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April 2011 · Volume 93 · Number 3


The New Normal Requires New Rules for Success

by Aaron Gruen

Today’s “new normal” requires a new set of rules for success. No longer can prosperity depend on excessive consumption, supported by asset inflation and the use of leverage. Here is what the foundation for prosperity requires:

  • Enforcement of laws that maintain the competitiveness and safety of private production.
  • Social and human capital and infrastructure provided or facilitated by government to increase the productivity of the private sector.
  • Invention, production, and distribution of new, innovative products and services that the rest of the world wants to buy.
U.S. Population by Age, 2010 and 2020 (est.)
Age group 2010 2020
Number Percent Number Percent
Under 16 66,533,965 21.4 72,665,159 21.3
16 to 33 77,471,405 24.9 81,350,698 23.8
34 to 45 49,132,276 15.8 52,254,029 15.3
46 to 64 76,873,347 24.7 80,312,309 23.5
65+ 40,597,339 13.1 54,804,470 16.1
Total 310,608,332 100.0 341,386,665 100.0
Sources: U.S. Census Bureau, National Population Projections; Gruen Gruen + Associates.

Successful places will contribute to and benefit from a more productive economy by creating:

  • Adaptive new uses for excess and obsolete retail space, because retail will not return to what it was before the Great Recession and an increasing proportion of sales will shift to the Internet.
  • Multifamily rental units in mixed-use developments that offer dining and nightlife that appeal to Gen Yers who elect (or are asked) to leave their parents’ homes.
  • Regulatory conditions that stabilize but don’t reinflate housing prices, including entitled land zoned with minimum suburban densities of eight residential units to the acre and in-city densities from 14 to several hundred units per acre, to cater to Gen Yers, baby boomers, and the growing market for smaller, green, single-family housing units.
  • Green office space near transit, integrated with relatively high-density housing close to experiential shopping, restaurant, and entertainment venues.
  • Distribution and industrial space to capture demands associated with shifts in patterns of goods movement and labor availability.

Adapt Excess and Obsolete Retail Space for New Uses

Powerful demographic, cultural, and technological factors are telling us that on-the-ground retail will not return to what it was before the advent of the Great Recession. Expenditures for goods purchased in retail outlets will decrease. What are the primary reasons for this anticipated decrease?

Gen Y Waves: The number of Gen Yers in the 20–34 age group will plateau in upcoming years.
Sources: U.S. Census Bureau, National Population Projections; Gruen Gruen + Associates.

First, the demographic shifts suggest a significant behavioral change. The dominant population group—the Y generation, those falling in the 18–34 age group—accounts for 77.4 million people. With the exception of technology, Gen Yers are less interested than earlier generations in purchasing apparel and similar goods at retail stores.

Gen Yers also have not directly felt the impact of the Great Recession as keenly as baby boomers who have been affected by a difficult job market, a decline in housing values, and a decrease in the value of retirement plans. But they are aware of both the impacts of the Great Recession on their family members and friends and the challenging job market. Gen Yers will also have less access to credit and won’t have their housing units to treat like ATMs. Gen Y consumers have become more value driven, and when they buy discretionary items they seek bargains and items of self-expression, including books and games.

The next most dominant age group, the parents of Gen Yers, the baby boomers, account for 75.6 million people. But many within this age range (47–64) already have much of what they want and need and, as noted above, have been adversely impacted by the Great Recession. Their surplus dollars are frequently spent on helping their children—college expenses, rental assistance, and so forth—along with caring for aging parents.

The impact of the Great Recession suggests that both Gen Yers and boomers will focus their future shopping on price and quality. Retailers will need to offer compelling value to attract purchasers. Instead of stressing the latest must-have fashions to baby boomer women, for example, retailers should emphasize how one item can be used multiple ways and flatter various body sizes and shapes.

Most significantly, however, more and more goods are now purchased on the Internet. According to Forrester Research, online sales now account for about 6 percent of all retail sales in America (up from 5 percent in 2008), and that figure is expected to reach 8 percent, or $248.7 billion, by 2014.

What implementation actions should downtowns take in light of the demographic and behavioral shifts and significant supply competition that can be expected to continue after economic recovery?

U.S. Online Retail Sales Will Grow to 8 Percent of Total Retail Sales by 2013
Source: Forrester Research.

First and foremost, local governments need to rethink the primary land uses their downtowns should attract and expand. If the community is historically known for some attribute or product, this attribute should be highlighted through branding. Although members of the Y generation do not spend as much time or dollars shopping, they do spend significant dollars and time eating out and clubbing.

An agglomeration of restaurants, appealing to a wide variety of tastes and budgets, will be able to draw from an extended geographic area. To the extent possible, entertainment venues—whether clubs or cultural or sports venues—should also be concentrated within as compact a downtown area as possible.

Encourage Multifamily Rental Units in Mixed-Use Developments

Homeownership rates reached unsustainable levels during the boom and will now inevitably experience a correction. Although the U.S. population continues to grow steadily, adding 2.5 million people each year, U.S. household formation has declined, dropping to less than one-third of the long-term average of approximately 1.4 million a year.

While several million people are waiting in the wings to form new households when jobs come back, the two big questions are what they will be able to afford and whether they will buy or rent. Falling wages, high college debts, and overburdened parents will fuel a robust rental market for the foreseeable future—particularly among members of Gen Y, who will rent for far longer than previous generations before buying a house.

So if, for example, a downtown has several restaurant and entertainment options like theaters, restaurants, espresso shops, wine bars, bowling alleys, skating rinks, and night clubs, then multifamily housing can and should be integrated into the land use mix.

The Y generation, which marries later and has few children (the dog has become the new child), will be a primary market for both multifamily rental and condominium housing. Some baby boomers will also want to shed their larger suburban homes for more central and easier living after their children have safely left home.

By 2020, more than one-third of all households in America will be single-person households. Smaller households without children living at home are typically more amenable to higher densities and smaller units and are more interested in urban-oriented recreation and entertainment attractions than child-oriented households, which are frequently more concerned about schools and neighborhood conditions.

Annual U.S. Household Formation
Source: U.S. Census Bureau, Income, Poverty and Health Insurance Coverage in the United States: 2009.

Change Land Use Regulations to Stabilize Housing Prices

Housing prices will have to even out from current levels and not reinflate in a replay of the price-escalating trends of the past decades. One reason retail and office spaces tend to be reasonably priced from the perspective of space users is that local governments readily zone and entitle these land uses so that the markets for retail and office spaces are usually highly competitive. The explanation for the rise in housing prices that culminated in the bursting of the housing bubble relates more to fundamental economics than it does to psychology.

When prices go up faster than costs, expectations of profits rise and new properties enter the market to increase supply. Since the 1970s, however, changes in both public laws and attitudes have created a barrier to such increases in the housing supply. Avoiding a repeat of the mortgage problems now upon us requires more than a tightening of credit laws. It also calls for changing the land use policies of economically strong regions where public land use entitlements outweigh market factors in shaping the ability of builders to add units to the supply of housing.

Escalating housing prices will make it harder to attract the young professional workers so critical to thriving, innovative business locations. In addition, wage levels can be anticipated to increase with escalating housing prices. Both hinder the formation and preservation of strong economic masses.

High housing prices mean that workers must make unfortunate choices among long and costly commutes, having to demand higher wages, or choosing to move from the region. Suburban housing developments, affordable to local employees and built near retail, entertainment, and experience-rich urban activity clusters, will also attract residents and help regions achieve their economic potentials.

To make new in-city and suburban housing financially viable as well as to induce regionwide prosperity, local officials must change land use regulations to zone more land at higher densities than was the case during the old economy. Minimum suburban densities of eight to 12 residential units to the acre and in-city densities from 14 to several hundred per acre must be allowed in enough desirable locations to keep land prices under half of what they were during the boom years that ushered in the subprime mortgage bust.

Ironically, if multifamily uses are encouraged and single-family housing prices are not again excessively inflated, demand will increase for some retail uses.

Certain types of retail will be attracted back downtown to serve this more urban population. The new downtown retail base is likely to include stores offering pet products and services (remember pets are the new children); food and wine, including small-format grocery stores offering organic and locally grown products; health spas and other health and alternative health products; a variety of personal services; demonstrations, instructions, and such other experiential retail environments as knitting and scrapbooking stores; and prepared meals to go. Fitness facilities will also be tenant candidates.

Integrate Green Office Space near Transit and Higher-Density Housing

Housing that is close to experiential shopping, restaurants, and entertainment venues will be needed. A more lively and diversified downtown will also retain and attract businesses wanting green office space.

This is one reason why office developers and investors should use their political muscle to encourage local land use regulators to zone more land for higher-density housing. This is needed because office occupancy rates will climb when appropriately skilled workers don’t have to demand higher pay or leave the area in order to find affordable housing that meets the needs of their households.

Projected Distribution of U.S. Household Growth
Household type 2010–2015 2015–2020 2020–2025
Married + partners, without children 47.7% 38.2% 28.5%
Married + partners, with children 2.6% 8.0% 11.1%
Single person 34.5% 38.1% 42.3%
All other households 15.2% 15.7% 18.1%
Sources: Joint Center for Housing Studies, Harvard University, Updated 2010 Household and New Home Demand Projections; Gruen Gruen + Associates.

It’s even better if these new agglomerations make it convenient for their workers to bike to work. In such locations, offices will serve as the workshops of the new economy, and housing will support professionals and technical experts who design, refine, finance, and sell the next big things.

Medical offices will also demand additional space in the coming years, and there will be a shift from hospitals to offices for some treatments, as there already has been for glaucoma surgery, for example. The key point is that more people prefer to live as close to employment hubs as they can afford.

Provide Distribution and Industrial Space for Current and Future Needs

To capture demands associated with shifts in the patterns of goods movement, opportunities will arise for the retooling of existing space and the creation of new distribution and industrial space to capture demands associated with shifts in patterns of goods movement. The Inland Empire in southern California, for example, is a key location for major supply-chain facilities that function as part of the system that ships finished goods and materials, predominantly imports from Asia, from the ports of Los Angeles and Long Beach to population centers to the north and east such as Las Vegas, Phoenix, Denver, the Midwest, and beyond.

The ports of Los Angeles and Long Beach currently dominate U.S. trade with Asia. About 40 percent of all container cargo traffic to the United States enters through these two ports. In 2014, however, the $5.25 billion expansion of the Panama Canal that will add a third set of locks to allow more and wider ships to pass will facilitate large ships passing through the Panama Canal to ports on the eastern side of North America.

This could alter routes of the Asian trade because it could be more cost-effective to ship goods straight to the East Coast by sea rather than to the West Coast ports and then by rail and truck. This is an example of a global macro change that could influence the demand for industrial space.

Aaron Gruen is a principal, Gruen Gruen + Associates, San Francisco, California, and Deerfield, Illinois (agruen@ggassoc.com). He was a presenter at the January 2011 meeting of the Metro Section of the Illinois City/County Management Association.

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