Reference

• The Metropolitan Momentby Bruce Katz, Vice President and Director, Metropolitan Policy Program, September 2011
• America Reaches Its Demographic Tipping Pointby William H. Frey, Senior Fellow, Metropolitan Policy Program, August 2011
• The Surprising Math of Cities and Corporationsby Geoffrey West, Physicist, July 2011
• Where the Skills Areby Richard Florida, Atlantic Senior Editor, October 2011

Are you ready for the re-urbanization of manufacturing?

Manufacturing is coming home, moving closer to markets to reduce logistics costs, carbon, and response times. When all the costs are fully loaded, the differentials in industrial labor costs between Here and There don’t look so big. And the labor component of most products is shrinking anyway.

By definition, US inner cities abut the nation’s largest markets, and they provide the best access to all other markets. Inner cities have dramatically more ports – air and sea – and intermodal shipping facilities than any other American geographies. They have the land, the labor, the markets, and the connections.

Okay, you’re not in the manufacturing business. You’re designers and developers.

Are you ready for the largest-ever changeover in industrial real estate?

Over the next ten years, the amount of industrial space vacated by declining industries in the United States is projected to be one billion square feet. That sounds grim, until you learn that a billion square feet is almost exactly the amount of space that growing U.S. industries are expected to need in the same ten years. For America and her investors, architects, developers and industries, it’s not about rebuilding. It’s about transition.

This is old news here in New England, where much of the urban landscape is still defined by what once were mills. Now we’re reinventing them. Look at the Holyoke High Speed Computing Center. I’m sure many of you have worked on projects that create 21st century futures for 19th century structures.

Are you ready for the new American?

This year, America reached a tipping point. We underwent a fundamental and irreversible change, and I’ll bet none of you felt a thing. For the first time, more than half of all babies born here were members of what we still call “minority” groups.

These new citizens will redefine consumer markets. In cities, they already have. Cities show us what the post-mass market future will look like. In metropolitan areas, most of the people under age 18 are now non-white; and 22 of our 100 largest cities are “majority minority” overall.

Are you ready for the new workforce?

In our cities, the future is already here. It’s a future of diversity on every dimension: race, ethnicity and culture, to be sure, plus a greater diversity of experience, education and age. Worldwide, cities are getting older. Here in the States, that includes Baby Boomers moving back into town from the suburbs, bringing their skills and their relatively high wealth with them.

Managing an increasingly diverse workforce is a challenge for some companies, but for inner city CEOs, a local, multi-cultural, multi-lingual workforce is a competitive advantage. Urban business owners know how to do things that the CEOs of big corporations haven’t had to think about yet. They also have a different relationship with their employees.

The CEOs of the fastest-growing inner city companies invest proportionally more in training and benefits than Fortune 500 corporations. Instead of mindlessly managing costs, they manage their investments in people. In return, they get more revenue per employee than big business does, and double-digit growth.

William Gibson, probably today’s most influential author of speculative fiction – the guy who coined the word “cyberspace,” by the way – put it this way: 

“The future is already here. It’s just not evenly distributed.”

No city is monolithic. Diversity, it turns out, is central to their advantage. There is really no such thing as Boston. Or Los Angeles, or Detroit. Cities are more like coral reefs. They are ecosystems of producers, consumers, builders, destroyers, and waste collectors – all inhabiting a crazy range of structures which, as architects, you know are ecosystems themselves.

Even a declining city is dynamic.

Forty square miles of Detroit is now vacant property. That’s horrible for the people who lost jobs and homes and businesses. But Teresa Lynch at Initiative for a Competitive Inner City will tell you that it gives Detroit and cities in a similar fix like Cleveland and St. Louis more strategic options. They have a bigger canvas on which to reimagine whole new futures, and more room to execute at less cost than a city like Boston, where industrial land is tight.

Teresa almost makes Detroit seem enviable when she describes it as a “land-rich” city.

I like to think that if I lost my job, I’d suddenly be “time-rich.”

None of us has a choice about the challenges we face in our cities in this economy, so let’s be optimists and declare that this is the most exciting time in history to be an architect. Or a developer. Or the managing partner of Next Street. I know it’s the most exciting time in my career.

If policy is stuck, and money’s dried up well maybe that’s not a bad thing, because the status quo stinks. Those good old days before the financial wreck weren’t so good. They’re part of what got us here. Good riddance.

The relationships among business, capital, government and philanthropies – in inner cities especially – weren’t working. Ben Hecht of Living Cities has called urban economic development “a field of perpetual frustration.” So let’s try a new way.

In a rapidly urbanizing world, Capital is stuck in old channels. Investors didn’t get the memo about almost every activity in our cities being 15% more efficient and 15% more productive at the same time.

Banks certainly didn’t get the news about urban entrepreneurs. Minority-owned companies have been outperforming their peers for more than a decade, but loan denial rates for these firms is five times higher than for whites. I can’t wait to see what happens in 2040 or so, when Caucasians become a minority.

High-potential urban companies are starved for capital because it’s easier for institutions with capital to keep doing what they’ve been doing. There is a tacit vested interest among public, private and nonprofit capital providers in the status quo. This is not a recipe for growth. Let alone the kind of transformative change we now have the opportunity to bring about.

Now that some of us are so “land-rich.”

What is missing in cities is not revitalizing new ideas. Cities have been Petri dishes of progressive social change for generations. What’s missing is growth capital for the small companies that should be the economic engines of their communities.

"Successful companies between $5 million and $60 million in revenues can’t get the capital they need to expand their operations and hire more people in city neighborhoods where the best social program is a job.

Companies in this general range used to generate two thirds of America’s new jobs, and 80% of the new jobs in our cities. These days, that’s not happening. Most of these companies are more productive than the average large corporation, but they’re starved for capital.

There are two barriers to investment. Neither is substantive.

The first is the misconception that there’s nothing in the inner city bigger than a bodega. In fact, we estimate there are over 25,000 investment-grade companies in U.S. inner cities alone. Nearly 10% of these “urban blue-chips” have annual revenues over $20 million. That means in some cities, there’s a $20 million company on every city block. 

But I’ve had bankers tell me that they have money to lend but can’t find good companies. That’s funny, because we can. Ron Walker, who’s the President of our firm, likes to say that it’s the people who aren’t getting business who tell you that there is no business.

The second barrier to capital flow is institutional inertia.

Lending to small business peaked in 2008 and has fallen every quarter since. The banks have retreated from that business – pursuing economies of scale, rather than helping scale up small companies. It’s easier to meet Community Reinvestment Act targets with housing and real estate than with business loans. A successful company is invaluable to a neighborhood, but it’s work to put a value on that company’s future.

At Next Street, we look at a company’s potential, not just its track record. And, in fact, we have an advantage over traditional banks. We’re a merchant bank. We’re inside the company, with the owner and her team, advising on every aspect of the enterprise. We help her hire the right managers; we even operate an ad agency help her market the company’s products. Whatever she needs to succeed.

Some of the traditional lenders are beginning to talk about small business again. Banks are running ads to show they care. But the trend-line for actual lending is still down.

Large corporations know more about opportunities in Chinese markets than they do about opportunities in our own cities. Few CEOs realize that their companies’ “supplier diversity programs” might be self-defense exercises for an urbanized future.

In general, US corporations are hoarding cash rather than investing in new initiatives or expansion. In 2008, nonfinancial corporations’ cash total crashed from $1.5 trillion to about $1.4 trillion, according to the Federal Reserve.  Okay, everybody took a hit back then. But now in 2011, the corporations are sitting on over $2 trillion in cash. An analyst at Standard & Poor’s figured out that the average company in the S&P 500 has enough cash to operate for six years. 

Big companies could transform their communities, change our cities, by expanding their operations or simply buying more of what they buy closer to home.  A lot of the work we do at Next Street is helping small companies scale up to deliver for big companies, but it’s hard to get the giants’ attention.

Our marketing people have suggested that we tell the corporations that inner cities are the new China. Abundant labor. Lots of clever new suppliers your competitors haven’t discovered yet. Simpler logistics. No language barrier or “special arrangements” to make. And a big market, too. The income density in Roxbury, where we have our office, is eight times higher than in Wellesley.

Ironically, another institutional player who’s not significantly invested in the urban economy is the foundations. They’re in the space, but they’re not investing there. America’s great foundations have over $600 billion in their endowments. Some of that money could be invested right in the communities where they do their fine nonprofit work. But most of them are stuck in old patterns. While minuscule amounts of program money are trickling out to small-scale community-development institutions, billions of dollars are sitting in those endowment funds.

Right next to all that corporate cash.

Making the case for investments that produce social impact as well as market returns is not a discussion most executive directors want to have with their board – or their financial stewards on Wall Street. Nobody is looking at the bigger picture. Or, if you like the coral reef analogy, seeing the whole ecosystem.

The institutions I’m complaining about – the banks, large corporations, foundations – aren’t stupid. They’re not mean-spirited. They just tend to do what they know. It’s easier to invest in a few big companies. It’s easier to buy from a few big vendors. And it’s easier to sell to a monolithic mass market than to the diverse and dynamic collection of markets that we call a city.

Money follows data, and there isn’t much data on the urban enterprise. You have to go out and look for opportunities, which is what Ron Walker and I did in 2005.

We started Next Street with the idea of equipping urban business owners with the same level of expertise that Wall Street, Madison Avenue and the elite consultancies provide to FORTUNE 500 Companies. Last year, our portfolio companies had revenues of nearly $600 million and employed 4,000 people. More than half of these companies are in low-income areas. Three quarters are women or minority-owned. Every one of them is making money.

That great small companies are harder to identify than, say, Apple or Exxon doesn’t make them less likely to pay off for investors. The default rate for urban businesses under $100 million is one third that of companies over $1 billion. But institutional leaders are used to looking in familiar fields and reaching for the low-hanging fruit.

It takes imagination to create a successful building – or a successful company. All it takes to invest in one is knowing where to look. On an institutional level, all that is required to unleash capital flows to expand already successful companies is leadership.

IBM is leading a consortium of 100 other far-sighted companies to build a single electronic platform that will enable small companies to bid for big contracts.

Caterpillar is now supporting small suppliers with financing. Google is using some of its surplus cash to invest in affordable housing while taking advantage of tax credits. The developers get financing. And Google makes more than money. The public thinks it’s a great company and Google is at the top of the list for top talent.

Look how far your industry has come with green engineering and green building. A few years ago, designers were way ahead of everyone else. Customers had to be convinced to invest in better efficiency – which is crazy, when you think about it – and often builders needed some convincing, too. Upfront costs aren’t the only thing, any more. Green isn’t exotic any more, it’s the color of money over time. And we get a better environment thrown in for free.

Incidentally, 300,000 Bloomberg terminals now include a company’s aggregate environmental impact in its financial profile. This kind of data used to be considered quote, “extra financial” but increasingly have direct bearing on business performance.

Most business people and public officials still equate innovation with risk-taking. Everybody talks about innovation, but when it’s time to make the decision, they play small-ball. Doing new things is scary. But just as upfront costs aren’t the whole story with green building, risk-assessment is an incomplete calculus whether you’re investing in a small company or the Apollo Project.

Gary Hamel and CK Prahaldad at Harvard Business School say getting to the future is less about making heroic investments than it is about de-risking heroic ambitions.

I’d like to give you an example of de-risking an ambition: the Loews Pitkin Theater in the Brownsville section of Brooklyn. For 40 years, it was a luxurious, 157,000 square-foot escape in a hard-working neighborhood. By 2007, it had been closed for most of another 40 years. A furniture store in the grand old lobby had failed. So had a church.

When POKO Partners bought the building, it had been empty for so long that the roof had collapsed. POKO specializes in low-income areas and envisioned transforming the site into affordable housing. Then the real estate market collapsed. When the financing dried up, POKO called Next Street.

Our most important role was helping POKO reconceive the stalled project – from affordable housing, which was already available in the neighborhood, to 65,000 square feet of new retail space. And a new charter school for 1,200 children.

We were able to gather seven different funders around the idea, and structured a deal using New Markets Tax Credits and Historic Tax Credits. The work is finishing as we speak. It’s LEED-certified. It’s the first new retail expansion in Brownsville in a generation. And it will bring 150 new full-time jobs to an area where unemployment is over 20%.

Low-income areas like Brownsville were having a job crisis long before the rest of the country followed. And one of the best ways to tackle the problem is with infrastructure projects. Inner cities have a lot more infrastructure assets per square mile than other parts of the city. A lot of it is in bad shape. Obviously, if you and your engineers fixed up a deficient bridge, there would be jobs while you were doing the work. But my friends at ICIC have the tools to calculate how many permanent jobs – in which industries – fixing that bridge would create. 

An angry body politic has made the public sector afraid to spend money. This kind of data goes a long way to de-risk an expensive project.

Mike Bloomberg, who’s done pretty well in both the private and public sectors, has an interesting take on why it’s hard for government to innovate. Here’s what he told Fast Company:

“The public insists on knowing where its money is going. That’s not the way innovation works. Innovation is you don’t know what you’re going to build, what it’s going to be called, how much it’s going to cost. You cannot use public moneys unless you can answer virtually every one of those questions, which is why government tends not to innovate. The public wants justification in advance, but that’s not going to work for certain things.”

So it’s on us – the private sector – to supply the creative quotient in the growth equation. But outside of a few leaders, like those I mentioned earlier, big business isn’t interested. They’re not investing. Think about that two and a half trillion dollars they’re sitting on. Two and a half trillion dollars under a really big mattress because they’re scared.

It’s time we raised our sights again. 

The times demand it. The citizens who inhabit the structures that you create demand it.  A lot of people are mad at Business lately, and with cause. Real incomes are going backwards and that’s worth getting mad about. The American Dream of a better life for each generation – our unwritten social contract – has been abrogated and a lot of Americans blame business.

Work by Harvard Business School Professor Michael Porter and his team shows that business is now perceived to be prospering at the expense of the wider community. The surprise is that Harvard Business School needed research to find this out.

We, the people, don’t like what’s going on. And the millennial generation – people in their 30s now coming into management roles – won’t stand for it. That’s another tipping point we’re reaching. The next generation of business leaders wants to work for Society at the same time they work for The Man. (Who probably won’t be a man any more anyway.)

This is good news for Next Street. Nearly every member of our professional staff has either left or turned down jobs at the McKinseys of the world and the big investment banks to come to work for us for less. Because we do the kind of work they want to be doing. There is enormous power in that.

This generation wants to know what good an organization does. And, as never before, they know what harm it does. How an organization is perceived is no longer mediated by its P.R. department. The ability of ordinary people to share their knowledge – instantly and widely – online has made intangibles fungible.

Relevance, reputation, and the connection people feel with an organization are now central to value creation. What a company does outside its walls – in its communities or on the other side of the world – affects its balance sheet.

If you want the best customers, if you want the best talent and want to retain them look beyond “shareholder value” to the good you do in the world. Or else.

Almost everybody in this room is in what I would call a creative enterprise. So I’d like to mention Steve Jobs.

I don’t know anyone in business who doesn’t claim a commitment to excellence. But there is almost no one in any field who lived it as he did. Great wasn’t good enough. It had to be “insanely great.” This made him hard to live with, but it changed computing. It changed communications. It changed the entertainment industry.

These are not small footprints to leave.

For most people, “excellence” is just a buzzword. Steve Jobs showed us that a true commitment to excellence is a commitment to risk.

Big change requires big ideas. But I would submit to you that what we need even more are big ideals.

Ideas get you noticed – they give you share of mind – but ideals give you share of culture – which is what you need to get anything bold done today.  It’s hard to push a new idea through all the constituencies you need to get to “Yes” in a big city.

Big ideals gather people around the New.

Rural electrification in the 30s and 40s. Civil Rights in the 50s and 60s. The Apollo Project.

Heroic ambitions don’t die because somebody’s fighting for an opposite goal. They die from conventional wisdom. The status quo is always the default setting. But how things have always been done doesn’t have much to tell us about the future that’s coming at us – a future that’s already here in our cities.

Are you ready? 

Another question worth asking is, What, besides making money, are we in business to do?  Nobody asked me that question until I was in my 40s. That’s what started the chain of thinking that led to Next Street. I wanted to do something that would change things.

In the Middle Ages, builders began cathedrals knowing that they probably wouldn’t live to see the work completed. Imagine the power of the idea – and the ideals – that kind of commitment requires. Some cathedrals were an act of centuries.

We need that kind of courage.

What will our cathedrals be?