Can rents in megacities keep on going up forever?

That is the topic of my latest Bloomberg column, and it is assuming no major increase in supply in the megacities themselves.  Here is one bit:

We live in a special time where clustered activities are unusually important for economic growth. Some activities, such as dentistry and cement production, don’t cluster geographically very much, for obvious reasons. In contrast, finance (New York and London), information technology (the Bay Area), and entertainment (Hollywood and New York) are the most clustered. For whatever reasons, it makes sense to have many of the top decision-makers in one place.

Leading cities have become so expensive in large part because two of these clustering sectors — finance and information technology — have been ascendant. There is no particular reason to expect those trends to continue forever, and that will bind rents in affected cities.

Even tech will decentralize its gains over time:

If you think of a typical technology project, some of the gains go to the venture capitalists and the intellectual property holders, and some of the gains go to broader society, including consumers. Insofar as the gains are disproportionately reaped by the early project initiators, then yes real estate values in the Bay Area (and other tech clusters) will rise. But the most likely future for information technology is that it will spread its benefits more and more broadly into more and sectors of the economy. That scenario suggests a partial convergence of urban futures.

Another way to put the point is that intellectual property returns erode over time. In the early years of smartphones, a big part of the gain goes to Apple. As cheap imitators enter the market, prices fall and more of the gains go to consumers, or business users of the product, who are scattered across the country.

The article contains other points of interest.


There is no particular reason to expect those trends to continue forever,

Well, that's making too easy of a case, isn't it? I mean, after a certain point, we have to count on the asteroid or the super nova, and I really don't think the high rents will survive those.

"For whatever reasons, it makes sense to have many of the top decision-makers in one place."

What are those reasons, anyway?

I remember the Information Superhighway hype of 1993 about how in the future it wouldn't matter where you lived.

How naive we were ...

It think location doesn't matter for work, but it may for doing business.

Many companies have silicon valley headquarters but large offices elsewhere, like Google in Hyderabad: A lot of other companies - like say Buffer - are fully distributed.

So in the work sense, you can live anywhere. In the doing business sense - deals, funding etc - being located within a drive of multiple meetings might make sense. If an industry is about deals, Finance, IT, Hollywood, mega-cities may be a consequence, even if the deals done are for far away things, like a movie shot in Sydney or Vancouver, or a distributed workforce of coders.

And once you have a workforce in a location, the service sector to serve them increases, and as that increases ...

This is true, yes. In an industry that's all about deals, you simply have to 'be there', in the mix. Major deals still require looking someone in the eye and a handshake. You have people randomly running into one another and sparking deals from there. It will be a long long time in the future, think centuries, before we do everything remotely.

I agree for some types of work like writing code it can be anywhere, and this has been going on for quite a while. Over 15 years ago I worked for a Palo Alto outfit that used contractors in Russia and Utah. You are also correct that making the deal can require presence in the hub of activity. The Palo Alto outfit used to have an office, but rents kept going up and the guy who ran it really didn't need to have an office for meeting customers -- he could meet them in their offices, so now he works from home and he contracts out any work he doesn't do himself to other people who work from home.

In the long run, I think face-to-face meetings are of declining importance. Why do I have to schedule a meeting when we can do it all over the net? I think some older people and companies may continue to require meetings, but over time they'll die. It's like print media -- some people are more comfortable with it, but their children won't want to deal with big stacks of old newpapers or media that can't do a keyword search.

Exceptions would be something like Hollywood -- if you're an actor or screenwriter, you pretty much have to live in the LA area. There's lots of face-to-face meetings for pitches, casting, etc. Part of the problem is that the buyers want to preview the goods for free. You got an idea for a TV show or movie, you come in and give me your pitch. If I don't buy it, you don't get a penny from me. If I'm casting a role, I might have dozens of actors try out, but only the winner gets paid. I don't see that changing anytime soon.

Good points but I think and hope (since my family's net worth depends on it) that Washington DC will always be the place for face-to-face meetings with pols, and that will keep the rent high here. No way are you going to outsource politics to India. What surprised me was in 2001 when Bush II decided to make the Department of Homeland Security--a huge bureaucracy--based in DC. Of all the places he could have put it in, including Kansas, Utah even Pennsylvania if you want to say on the East coast, they choose DC. Good for us, but even as a long time DC landlord I was surprised by the myopic vision of that decision.

"Why do I have to schedule a meeting when we can do it all over the net? I think some older people and companies may continue to require meetings, but over time they’ll die."

Agreed, this is to some degree a function of age. A larger percentage of my company meetings are on-line. So, much so, that we'll avoid reserving a conference room and all just Skype through our laptops if there isn't a convenient conference room available.

I believe that some level of physical meetings will prevail in the short to medium term, but it will only be the most important meetings. And meetings can be very costly. An out of town 1 day meeting, probably costs $1,200 - $1,800 per participant, when you factor in lost time due to travel, air fare, rental car, hotel and expenses. The same meeting is close to $0 additional costs over Skype.

Even more costly than the direct expense, is the actual productivity lost in travel time. Assume you have a tight project deadline of say 6 weeks, and you need 3 process reviews, a FAT, and a final SAT, with 4 people on each side. If 4 people have to travel and there's an additional travel day per meeting, then you've lost 20 man days out your schedule. Dropping the in-person requirement for the 3 process reviews adds 12 man days of time.

I agree for some types of work like writing code it can be anywhere,

Lets call that writing code from spec When you are designing or prototyping something new, then you need proximity. In a company I used to work that did innovative products, there were several stories about why do you need proximity, someone went into an office a Tuesday to talk about the previous night football game and when he came out they had an idea for a new product. In my case after weeks of conference calls and presentations with a director that was located in another state, I ran into him in the hallway and right there in less than half an hour he reached a decision. The guys that worked remotely tended to get marginalized and assigned less desirable tasks.

"Lets call that writing code from spec When you are designing or prototyping something new, then you need proximity"

Nah, that's really not true. Web meetings work fine for brain-storming and hashing out designs. The days of everyone having to gather in one place around a white board are gone. Not that there aren't companies that still do things that way, but it really isn't necessary.

I think that means the director is kind of a bum....

"The guys that worked remotely tended to get marginalized and assigned less desirable tasks."

That was certainly true in the early days of teleconferencing.

Anyway, that's one reason so many people are frantic to No-Platform dissenters like Charles Murray. Seeing somebody in person is anti-dehumanizing. You keep reading blurbs about how he is a horrible person, but then you go see him give a talk and you realize: Wow, he's actually a wise man.

And then maybe you realize: I was lied to about Charles Murray.

And then maybe you wonder: What else have I been lied to about?

My view is that the trend away from the country to urban areas which has been going on for the last couple of millennium but accelerating in the last 3 or 4 decades is now becoming a trend from small cities to mega cities. Mega cities lead in service specialisation, specialisation is what makes economic growth. And it's chicken and egg, you can't be a specialist without a big enough market in your area, and you can't get a specialist if you only need them once or twice. So mega cities solve this coordination problem. But it is a network effect, the more specialists the more there can be supported. As an example a big hospital can add a specialist in one area because their skills are complementary to the other specialists, where a small hospital can't.

The challenge is of course the cost of living can simply eat the rent, the answer though is more dense housing, whether Nimby's can be overcome will be the determining factor on whether a particular mega city can grow land prices for ever.

I'll buy this in the mega-cities (topic of the post). Eye-balling San Francisco and New York, there are no reasonably priced homes within any sort of reasonable distance of downtown. If you want a 300k 2 bed condo in New York, you're deep into Flushing, or an inconvenient part of Jersey City. Ridiculous.

I'm glad to see acknowledged the increasing returns to others from technology. We seem to forget that there was a thriving market for mobile phones (not smartphones) at $1000+ a pop with batteries that allowed just 30 minutes of talk time and high per-minute costs. That market, I'm sure, still exists and is getting a great bargain. Same thing for computers, etc.
Just because the marginal price of a smartphone is low doesn't mean the consumer surplus is low. In fact, it is huge.

I thought your points on immigration and poltics felt a little tacked on - as a single sentence in the second last paragraph. It jells with my intuitions, but I'd wager will seem like a non-sequitor to many others. Maybe this is an idea worth fleshing out in its own article, particularly in the context of the Brexit vote and London versus the rest of the UK?

The Internet has facilitated the spread of certain types of work away from the cities. As rents increase, the alternatives will become more attractive.

You did not mention geography, which is an important factor in the supply of rentable space in the city.
Workers in NYC make a choice between high rents and a long commute.

NYC is on an island. Palo Alto, San Francisco are surrounded by the ocean and national parks.
Vancouver has the ocean, US Border and mountains.

He's delusional.

NY is not by any stretch a tax haven for the Americas or the world.

London is, for non-doms. Even if it were not, the richest Russians and Arabs spending their money there on rents and hotels are not UK tax resident. They often also legally avoid stamp duty and reclaim all VAT. So London prices probably can keep going up for a LONG time. Non-millionaires will soon be pushed to other parts of UK, just like Manhattan.

It's impossible to know what will happen without guessing political trends. In other countries, urban-rural and elite vs non-elite megacities have persisted for a long time due to increased regulatory rent-seeking. To think that technology alone will change this is naive. If DC becomes more important for the US and credentialism rises, this will blunt all attempts to equalize through technology. If not, then market forces will push for convergence and equalization. Or else something in between with strange swings on the way.

What if new transport technology- hyperloops and cheap tunnel construction and maybe even jet packs- comes on line? Might that not reverse 'gentrification'?

Hot take: as the pie stops growing, rents increase in zero-sum competition. If economic growth stalls, we can expect full Malthusianism, rents approximately equal to subsistence.

So that's when they stop growing.


I thought, "Well, property zoning must be mentioned in the full story." So I went to the cite.

Tyler Cowen, how on earth can you mention rising rents in the very cities where property zoning is the most-stipulative, without mentioning property zoning?! Supply and demand?

What is it about property zoning that makes it invisible in orthodox macroeconomic circles?

Why is there wholesale condemnation of government-induced structural impediments---but never property zoning?

I would suspect conspiracy, but the silent treatment on property zoning is too pervasive….

Thought so too. Zoning is probably the most important factor. But given that zoning is hard to compare in a quantitative way and yet persists in all of those megacities*, its fair to assume zoning less relevant when comparing megacities with another and with other urbs.

High productivity sectors and their hubs are working together like in a sack-race. The city's inelasticity in rentable space can only be relieved from pressure if the sector is losing its pace. Which both sides don't want. So they'll sprint together. After the race is over (market maturity) one of the two will find itself more used up than the other.

Keeping hubs from de-creativize themselves is the holy grail of urban economic policy. But then, there's human nature. Just as recent bursts of nativism are ridiculing our pro-immigration utopia, zoning will always be the lazy citizens rent-seeking scheme.

So in short: Zoning will remain, expect more from new hubs elsewhere.

* = What Houston lacks in government zoning it partially makes up with private 'ad-hoc' zoning.

Zoning only matters relative to the competition. All things being equal, one would expect cities with low zoning requirements to have an edge. However, as cities get bigger, they tend to accumulate higher levels of zoning.

Surely you know that he regularly raises the issue.

To see conspiracy for failure to mention it one time in a hundred is pretty ridiculous.

This column is a little late, at least with New York City. Rental Prices in New York City have been either drastically slowing down the increase, stagnating, or going down since at least 2016.

FWIW rents in London are also drifting off while prices in the "oligarch" areas are down 10-15% although outer London prices are still rising.
Over the past 10 years prices have risen much faster than rents.

How many opportunities would Trump have had to go bankrupt if NY real estate had done similarly well as other periods?

The share of info biz has been increasing for centuries. I see no reason for that to change. One gating factor on urbanization is the diseconomies of transportation. If cheap robotransport fixes that, urbanization should intensify.

'The article contains other points of interest.'

One certainly hopes that includes information about a ground breaking new work concerning the complacent class, and a link to the quiz to allow you to determine your own degree of complacency.

Very interesting article and is right in my favourite area of research!

Could you point me to any interesting papers done on "cluster economics"?

Thanks a lot!

In the more general sense, Krugman on economic geography is a good background for a variety of general theoretical considerations that can be relevant.

Finance and what Cowen calls "information technology" exist to perpetuate their own myths about creativity and productivity. When he suggests the megacities in which they have clustered won't be ascendant forever, what he means is that the myths can't last forever. Finance is ascendant as long as asset prices are rising; "information technology" is ascendant as long as owners of capital are willing to suspend disbelief. Cowen's Great Reset will correct the myths.

"Reliance on immigrants also insulates megacities from the core political trends of their nations and thus limits their political influence, again a reality already in the U.S. and U.K."

This is a cooler point than it seems at first, megacities want and attract immigrants, expats and foreigners but this means less voters per capita. In a way, immigration can raise the value of non-cosmopolitian areas in the political process if it holds true as they cluster to cosmopolitan areas.

Often the root causes of rent increases (or more specifically all housing cost increases) is the direct result of local government efforts to create affordable housing. Other local government actions also tend to drive up costs and thus rents too.

Don't forget that this often represents what people want.

For example, rent would be lower if you built over all the parks. But what quality of worker could be attracted to such a city?

Personally, I think a more permissive attitude towards densification in general, even to the point of actively deterring low-density housing (in cities) and promoting higher density housing, would be good.

But I disagree with a characterization of "because government = problems". It's sort of true, but it's more because local governments in many cases are doing what voters want. Almost as though something other than dollars and cents contribute to their bottom line.

I don't see this as new. Detroit was a center for the auto industry. Akron for rubber. Toledo for glass. Chicago meatpacking. New England for shoe manufacturing. Pittsburg steel. etc

I think you ignore the issue of access to capital. The financing supplied by buyers is vital many small firms. This often requires a relationship between the buyer and the sub-contractor that is aided by proximity. Once those ties are established proximity becomes less important. However during the early startup period of an industry these capital networks are vital to growth. Capital markets are rarely as efficient as most economics textbooks assume.

Hollywood and New York are both driven in part my the need to access capital. The dealmakers are often more comfortable with proximity to other dealmakers. It feels less risky.

The founders of the auto industry knew each other. They had children who married each other. The line between family and business could blur. Heck family and personal connections are vital in Washington, New York and Hollywood. I am often amazed at the family connections in Washington. Heck even inside the CIA.

In many industries, as they mature, they players become more established. Outside competition increases, often from firms with easier access to capital markets, and the informal ties become less important.


To expand your point, cities that are not single industry dependent, NYC/shanghai/london being some prime examples, can keep growing their rents. Cities that are heavily dependent on one industry (detroit, pittsburgh, manchester..), fall within TC's thesis, which really is rather bleeding obvious.

One more thing, NYC is actually a bad example for a place where rents will stop growing because it is wrongly identified with finance purely. There is more marketing, industrials, pharma, tech and other industries in NYC than most other cities put together. So for the 'megacities', its likely that rents WILL keep growing because the next big industries (where primary input is intellectual talent) will also probably end up growing here due to sheer density of available talent, capital, vendors and customers.

Zapier is offering people $10k to move out of the bay area and join as a remote employee from wherever people want to live.

Trivial technical point. Yes they can if they go up slowly enough.

Can anyone comment on the NZ property values in Auckland? This seems like an interesting text case for economists.

It still boggles my mind that we don't see a greater usage of land value taxes in megacities, at the very least to ensure the most efficient allocation on land. It will provide incentives to build vertically rather than horizontally.

Who knows, maybe someone will invent a mechanism to build much taller buildings than now...

Tinder and other sites will mean that mega-city rents will continue to go up. People want to meet other people...more than anything. They're happy to pay for that, too.

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