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Downtowns in Distress

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The New Economic Geography

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How Downtowns Diversify

The new economic geography is quintessentially metropolitan in scale. As research has convincingly shown, the first wave of reshoring is disproportionately decentralized, located in places far from urban and suburban communities. Many mega factories designed to produce electric vehicles or chips are landing at the periphery of metropolitan areas or beyond, challenging the ability of stakeholders to connect all the necessary dots and realize the full potential of this resurgence for firms, people, and places.

Despite this, downtowns have a powerful, if still in formation, role to play in the new economic geography. They are not, of course, going to suddenly house super-sized semiconductor facilities. But the innovation imperative created by economic restructuring means that downtowns could, among other things, maximize the use of federal and state funding to:

• become a home for the innovative parts of universities, health care facilities, and major industrial companies and next generation centers of excellence, industry/academy vertical campuses, and test labs;

• become a platform for startups and scale ups in sectors such as defense tech, clean tech, med tech, and fintech; and

• lead the transition to climate friendly buildings, renewable energies, and the modern grid.

• These innovation moves could be further supported by applying other federal and state funding to:

• modernize transportation infrastructure by decking over or reconfiguring freeways and rail yards in strategically located parts of cities;

• enable the scaled conversion of office towers (and publicly owned parcels around transit and rail stations) to mixed-use buildings, via new financial stacks and policies; and

• grow the entertainment, sports, and experiential economy at scale.

A group of cities are beginning to bend federal and state investments to enable the diversification of their downtowns.

On the innovation front, the downtowns in multiple cities are being infused with a burst of startup energy and public and private capital.

In Newark, HAX, a hard-tech incubator that attracts pre-seed startups that focus on emerging clean tech, robotics, neurotech, and bio manufacturing, is reinvigorating an historic department store as the hub of a new entrepreneurial ecosystem.

In Chicago, Fulton Labs in the downtown’s West Loop has become a magnet for bioscience companies and research labs.

In Syracuse, New York, HII, the nation’s largest military shipbuilder, has opened a new engineering facility in a former department store.

In Dayton, Ohio, Infinity Labs, a fast-growing firm in the advanced air mobility sector, has taken space in the historic Dayton Arcade.

Even in San Francisco, the epicenter of the “urban doom loop,” a surge in generative AI startups is leading the early rebound of the commercial real estate sector.[v]

Each of these efforts is relatively small and nascent, but they point to the potential for university outposts, technology firms and advanced research labs to take over spaces once occupied by office work.  As an Economist correspondent recently noted about the Fulton Labs in Chicago, “Evidently almost nobody is working from home – probably because they do not have access to bioreactors in their living room.”[vi] And the proximity to world class universities and the talent and scientific research they possess is impossible to ignore.

In some cases, transformative infrastructure investments are setting the platform for new economic activity.

In New Haven, the remake of Route 34 is enabling the build out of Downtown Crossing, a rapidly growing, life sciences-oriented innovation district.

In Cleveland, an unprecedented alignment of federal, state and local resources is connecting “the core to the shore,” making a formerly inaccessible industrial riverfront the centerpiece of a new urban fabric.

In Philadelphia, the planned reconstruction of the iconic 30th Street Station will further fuel the growth of the globally significant innovation district anchored by Drexel University, the University of Pennsylvania, leading hospitals and specialized companies like Spark Therapeutics.

Where Next?

As the post pandemic economy continues to take shape in the United States, it has become apparent that hybrid and remote work are not the only market or capital dynamics that have been unleashed post pandemic. The reindustrialization and decarbonization of the US economy, and the innovation imperative it engenders, has created an opening for the rise of new companies, technology workers, and districts in traditional downtowns.

As our examples illustrate, a group of vanguard cities and enterprises are realizing the potential to align downtown revival with broader market dynamics by placing federal, state and local funding in the service of urban regeneration. These organic efforts, if codified and scaled, could help bring economic life back to hollowed cores and, consequently, mitigate the fiscal fall out that many cities and transit systems now face.

The federal government, to date, has been a large but passive investor, enabling but not guiding cities to blend innovation and infrastructure funding for maximum effect. That should and must change in the next few years. In cities with a large military presence, for example, vacant office space can be taken by innovative defense firms as well as defense personnel themselves. As in the late 1970s, when President Jimmy Carter signed an executive order favoring downtown office space for federal government activities, federal direction could help scale the promising actions and decisions bubbling up from leading cities.

To paraphrase Mark Twain, the death of America’s downtowns are greatly exaggerated, if the nation marshals the full resources and energies of the new economic geography.

[i] Ben Casselman, Emma Goldberg and Ella Koeze, “Who is Still Working from Home?,” New York Times, 3/16/2024
[ii] Erica Xuewei Jiang et al., “Monetary Tightening, Commercial Real Estate Distress, and US Bank Fragility, NBER Working Paper Series, December 2023
[iii] Arpit Gupta, Vrinda Mittal and Stijn Van Nieuwerburgh, “Work from Home and the Office Real Estate Apocalypse, SSRN, December 5, 2023
[iv] Alan Rappeport, “City Coffers Feel Impact as Building Prices Fall,” New York Times, March 19, 2024
[v] Laura Bratton, “AI startups are resurrecting San Francisco’s commercial real estate,” Quartz, 2/4/2024
[vi] “Science and the City,” The Economist, 12/9/2023

Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University.