The Reshaping of City and Metropolitan Economies: 5 Trends to Watch in 2023
Below is the Nowak Metro Finance Lab Newsletter shared biweekly by Bruce Katz.
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January 11, 2023
As a new year begins, I am reminded of the evocative image Jeanna Smialek put forth in the New York Times last March:
“The pandemic, and now geopolitical upheaval, have taken the economy and shaken it up like a snow globe. The flakes will eventually fall – there will be a new equilibrium – but things may be arranged differently when everything settles.”
The litany of disruptive effects is long and daunting. In the US alone, the pandemic disrupted global supply chains, accelerated remote work, devastated downtowns and amplified all forms of digital communication and commerce. Russia’s horrific campaign against Ukraine triggered volatility in energy and commodities markets, reinforced deglobalizing dynamics and intensified re-militarization given the struggle between autocracies and democracies.
And there is more. During this turbulent period, a perfect storm of new technologies, ample private capital and insufficient supply exacerbated the housing affordability crisis as investors bought up swaths of rental housing. And the long march of climate change, coupled with government investments and regulatory changes, upended the transportation, energy and building sectors.
These macro dynamics have profound metro consequences. Often confusing and chaotic, structural rather than cyclical, they set a foundation for a reshaping of urban and metropolitan economies that will be grand in scale and years in the making. Some dynamics will present radically different challenges; others will present intriguing opportunities. All will make for a volatile, decade-long transition.
The only common thread is that city and metropolitan leaders must be present at the creation, taking advantage of opportunities as they arise, addressing challenges before they fester. The good news is that these leaders have access to a dizzying array of federal and (occasionally) state resources. The harsh reality is that harnessing the full potential of these unprecedented investments will require a level of deliberate and purposeful action that is often difficult to marshal.
Here is a checklist of 5 economy shaping trends to watch in 2023. It is by no means exhaustive and focuses on the shifting nature of economic activity (e.g., the goods companies produce, the services they provide), the places where that activity occurs and the supportive infrastructure (of all kinds) that is needed to drive inclusive growth. As such, it reminds us of the complexity of city and metropolitan economies, collectively and individually, and the need to imagine (and enable) a different future for the engines that power our nation.
First, after years of debate, the US is experiencing a manufacturing moment. Multiple forces are in play: supply chain issues and heightened national security imperatives that compel companies to produce more domestically; federal and state policy reforms intended to decarbonize whole industries; and federal and state investments designed to level the playing field between domestic and foreign locations. To date, attention has been naturally given to big semiconductor commitments in New York, Ohio and Arizona and new battery factories in Kentucky, Georgia and Michigan.
But US manufacturing is not just about big companies like Intel or General Motors or General Dynamics. It’s also about thousands of suppliers downstream. For cities and metros, there is a clear signal: understand your current (and even past) position in the production economy, both civilian and military, and design and execute a host of strategies (e.g., site acquisition and readiness, environmental remediation, infrastructure access, applied research, workforce training, housing availability) needed to help companies, large and small, locate or expand. For many cities and metros, this will require reusing muscles that atrophied during the period of excessive off-shoring. And it will require engaging a broad array of stakeholders, including universities, community colleges and business associations. But the payoff could be big.
Second, the US (finally) is responding to climate change. With large federal resources and market adoption, we should expect transformative changes in the nature and location of the energy we use, the buildings we occupy, the consumer products we buy, the infrastructure we depend upon, the materials we employ and the very means of mobility and design of our communities.
Even a cursory review of the Inflation Reduction Act (the “IRA”), the Biden Administration’s principal means for addressing climate change, shows the far-reaching effects of what amounts to a multi-pronged transformation of entire sectors of our economy. The IRA has made full use of the tax code to favor, among many things, the production, storage and distribution of renewable energy, the purchase of new and used electric vehicles and energy efficiency products and the remodeling of homes. It has also appropriated more traditional resources to states and communities to speed the construction of EV charging stations, the re-skilling of workers and the mitigation of climate effects in vulnerable areas.
Cities and metropolitan areas will uniformly need to sort out how to harness the cumulative impact of these investments which mostly delegate decision making to a plethora of market actors – big industrial companies and utilities, large and small owners of commercial and residential real estate, consumers in the market for cars, heat pumps and the like. A smaller number of places, given their location, industry mix and academic prowess, will face an even more enticing challenge: become a catalyst for the invention of products and processes that can become the norm in the US if not the world.
Third, production, remilitarization and decarbonization are driving a step change in innovation, predictable and unpredictable, large and small. Economic restructuring of this magnitude demands continuous product innovations, some breakthrough in nature, many iterative. And other forms of innovation — process innovations to lower costs and drive efficiencies, policy innovations to adapt to new locational uses and workforce needs, financial innovations to enable a broader continuum of entrepreneurs to take ideas to market in traditionally underserved communities — will organically follow. A virtuous cycle – the rise of new industries, the formation of new businesses, the growth of existing institutions and enterprises – is evolving quickly.
The US, despite our political volatility, is tailor made for this disruption. Our network of industry clusters, universities and military and energy research hubs forms a strong and geographically distributed platform giving disparate cities and metros distinctive advantages that can be exploited. Our culture embraces and rewards technological innovation. And collaboration between public, private and civic leaders, the fundamental tenet of New Localism, is a natural act, particularly compared to other parts of the world.
The federal government has become a vehicle for stepped up innovation. It is scaling up investments not only in basic research and development but also innovation hubs that enable communities to declare their special niche in the economy and drive the integration of mature companies, start-ups and scale-ups, researchers, investors, skills providers and quality places. It is also helping, through efforts like the State Small Business Credit Initiative, to capitalize components of the innovation continuum by providing flexible resources for new debt and equity instruments and intermediaries that can help traditionally overlooked entrepreneurs access market demand and financial products that are fit to purpose.
States, closer to the ground, are also playing a substantial role in industrial and innovation policy. California and Indiana, following a decade old practice in New York, are supporting regionally based, multi-jurisdictional economic development. Ohio and Michigan, for their part, are making pointed investments in innovation districts around their major universities and industrial companies. Beyond resources, state oversight of public universities and energy utilities and close engagement with metropolitan business and civic organizations are enabling strategies that align with distinctive strengths.
Fourth, these forces and dynamics are compelling cities and metropolitan areas to rethink the function and role of the different sub-geographies that make up their communities. The future of downtowns is already top of mind for local leaders, business chambers and commercial real estate owners and investors given the outsized role these places play in the life and rhythm of cities and metropolitan areas. Remote work is undermining the traditional concentration of office work in central business districts across multiple sectors and, in turn, triggering second order effects on small business performance, transit ridership and local tax revenue generation.
These multiple impacts are already driving a broad array of downtowns and stakeholders, from New York City to Detroit, to consider a radically different mix of uses and experiences in their impacted cores. The radical conversion of office towers to residential purposes. A substantial uptick in entertainment activities and the experience economy. The relocation of the innovative bits of universities and other anchor institutions, to form a new economic foundation for product invention, company formation and job creation. First-mover adoption, at scale, of climate friendly buildings, energy and transportation. The next American downtown is being designed and delivered in real time.
Urban (and suburban) downtowns, of course, are only one part of the metropolitan landscape. Macro trends are radically revaluing other sub-geographies that play distinctive roles in local and traded economies. The re-shoring of production, the explosion of clean energy and the decarbonization of transport and logistics, for example, place heightened attention on the state and interconnectedness of our roads, transit, rail, port, airport, water and energy infrastructure (which have their own location realities). In the face of compartmentalized federal investments, cities and metro will need both to design “whole infrastructure” approaches to metropolitan economies as well as rethink the future state of individual elements (e.g., production nodes close to freight hubs or new energy hubs). Here, global examples (e.g., the remaking of the North Sea as an economic powerhouse through the scaled introduction of renewable energy) should prove instructive and inspiring.
The innovative imperative is also raising the profile of Innovation Districts, mixed-use hubs that have emerged over the past two decades around advanced research institutions in the US and beyond. As the Global Institute on Innovation Districts has shown, these hubs benefit from the fact that anchor institutions (e.g., universities, hospitals) still conduct their activities in person rather than on-line and that breakthroughs in products and processes are furthered by co-location, density and the serendipity of interaction. We should expect a flourishing of these places over this decade, fueled by a mix of market dynamics, institutional investment and government attention.
Finally, unprecedented federal infrastructure, industrial and climate investments are fueling intentional efforts to grow small businesses. The Procurement Economy – the goods and services purchased by governments and large anchor corporations, universities and hospitals – has always been a substantial but often overlooked part of the US economy. It has also been a part of our economy that has historically favored large, powerful firms (think Eisenhower’s warning of the “military industrial complex”).
The enactment of unprecedented federal spending has placed a renewed focus on using government investments to not only grow small businesses in general but also Black- and Brown-owned businesses in particular to address the recent impact of the pandemic and longstanding disparities on business ownership and wealth.
This laudatory goal will not occur without serious reforms. Federal investments flow to a fragmented set of public authorities and agencies, which have their own, hard to navigate, rules, definitions and practices. Collaboration between public entities and the business chambers, financial institutions and entrepreneurial support groups that help enterprises grow is rare. Supplier diversity efforts have traditionally focused on legalistic compliance rather than business building. And the strategic use of technology and big data to enable the seamless and transparent matching of buyers and sellers is still in its infancy.
But these challenges can and are being overcome with initiatives launched by a disparate mix of national organizations and local stakeholders. The Procurement Economy, long a staid, captive platform for big industry, is itself being disrupted.
These five market dynamics (manufacturing, climate, innovation, place, and procurement), alone and taken together, send a powerful signal. 2023 will not constitute a return or bounce back to a pre-pandemic economic normal. By contrast, it represents the beginning of a profoundly different economy, the contours of which are only starting to take form and shape.
The stakes for cities and metropolitan areas could not be higher. The macro forces are not academic or theoretical or abstract. They will help determine which communities will prosper and what our notion of prosperity will even look like. There will be big winners and losers, across and within cities and metropolitan areas.
There is, in short, no rest for the weary. 2023 will continue to stress-test the ability of cities and metropolitan areas to organize themselves across jurisdictions and sectors. As the year progresses, leaders would be wise to track the scale and trajectory of these macro dynamics, continuously assessing what they mean for their communities given distinctive strengths and competitive advantages. My team at Drexel University and our close partners at Accelerator for America and the Aspen Institute’s Latinos and Society Program will be coaching those vanguard communities that use this moment to leapfrog by taking risks, deploying integrated strategies, leveraging institutional powers, assembling innovative stacks of capital and accelerating their transition to the next economy.
Buckle up: this promises to be a bumpy, yet productive, year.
Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University.