Are big cities doomed?
Chicago Skyline. Photo: J. Crocker. Source: Wikimedia
The problems that many big cities face are well known: crumbling infrastructure, ossified politics, and economic decline. Without the economic growth to support public services, political factions end up squabbling over pieces of an ever-smaller pie.
This matters for investors. Not only do they make direct investment decisions, like whether to purchase municipal bonds issued by a city, but investors also need to look at where companies are based. If a firm is located in the middle of a demographic desert, it’s going to be hard to find the talent necessary for any successful venture.
Chicago is a case in point. The city grew dramatically in the first half of the 20th century. The population more than tripled from 1890 to 1930. It was the final destination for waves of immigrants from Ireland, Germany, Italy, and Poland. In addition, the Great Migration of African Americans from the South added more workers. The population peaked in 1950, but then went into a slow decline, falling by about 20%. It stabilized in the 1990s, when the “Second City” ranked third in the US, behind New York and LA.
Source: US Census
Chicago’s credit issues stem from this demographic decline. A smaller population needs to support – or at least manage – a larger infrastructure. Roads, mass transit, and public education facilities are structured to serve a different economy than exists right now. And in Illinois, public pension obligations are senior to just about every other credit claim. They enjoy a privileged status in the State Constitution. This means that promises made to public employees can come back to haunt creditors decades later. It’s largely because of pension issues that Illinois bonds have the worst credit rating in the country.
But Chicago still has a lot going for it. It’s near the geographic center of the US, equally close to either coast. Chicago O’Hare airport is one of the busiest in the world, a major hub for both United and American Airlines. It has several world-class universities, like the University of Chicago, Northwestern University, Loyola, DePaul, and it’s near the University of Illinois. And it is a destination for hoards of tourists. Last year, almost 60 million people visited Chicago, second only to New York City. The sports teams, the lakefront, the art museums, the nightlife: they all have their attractions.
Chicago at night from the Willis Tower. Photo: Charles Voogd. Source: Wikimedia
This is why Chicago now ranks second in the US as the destination for young, affluent workers. In a recent US Census Bureau study, Chicago added more than 26,000 households headed by a person under 45 making more than $100,000 per year – growing more than 57%. These people could live pretty much anywhere, and they’re choosing the City of Chicago. More than 38% of Chicagoans over age 25 now have a college degree.
This is having an impact on where big companies choose to locate. Boeing recently moved its headquarters to Chicago; Facebook is leasing a 200,000 square foot downtown office space – large enough for 1,000 additional employees for the software giant; and the city is a finalist in the competition to be Amazon’s second headquarters.
American cities have transitioned from being manufacturing centers to service centers to information centers. These changes almost bankrupted several of them. But a focus on the fundamentals – infrastructure, education, public safety – has helped cities like Chicago remain vital. The alternative – a feedback loop of decline, blight, and decay – isn’t very attractive.
Urban blight. Public Domain. Source: Wikimedia
Douglas R. Tengdin, CFA
Charter Trust Company
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