fount of marketing wisdom. In federally tabulated figures, he saw the country moving from farm to city, and then from city to suburb. His plan: Follow them with stores.

The first Sears stores opened in the company’s existing mail-order warehouses, for convenience’s sake. But soon they were popping up in new locations. Not satisfied with merely competing with urban department stores like Macy’s, Wood distinguished new Sears locations by plopping them into suburbs where land was cheap and parking space was plentiful….

The company’s brick-and-mortar transformation was astonishing. At the start of 1925, there were no Sears stores in the United States. By 1929, there were 300. While Montgomery Ward built 90 percent of its stores in rural areas or small cities, and Woolworth focused on rich urban areas, Sears bet on everything—rural and urban, rich and poor, farmers and manufacturers. Geographically, it disproportionately built where the Statistical Abstract showed growth: in southern, southwestern, and western cities.

So what is the equivalent today of the burgeoning suburbs of the 1920s in terms of locations? The end of the article hints at one option:

Amazon, too, will thrive as long as it uses American demographics as a roadmap and takes advantage of new personal technology, like mobile phones for shopping and AI assistants for the home. In the last six months, Amazon has spent $13 billion to buy Whole Foods and its upscale urban locations. At the same time, it has offered discounts for low-income shoppers to become Prime subscribers.

Locating in wealthy communities is an interesting strategy. Other major popular retailers today are following such a model: think of Apple stores (perhaps another reason they cannot truly be town squares if they are primarily in wealthy areas) and Starbucks locations (less exclusive than Apple but still located within reach of wealthier customers or along well-trafficked roadways – see all 11 locations in the wealthy suburb of Naperville). Could we end up with a bifurcated retailing model where the wealthy (and those who can travel to these locations) can shop at a bricks and mortar store while the majority of Americans primarily shop online? This might be an overlooked edge for Walmart at this point: Amazon may rule online but Walmart stores, like Sears, are where many more typical Americans are and it may take some time to switch loyalty.

The same LA bridges in many car commercials

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One interesting set of locations is fairly common in car commercials: bridges in Los Angeles. This is not what you might expect: how many people know that bridges are even necessary in Los Angeles? (The Los Angeles River does exist.) This has a long history: a 2004 New York Times story suggests the presence of production companies in southern California plus good weather leads to many shoots in Los Angeles.

One of the past bridge locations was the Sixth Street Viaduct which closed in 2016:

According to Film L.A., the organization that helps the film industry book municipal locations, over 80 movies, television shows, music videos, and commercials are shot on or underneath the Sixth Street Viaduct each year. That’s partially because of the bridge’s swooping metal arches, perched on an art-deco concrete platform; and partially because of the river underneath and that access tunnel: if you want to film something set in Los Angeles that makes reference to the city’s automotive culture, or if you’re just looking for a place to shoot a car chase that’s cheaper and more available than a clogged freeway, the channelized, concretized bed of the Los Angeles River is your best choice.

Except that the bridge officially no longer functions that way, as of last week. It’s going away completely. And the river? It’s on its way to becoming a river again.

Here is a short montage of the bridge being taken down alongside iconic images from films.

The Fourth Street Bridge is also home to a number of shoots and features Art Deco columns as well as views of the downtown skyline. Here is a Google Street View image:

FourthStreetLosAngeles

Are viewers of car commercials more likely to purchase a vehicle if it is shown in Los Angeles compared to other settings? Los Angeles has its own aesthetic which may or may not match with many other places. (In urban sociology, Los Angeles is often held up as the prime example of decentralization. Yet, it also does have a downtown as well as numerous other scenic sites such as the hills behind the city.) In the Chicago television market, we see some car commercials shot in Chicago. Might this help viewers envision themselves driving a new car when they see it in a familiar location? It would be more difficult to do this for all of the metropolitan markets in the United States.

Here are some other common car commercial locations with several more in the Los Angeles area.

Two new options for those aspiring to a mortgage: take on an investor or list on Airbnb

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Axios highlights two businesses trying out some models that could help potential homeowners acquire a home:

James Riccitelli, CEO of Unison Home Ownership Investors, says in an interview with Axios that he is consistently surprised that nobody in the decades-long history of U.S. housing finance had thought of the company’s business model. Unison co-invests with prospective homebuyers—typically putting 10% down along with a bidder’s own 10%, helping them qualify for a standard 20%-down home loan. Depending on the lender Unison partners with, a homebuyer can end up putting as little as 5%:

  • Unison’s investors—who Riccitelli says are typically large pension funds with long investment time horizons—realize a profit only when the home is sold. The product is attractive to such investors because they need assets that match their liabilities, i.e. pension payments sometimes 30 or 40 years away.
  • Other than a few private equity funds that bought up cheap single family homes at the housing market’s bottom between 2010-2012, there are few ways for investors to own a diversified pool of residential real estate, a market that at $30 trillion is more valuable than the U.S. stock market
  • A homeowner can buy Unison out at any point after three years—as long it recoups its original investment. A homeowner can sell the home to another party at any point, however, even if it results in Unison taking a loss.
Loftium has an alternative strategy. It will will contribute $50,000 for a down payment, as long as the owner will continuously list an extra bedroom on Airbnb for one to three years and share most of the income with Loftium.

This strategy might be particularly appealing in booming markets like Seattle, where rent prices are rising even faster than home values themselves, and which are popular tourist destinations.

These present alternatives to the traditional mortgage market with one emphasizing long-term payoffs (and assuming that housing values continue to rise at investment-level rates) and the other trying to capitalize on rental opportunities in the next few years. It will be interesting to see if such options (1) become popular (and if so, how traditional lenders fight back) and (2) whether there are negative consequences to such alternatives (and reactions to them including regulation).

Apple: new Chicago store will “transform the riverfront”

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The claim that Apple stores can serve as town squares is questionable and another claim about the new Apple store on the Chicago River might be as well:

During the keynote address, Apple’s Angela Ahrendts claimed that the new store will “transform the riverfront.” And in typical Apple fashion, the new store combines form and function to deliver perhaps the most transformative retail offerings in years. Similar to designs for other Apple flagship retail stores, the new Michigan Avenue store boasts a glassy, transparent box shape. However, it is capped with a curved roofline that resembles the lid of its Macbook laptop computer.

The new store has taken over a large portion of Pioneer Court, an outdoor office plaza which had previously served as the location for large-scale art installations. Construction on the new store officially kicked off last March, and after a year, the store began to take shape as workers installed the store’s large glass walls.

Apple is known for its focus on design, and its big move and new location is notable for not just being on the river, but for adding more to Michigan Avenue south of the Magnificent Mile. Once a quiet stretch, the length of Michigan Avenue between the Mag Mile and Millennium Park has gained significant momentum with the delivery of a new apartment tower, a new hotel, and the planned overhaul of the Tribune Tower and its surrounding properties.

This one store has been talked about for months and certainly has a striking design. Yet, can it truly “transform the riverfront”? That remains to be seen. Part of the issue could be exactly how transformation is defined. Is it simply operating an iconic building? Does it involve attracting a lot of people? If it does bring in a lot of people, what if those people primarily stay inside the Apple store rather than lingering on the riverfront and frequenting other spaces and businesses? Is it bringing in big money (sales as well as tax revenues)? Is is transferring the high status of Apple to a development project – the Riverfront – that could use some status?

Let’s see what happens. My guess that this will be an iconic store for Apple but the Chicago Riverfront is going to need much more than this to truly be a destination in its own right.

Apple stores are not new town squares

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American communities often lack vibrant public spaces but Apple stores may not be the answer:

The stores have good vibes. Everything is clean. There are no sounds of commerce. No clanging till. No specials on an aisle. No mechanical belt sliding products toward a beeping scanner. People will tell you they like your new shoes. I love Apple Stores.

But there is one problem with calling an Apple Store an Apple “Town Square”—which the company announced it’s now doing at Tuesday’s iPhone event. Namely, the Apple Store is a store and not a town square…

And most surreally, a dominant problem for democracy at this moment is that truly public space doesn’t exist on the internet you access through your phone.

Internet platforms, as John Herrman has argued, merely masquerade as democratic spaces. But they are not. They are private, as private as an Apple Store.

This is a regular issue that pops up: private retail or office space that often functions as public space is not truly public space. If you conduct activities that are not conducive to business, whether in an Apple store, a McDonald’s, the cavernous lobby of a hotel, a shopping mall, or even a landscaped area outside a business but that it is on private land, you can be removed from that space. These private spaces that allow people of different backgrounds to gather and interact can still be very valuable – see the concept of “third places,” an idea that Starbucks CEO Howard Schultz has discussed. Granted, there are restrictions on what you can do in public spaces as well but your activities are much more limited in private spaces.

Sociologists and others have asked for decades how American communities might develop more public spaces. The Internet was one space that offered new opportunities for democracy and public interaction. Alas, much of that early fervor has decreased as the Internet is dominated by major corporations and online discourse is often not very enlightening or civil.

Roll out the tax break bidding war for Amazon HQ#2

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Amazon want to build a second headquarters with some 50,000 workers. Expect the tax break war to begin:

Amazon is seeking proposals from local, state and provincial government leaders, and says it is focusing on metropolitan areas with more than 1 million people. It is also looking for areas that can attract and retain technical workers and “a stable and business-friendly environment.”

News of the search has unleashed a wave of speculation about where the world’s largest online retailer could set up shop. But experts say the company’s decision is likely to be as much about politics as it is about logistics and incentives. Bezos has been a vocal opponent of President Trump’s immigration bans, and earlier this week was among hundreds of tech leaders who urged him to reconsider his stance on the “dreamers” immigration program…

Among the criteria it will consider, Amazon says, are tax exemptions and other incentives, including relocation grants and fee reductions. “The initial cost and ongoing cost of doing business are critical decision drivers,” the company said in its request for proposals.

It added that the location does not need to be in an urban or downtown location, or a development-prepped site. The site should, however, be within two miles of a major highway and have access to mass transit. Amazon said it will give priority to existing buildings that are at least 500,000 square feet and undeveloped sites that measure about 100 acres.

Here is the actual language from page 6 of the RFP:

AmazonRFPp6

This may seem like a perfect scenario for locations (cities and states) to offer tax breaks: the company is growing, it is a major player, and it comes with a large number of jobs. Headquarters are a status symbol for areas but this one includes real jobs and a high-status company.

However, I would still argue a tax break war is a bad idea. Here are a few reasons why:

  1. There will be one winner and a lot of losers. Those who do not win may just offer even deeper breaks to the next possible company. When does this stop?
  2. A massive tax break will offset at least some of the benefits of the headquarters. While it is hard to pass up 50,000 jobs, significant tax breaks mean local governments and residents get less than they might otherwise.
  3. A bidding war puts Amazon in the driver’s seat and may have local governments begging for this. A victory would wipe out groveling but going all in on an offer and losing may reduce the status of a location. (Think of unsuccessful Olympics bids in the past.)

The locations involved could be many but this will not turn out well for many or maybe even all.

A new suburban Walmart comes with tax revenue, crime, and economic development

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How exactly does a new Walmart change a suburb? Here are at least a few factors to consider:

From its opening day to June 30, 2017, officers responded to 445 calls for service at Walmart, 166 of which resulted in arrests, according to records obtained by the Daily Herald. That means police were called to the store an average 1.2 times per day in its first year…

Walmart announced in 2012 its plans to close an East Dundee store and build the Carpentersville supercenter less than three miles away, prompting a lengthy legal battle between the company and the two villages. Walmart is expected to receive $4.3 million in tax increment financing funds ­– property taxes above a certain point in the area that would have gone to local governments — for the new store…

Though he declined to disclose specific sales numbers, Rooney said the new Carpentersville store has generated more sales tax revenue than East Dundee reported losing…

Already, the supercenter has significantly increased traffic and economic interest on the village’s east side, he said. Plans are moving forward for constructing a new five-tenant building and an O’Reilly Auto Parts on the store’s outlots.

To be honest, many suburbs cannot afford not to welcome Walmart into their communities. It is rare to find a user for a decent sized portion of land along a major road that will bring in so much tax revenue and provide jobs. The increase in crime can be chalked up as simply part of doing major retail business (I assume there may be bumps with other major retailers or shopping malls) and may not be a huge issue if it is largely isolated to the Walmart site.

In the long run, there are additional factors to consider including the local business climate with the behemoth Walmart in town (more competition for certain businesses), the opportunity cost of what else might have operated on that site, and the image of having a Walmart and related businesses. There is a reason more exclusive communities turn down big box stores and large strip mall areas. Furthermore, the fate of East Dundee could soon befell Carpentersville; if Walmart eventually wants a better deal or a bigger store, they can simply move and bring their benefits (and problems) to a different suburb.

As I suggested above, given these short-term and long-term outlooks, most American suburbs would choose to welcome Walmart. From whence the Walmart came does not matter while the tax receipts can be blinding to many.

No cheap homes left at the bottom of the housing market

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One downside of increasing housing values is that the lower end of the market also rises:

More telling is that at the start of 2013, when home prices were just beginning to bounce off the bottom of the housing crash, the share of homes sold above $500,000 was just 9 percent of all sales. Today that share is more than 14 percent. The share of lowest-priced home sales today is less than half of what it was then as well.

“On the lower end, there is virtually no property at a very low price level anymore,” said Lawrence Yun, chief economist for the National Association of Realtors. “The same property has been moved up to a different price bucket just because the prices have been rising strongly, over 40 percent price appreciation in the past five years. We are not getting the transactions on the lower end because there is virtually no inventory on the lower end.”

In the wake of the housing crisis, investors bought thousands of low-priced, distressed homes, putting a price bottom on the market but also removing lower-priced inventory. The expectation at the time was that if prices jumped, the investors would sell. For the most part, they did not. In fact, investors continue to buy properties, even at peak prices today because both the rental market and the market to flip these homes are so lucrative…

Homebuilders are continuing to increase production and selling homes they haven’t even built at a historically fast pace. They are not, however, putting up low-priced homes, even though demand there is high. They argue they cannot make the margins work, given the high costs of land, labor, materials and regulation. The median price of a newly built home recently hit a record high.

Two quick thoughts:

  1. I thought letting this go to the markets would solve the problem. In other words, if there is a need for cheaper housing, shouldn’t the market correct? It does not appear this is happening as builders do not want to have smaller margins. Some interventions may be necessary if no businesses see an opportunity.
  2. This makes the issue of affordable housing even more difficult. Many big cities already have major shortages of affordable housing. If prices keep increasing and little is being built at the lower end, might be drastic consequences?