America's Declining Luxury Cities

Joel Kotkin might have entitled his analysis, The Decline and Fall of the American Luxury City.

Large American cities, like New York, San Francisco and San Jose are falling apart. They suffer from the highest level of inequality, between the ultra rich and the rest. The ultra rich are not only Americans. They are often foreigners. The rest are, you guessed it, the rest.

These cities have not built local economies. They have functioned as savings banks for foreign money looking for a safe haven in real estate. This money has pushed housing prices up to the point where precious few people will ever be able to afford them. 

Now, these cities have been taken over by radical leftist politicians like Comrade de Blasio and Alexandria Ocasio-Cortez. The latter was instrumental in killing Amazon’s plan to create a new business hub in Queens. Considering how many jobs this would have created, AOC has consigned many of her constituents to financial oblivion, dependent on government handouts. Middle class citizens who can afford to leave, leave.

Kotkin explains the problem:

After roughly 20 years of big-city progress, measured by economic growth and demographic progress, the dense urban centers, including New York, are again teetering on the brink of decline.

Long associated with glamour, money and cultural influence, the rise of the luxury city has foundered on the rocks of inequality and, increasingly, diminished upward mobility. Indeed, according to Pew research, the greatest inequality now exists in superstar cities such as San Francisco, New York, Los Angeles, and San Jose. Rather than working to create and sustain a middle class, as Jane Jacobs once suggested, by building local economies, these cities have depended on luring both the ultra-rich and the young and ambitious of the global marketplace to secure and enhance their place.

This means:

Today, as The Atlantic recently noted, Manhattan now suffers conditions where “the homeless shelters are full, and the luxury skyscrapers are vacant.”

Now we are seeing an exodus of middle class families from these luxury cities. 

More revealing still, the country’s three largest metropolitan areas — New York, Los Angeles, and Chicago—are now losing population. Since 2012, suburbs and exurbs, which have seven times as many people as the core, are again growing faster. Suburbs are also seeing a strong net movement among educated people, those earning over $75,000 and especially those between the ages of 30 and 44. Far from being dead, as often asserted in the big city media, a new Harvard study shows that over the past 40 years the periphery has increased its lead in terms of wealth and jobs compared to core cities.

Recent college graduates are attracted to the party scene, but once reality bites they are decamp for cities that offer better quality of life at more reasonable prices:

Dense, high-priced cities, the object of endless love from architectural critics like The New York Times’ Michael Kimmelman, do still attract many talented young people straight from college, but many don’t stay long, and increasingly are seeking out other, less dense and more affordable places. A recent Brookings study shows that New York now suffers the largest net annual outmigration of post-college millennials (ages 25–34) of any metro area, followed by Los Angeles, Chicago, and San Diego. The biggest gains, outside Seattle, have been concentrated in the central and mountain time zones in places like Austin, Dallas, Houston and Denver.

As we have reported, the luxury housing market in a place like New York City has been in decline:

The mounting surplus of luxury housing in America’s great core city is one indicator of a mounting crisis. Manhattan condo prices are now declining and many of the most luxurious new high-rises in New York—including MoMA 520 Park Ave., Central Park Tower, One57 and 100 E. 53rd St tower—are saddling well-heeled investors with potentially huge losses. Half of all the city’s condos built since 2015 lie unsold, as oligarchs, drug lords, celebrities and others lose interest in luxury real estate.

Precisely why the ultra rich are losing interest in luxury real estate is an interesting question. Could it be that they see a market in decline. This might mean that they do not want to try to catch a falling knife. Or could it be that capital controls imposed by Beijing are drying up the money flow?

Similar drops in luxury sales can be seen in markets such as Los Angeles, San Francisco and Miami, a process that also can be seen in other major world cities from Sydney and London, to Paris and Hong Kong. For a generation all these places were flooded with mobile capital from the ultra-rich, who invested in elite properties either for investment purposes or as a second, third or fourth residence. Now that cash, much of it from China, is drying up as slower growth, the coronavirus, and trade tensions slow the outflows, causing a drop in values.

In the past serious thinkers believed in an urban renaissance. The magnet would be superstar performers. And yet, the promise has come a cropper as quality of life issues drive these people away from the luxury cities. If the best and the brightest are really the best and the brightest, why would they tolerate the living conditions in San Francisco?

If culture and coolness drove much of the elite migration to cities, so too did the widespread notion that urban centers would dominate the economic future. Cheerleaders for the “new urban renaissance” such as Neil Irwin of the Times, sees these cities as the places with “the best chance of recruiting superstar employees.”

Yet the recent data belies such assertions. As [Richard] Florida has noted, the bulk of new growth of the “creative class”—the well-educated millennials who sparked the urban renaissance—is “shifting away from superstar cities.” Growth in the migration of such prized workers is now two to three times faster in Salt Lake, Pittsburgh, Cincinnati and Grand Rapid, Michigan than in regions around New York, Los Angeles, or Washington, D.C. This is true even in San Francisco, where nearly half of all millennial generation described themselves as “likely” to leave the city by the Bay, a dramatic shift from a decade earlier, in large part caused by insanely high housing prices and deteriorating conditions on the streets.

Even a concentration of tech geniuses is not sufficient. 

Today much of the big growth, even in tech, is occurring in largely suburban regions. Last year Austin, Salt Lake City, Dallas-Fort Worth and Phoenix, as well as smaller cities like Madison, Wisconsin and Boise, Idaho grew their tech sector as much as twice as quickly as ballyhooed hubs like New York or Los Angeles. There are growing signs that even Silicon Valley is dispersing as evident in Lyft's move of many key operations to Nashville, Uber establishing its second-largest office to Dallas-Fort Worth, and Apple’s construction of its second-largest facility in the suburbs north of Austin.

Middle class incomes will no longer allow a couple to raise a family in the luxury cities. The cost of property is prohibitive, private schooling becomes compulsory and the only real solution is to leave:

In many ways the promoters of the luxury city unwittingly set the conditions for its own demise. As mayors like Bloomberg pushed their elite vision, focusing on the billionaire class and elite industries, the middle class continued to decamp to more affordable places. With the stabilizing force of middle-class families diminishing, a new urban demographics emerged that has become dominated by singles, hipsters, the very rich and the very poor. This new reality has shifted urban politics from the pro-business corporatism of Bloomberg to the fully woke metropolis of Bill de Blasio with its hostility to business interests, dislike for police and opposition to education reform.

Hollowing out the middle class has left cities with the rich and the rest. The accumulated resentment against the rich manifests itself in political leaders who promote crime as a protest against injustice:

Under Bloomberg and other “luxury city” mayors, there was a concerted attempt to regain control of the streets from criminals and often unhinged vagrants. Now in some cities, like San Francisco, criminality in the public space is no longer being prosecuted. Particularly impacted has been law enforcement. The new progressive leniency, including perhaps overly expansive bail reform, appears to have encouraged criminals back to the streets of New York and other cities. Both violent and property crimes are on the rise, not only in Gotham but in cities such as Philadelphia, Baltimore and Washington.

The great American luxury cities are crime ridden and drug ridden and are infested with homeless encampments:

Rather than enforce basic order, cities swept up in “resistance” to Trump increasingly curry bedlam by all but abolishing penalties for property crimes, allowing people to sleep on the streets, shoot up and even defecate in public. San Francisco is the new role model here. Nancy Pelosi may praise the city by the Bay as “guiding light for progress across America” but the Daily Mail more aptly recently described it as a “dystopian nightmare.” It is a city with more drug addicts than high school students, and so much human waste on its streets that one website has created a “poop map.” Remarkably, San Francisco just elected as district attorney Chesa Boudin, son of unrepentant 1960s left-wing terrorists, on a platform further de-emphasizing criminal prosecution for property crimes and vagrancy.

While we rail about the horrors of life in China, we ought to take a look at what is happening to our own large cities:

Similarly in the core cities of Portland and Seattle, lavish investment has accompanied massive homelessness and disorder. In Los Angeles, run by gentry liberal and uber-green Eric Garcetti, the city’s core—filled with overbuilt, overpriced and often vacant apartments—is filled with homeless camps overrun with rats. A UN official last year compared conditions on the city’s Skid Row to those of Syrian refugee camps.

Since charter schools, like New York’s Success Academies, do a better job of providing a quality education, politicians and teachers’ unions are doing their best to kill them. This will obviously contribute to a further hollowing out of the middle class:

Charters and screened high schools, critical to retaining middle- and working-class families, are getting steamrolled by teachers’ unions and associated administrators. Increasingly public schools are abandoning both academic and personal discipline, while political indoctrination is replacing the acquisition of skills. The biggest losers here are usually inner-city poor children but the shift also makes cities far less attractive both to middle-class residents and businesses.

It’s inequality on the march. In part it was produced by the flood of money invading the local real estate markets. If you are going to park money in property you are not going to inhabit, big city condos are the place to be. If the owners of these properties do not live in the city they do not care about crime and education.

Once middle class people were priced out of the market, the extremely poor, those dependent on government, gained political power. They used the ballot boxes to vote themselves a living.

And they resorted to crime, to make a living and to express their impotent rage against the rich. They happily voted for officials who saw crime as the just expression of their revolutionary outrage against the privileged classes.