What's the best city to invest in? Well, according to the U.S. Census, it's a Western city with a warm climate and low precipitation, a high median household income, a low poverty rate and a high percentage of persons over 25 years old. You can also add to that list a city with a small manufacturing base and large service-industry base, 8% to 15% foreign-born residents and a weak mass transit system. Although such a simplistic approach is not sensible, the results of the census indicate investors should take these characteristics into account when considering where to make real property investments.
The 2000 Census results are causing some analysts to think that many of America's big cities are in the midst of a revival that makes them more attractive as places to invest than in the past. However, because the Census data is so diverse, it is wise for potential investors to look more closely before accepting that premise. Especially useful is a recent analysis conducted by Edward Glaeser and Jesse Shapiro, both of Harvard University, and available from the Brookings Institution. The analysis reports their findings about population changes in the 195 cities with 2000 populations over 100,000.
Compelling trends
Almost 80% of large U.S. cities — 154 out of 195 — gained population during the 1990s. The median population change among all 195 was plus 8.7%, compared with the overall U.S. gain of 13.1%. Among all big cities, 45% gained “fast,” growing by more than 10%; 28% rose modestly from 2% to 10%; 10% experienced little change with less than 2% gain or loss; and 17% declined more than 2%. The 87 fast gainers were concentrated in the West (59%) and the South (32%); none were in the Northeast.
In fact, regional variations were among the most striking findings. Western cities were by far the most dynamic. Three-quarters of the West's 67 big cities were in the fast-gaining group and none declined in population. Of the 20 fastest-growing cities in percentage terms, 12 were in the West, including four of the top five (Las Vegas; Scottsdale, Ariz.; Boise, Idaho; and Glendale, Ariz.). Among the South's 64 big cities, 44% were fast gainers and 31% were modest gainers; 17% declined. In contrast, among the Northeast's 24 big cities, none were fast gainers and 42% saw declines in the number of residents. In the 40 Midwestern big cities, 20% were fast gainers, 35% modest gainers and 30% declined.
One implication of this data is that warm weather is a strong promoter of population growth, and cold weather and heavy precipitation are growth deterrents. Cities with relatively high median household incomes in 1989 also grew much faster in the 1990s than those with very low household incomes — 19% vs. less than 1/2%. Cities with high poverty rates also grew more slowly than those with low poverty rates.
Cities built primary for automobile transportation grew faster than those relying heavily on walking and public transit. Cities with less than 65% of their commuters driving to work alone grew under 1% in the 1990s, whereas cities with more than 80% of their commuters driving alone grew by more than 15%. This is partly because most Western cities were built largely during the automobile era, in contrast to many older Northeastern and Midwestern cities.
Other factors influencing big-city growth were immigration and the level of education among residents. Cities with very low percentages of foreign-born residents grew much more slowly than those with 8% to 15% foreign-born residents. Cities with high percentages of residents 25 years old and older who had graduated from college grew faster than those with less educated populations. Cities with a high percentage of their workers in manufacturing grew more slowly than those with lower manufacturing percentages and higher percentages of residents in service jobs.
There are no absolutes
Here are two cautions about these findings. First, real estate is a highly localized business and every property is unique. Therefore, market success may be based more on immediate surroundings than the nature of an entire region. A well-located, high-quality property in a stagnant or slow-growing city may be a much better investment than a mediocre property in the fastest-growing city. Similarly, investing in fast-growth cities may be inferior to investing in economically strong cities with low growth rates and obstacles to new development, including a shortage of available sites.
Anthony Downs is senior fellow at the Brookings Institution in Washington, D.C. The views are those of the author and not necessarily those of officers, trustees or other staff members of the Brookings Institution. You can contact the columnist directly through e-mail at [email protected]