Analyzing Local Economies

Analyzing Local Economies

Presentation to:

The Aspen InstituteROUNDTABLE ON COMMUNITY

CHANGEThe Funders’ Exchange on Community Change,Poverty Reduction and Prosperity Promotion

Robert WeissbourdRW Ventures, LLC • January 15, 2008

Agenda

Background: The DNT Project

The Nature of Neighborhood Change

Implications 1.0: Dynamic, Specialized Neighborhoods

Implications 2.0: Specialized Tools - From Diagnostics to Investment

I

Implications 3.0: Innovation Capacity

II

III

IV

V

About Living Cities

“A partnership of financial institutions, national foundations and federal government agencies that invest capital, time and organizational leadership to advance America’s urban

neighborhoods.”

I Background: The DNT Project

AXA Community Investment Program Bank of America The Annie E. Casey Foundation J.P. Morgan Chase & Company Deutsche Bank Fannie Mae Foundation Ford Foundation Bill & Melinda Gates Foundation

Robert Wood Johnson Foundation John S. and James L. Knight Foundation John D. and Catherine T. MacArthur Foundation The McKnight Foundation MetLife, Inc. Prudential Financial The Rockefeller Foundation United States Department of Housing &Urban Development

LIVING CITIES PARTNERS:

Partners and Advisors

The Urban Institute


Participating Cities: Chicago, Cleveland, Dallas and Seattle

We Know Where We Want to Go...

Common Goal:


The Challenge: Scarce Resources, Many Options

Community-Based OrganizationsCommunity-Based Organizations: select : select interventions, identify assets and attract interventions, identify assets and attract investment investment

GovernmentsGovernments: tailor policy and interventions: tailor policy and interventions BusinessesBusinesses: identify untapped: identify untapped

neighborhood marketsneighborhood markets FoundationsFoundations: target interventions,: target interventions,

evaluate impactsevaluate impacts


Information Resources



Increasingly available, but more progress to be made



Gap between practitioners and academics: need “Clinical Economics”(Sachs)




Few decision systems for neighborhood practitioners,investors and service providers

Gap between practitioners and academics: need “Clinical Economics”(Sachs)



Comprehensive Neighborhood Taxonomy

BusinessBusiness PeoplePeopleReal EstateReal EstateAmenitiesAmenitiesSocial EnvironmentSocial Environment

Improvement or Improvement or deterioration deterioration within typewithin type

Gradual vs. Gradual vs. Tipping pointTipping point

From one type to From one type to anotheranother

Port of entryPort of entry BohemianBohemian RetirementRetirement Urban Urban commercializedcommercialized

EmploymentEmployment EducationEducation CrimeCrime Housing Housing stockstock

Investment Investment activityactivity


PHYSICAL:Distance from CBD, vacancies, rehab activity, …

Drivers Model and Data

TRANSPORTATION:Transit options, distance to jobs, …

CONSUMPTION:Retail, services, entertainment, …

PUBLIC SERVICES:Quality of schools, police and fire, …

SOCIAL INTERACTIONS:Demographics, crime rates, social capital…


Agenda

The Nature of Neighborhood ChangeII

Agenda

The Nature of Neighborhood ChangeII

a. Measuring Change: the RSI

b. Overall Patterns

c. Specialized Patterns

d. Degree and Pace of Change

e. Drivers of Change

Theoretical Framework

Use Demand for Housing as Proxy for Use Demand for Housing as Proxy for Neighborhood HealthNeighborhood Health

Look at Quality Adjusted Housing Values to Look at Quality Adjusted Housing Values to Capture Neighborhood AmenitiesCapture Neighborhood Amenities

Look at Change in Quantity of Housing to Account Look at Change in Quantity of Housing to Account forforSupply EffectsSupply Effects

Amenities

Structure Rent

Housing Price

IIa Measuring Change: the RSI

Final Product: The DNT RSIRSI Estimation Coverage Using Case/Shiller Method

Time Period: 2000 - 2006 RSI Estimation Coverage Using DNT RSI Method

Time Period: 2000 - 2006


Looking at Particular Tracts: High Appreciation in Logan Square


Contour Model of 2004-06 Prices around Mt. Prospect Property

Spatial Distribution of Housing Values – Mount Prospect

1450 S. Busse

Sales Transactions

Tract Boundaries


Chicago Neighborhood Change, 1990-2006

2006

IIb Overall Patterns

Initial Conditions and Appreciation

APPRECIATION59.7

-1.0

MEDIAN HOUSING PRICES 1990Up to $38,000

$38,001 - $63,750

$63,751 - $107,500

Over $107,500


Change in Price: Poor Neighborhoods Present the Most Opportunities for Investment


Partly Due to Lack of Information,These Areas Are Also the Most Volatile

TEMPORAL VOLATILITY OF INDEX0.14 - 0.93

0.94 - 1.33

1.34 - 2.54

2.55 and above

APPRECIATION59.7

-1.0


IIc Specialized Patterns

Patterns of Interest: Tipping?

Chicago, North Side


Patterns of Interest: Neighborhood Turnaround

Dallas, Southeast Side


Patterns of Interest: Neighborhood Decline

Cleveland, East Side


Neighborhood Change Is a Slow Process

Neighborhood Mobility by Time Interval

5 Years 10 Years 15 YearsNo Change 1 Quintile2 or More Quintiles

58%

33%

8%

64%

30%6%

71%

25%4%

IId Degree and Pace of Change

Yet Substantial Change Occursin Select Neighborhoods

Median Sales Price Transition MatrixCleveland, 1990-2004

Final QuintileInitial Quintile 1 2 3 4 5

1 76.9% 15.4% 7.7% 0.0% 0.0%2 5.1% 51.3% 25.6% 15.4% 2.6%3 2.6% 26.3% 26.3% 39.5% 5.3%4 7.7% 2.6% 28.2% 23.1% 38.5%5 7.7% 5.1% 10.3% 23.1% 53.8%

IId Degree and Pace of Change

Neighborhoods and Regions

IIe Drivers of Change


Across Cities, 35% of NeighborhoodChange is Accounted for by Regional Shifts

R Squared from Regression Models of Tract RSI on Region


Cleveland Chicago Dallas Seattle


Across Cities, 35% of NeighborhoodChange is Accounted for by Regional Shifts

R Squared from Regression Models of Tract RSI on Region


Cleveland Chicago Dallas Seattle

81%57%

28%7%

The Big Picture: Urban Neighborhoods Are Coming Back

Chicago Cleveland Dallas Seattle

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

Average Tract Appreciation Rate (1990-2004)

Suburbs

City


The Big Picture:Neighborhood Change = Changing Neighbors?

Ratio of HMDA Borrower Income (2000-2005) to Census Income (2000)


The Big Picture:Drivers of Neighborhood Change

Mobility is the key mechanism of change Movers are attracted to areas with undervalued

housing but sound economic fundamentals (employment, income, education, young adults)

Being connected is important: proximity to job centers, access to transit, lower commuting times are positive

Cultural and Recreational Amenities (art galleries, bars and restaurants) help, but are not the main event

“The Goldilocks Theory” …


The Big Picture:Drivers of Neighborhood Change

Race is still a factor: even controlling for income, influx of minorities in a neighborhood leads to lower appreciation

Neighborhood Spillovers are important: what happens in your neighborhood reflects what happens in the neighborhoods around you

Context matters: substantial variation by type and stage; current conditions have large affects on degrees and patterns of change


The “Little” Picture: Few Silver Bullets


Neighborhood Convergence


Beta Convergence in Cook County, 1990 - 2005

Neighborhood Convergence


Beta Convergence in Cook County, 1990 - 2005

Characteristics of Poorer Neighborhoods that Tend to Converge

Strong evidence suggests convergence is more likely:

Closer to the Central Business District In neighborhoods with more turnover With more Social Capital

– Civic, Social, Fraternal, Political, Religious, Businessand other Membership Associations


Characteristics of Poorer Neighborhoods that Tend to Converge

Moderate evidence favors: Educational levels Supermarkets Transit nearby Income diversity Art Galleries nearby Eating establishments nearby


How Drivers Interact Also Varies by Place

Far from CBD and with High Income Diversity


Summary Implications

Neighborhoods are highly specialized Neighborhood change is a function of people and

money moving in and out This in turn varies based on neighborhood type and

stage of development – different people and investors choose different neighborhoods in the context of larger markets and systems

As a result, what matters varies by place. For any given neighborhood, the goal could be continuity or change in type, and implementation entails understanding who you want to stay or move in, and what factors matterto them


Summary Implications

Two major implications:

1. We need a framework for understanding neighborhoods as dynamic, specialized, and nested in larger systems

2. We need much better tools for customizedanalysis of local economies


Agenda





I


II

IV

V

III

Neighborhoods are Complex

Dynamic, Specialized NeighborhoodsIII

Neighborhoods are Complex


Neighborhoods are Dynamic


Neighborhoods are Nested in Larger Systems Which Drive the Flows of People and Capital


Neighborhoods are Nested in Larger Systems which drive the Flow of Capital and People


Functioning Neighborhoods Connect Residents and Assets to Larger Systems

Poverty Productivity

Connectedness

Isolation


Functioning Neighborhoods Connect Residents and Assets to Larger Systems

Employment networksEntrepreneurial opportunities

Business, real estate investment

Expanded products and services

Productive, healthycommunities

Undervalued, underutilized assets

Poverty Productivity

Connectedness

Isolation


Economic Systems: Identifying Key Levels andLevers of Market Activity

Level: Market Operations


PRODUCTION CONSUMPTIONEXCHANGE


Level: Market Operations


PRODUCTION CONSUMPTIONEXCHANGE

Transaction costs

Finding costs

Measurement costs

LEVERS

TasteIncome

LEVERS

Productivity

CostsLEVERS



PRODUCTION CONSUMPTION

EXCHANGEMarket Operations


Level: Market Environment


INSTITUTIONALCONTEXT

Enabling LawsPrescriptive Regulation

Entry Barriers

OTHER EXOGENOUS INFLUENCES

Infrastructure Factors/resources

TechnologyTastes

PRODUCTION CONSUMPTION

EXCHANGEMarket Operations

Applying the FrameworkSTEP 1A: What type of neighborhood do you

want to be?



want to be?

Starter Home Community



want to be?STEP 1B: What drivers will get you there?






• Specific Retail Amenities• Child Care• Schools• Safety• Affordability





• Specific Retail Amenities• Child Care• Schools• Safety• Affordability


Applying the FrameworkSTEP 4: Specify Interventions



Commercial Land Assembly (production –

costs)Specialized Market Data(exchange – finding costs)

ECONOMIC SYSTEM

Retail Markets

Agenda





I


II

IV

V

III

Developing New Tools for the FieldQuestion/Goal ToolAnticipate and Manage Neighborhood Change Pattern Search Engine

Enabling Investment in Inner City Real Estate Markets RSI REIT

Track Affordability and Neighborhood Housing Mix Housing Diversity Metric

Anticipate and Manage Gentrification Early Warning System

Planning Community Development Interventions Neighborhood Change Simulation

What neighborhoods are similar along multiple dimensions of interest?

Similarity Index/ Custom Typology

What drivers differentiate neighborhoods with respect to a specific outcome of interest? CART

How will a specific intervention affect its surrounding area? Impact Estimator

What locations will maximize the impact of an intervention? Spatial Multiplier

Does the impact of an intervention vary in different places?

Geographically Weighted Regression

Specialized Tools - From Diagnostics to InvestmentIV

Developing New Tools for the FieldQuestion/Goal ToolAnticipate and Manage Neighborhood Change Pattern Search Engine

Enabling Investment in Inner City Real Estate Markets RSI REIT

Track Affordability and Neighborhood Housing Mix Housing Diversity Metric

Anticipate and Manage Gentrification Early Warning System

Planning Community Development Interventions Neighborhood Change Simulation

What neighborhoods are similar along multiple dimensions of interest?

Similarity Index/ Custom Typology

What drivers differentiate neighborhoods with respect to a specific outcome of interest? CART

How will a specific intervention affect its surrounding area? Impact Estimator

What locations will maximize the impact of an intervention? Spatial Multiplier

Does the impact of an intervention vary in different places?



Pattern Search

What It Does: For identified patterns of change, finds other

neighborhoods that have been through or are going through the same pattern

Applications: Enables identifying comparable neighborhoods

with respect to particular patterns of change in order to identify key factors and effects

Enables anticipating and managing particular patterns of change


Pattern Search Example: Gentrification in Chicago Goal: Anticipating Neighborhood Change How it Works: Define a Pattern and Find Matching

Cases Example: Possible Gentrification Pattern Defined

Based on a Neighborhood in Chicago


Zooming In: Wicker Park Area


Zooming In: Wicker Park Area


Pattern “Spreading” to Nearby Tracts



Possible Application: Anticipating and Managing Gentrification

Different Appreciation Patterns Found in the DNT RSI










Housing Diversity Metric

What It Does: Tracks the affordability and mix of the

housing stock (distribution, not just median) Applications: Enables tracking the range of housing

available in the neighborhood Better indicator of possible displacement

than median prices alone



Example: Tracking the Price Mix

Strong Overall Appreciation, Strong Overall Appreciation, Range of Housing Options Is NarrowingRange of Housing Options Is Narrowing


Example: Tracking the Price Mix

Strong Overall Appreciation, Strong Overall Appreciation, Range of Housing Options Is NarrowingRange of Housing Options Is Narrowing

Strong Overall Appreciation, butStrong Overall Appreciation, butRange of Housing Options Is Still WideRange of Housing Options Is Still Wide


Percentage of Affordable Homes, 1990-2006

19901990


20062006

Percentage of Affordable Homes, 1990-2006

Classification and Regression Tree (CART)

What It Does: Identify similar neighborhoods with respect

to an outcome of interest and its driversApplications: Identify leverage points to affect the desired

outcome Meaningful comparison of trends and best

practices across neighborhoods



Sample CART: Foreclosures

40 Variables Tested


Sample CART: Foreclosures

40 Variables TestedOutcome: Number of Foreclosures (2004)

Drivers:% Subprime Loans in Previous Years

Mean Loan Applicant Income

% FHA Loans% Black Borrowers


CART Output: Chicago Segments

Cluster 8: Defining Traits and Risk Factors

Segment Profile: Isolated, underserved, predominantly African

American communities. High rates of unemployment and subprime lending activity.

Primary Risk Factor: Percentage of subprime

loans (primary driver offoreclosures) is at itshighest and still onthe rise


Impact Estimator

What It Does: Estimate impact of an intervention on

surrounding housing values (or on other outcome, e.g. crime)

Possible Applications: Evaluate the impact of a development policy Choose among alternative interventions

based on estimated benefits to the surrounding community

Advocate for a specific interventionSpecialized Tools - From Diagnostics to InvestmentIV


Example: What is the effect over time and space of LIHTC housing?

PRELIMINARY – FOR ILLUSTRATION PURPOSES ONLY





Impact of LIHTC on Surrounding Properties

Estimated Distance Decay Function – LIHTC ProjectsEstimated Distance Decay Function – LIHTC Projects

Distance from Intervention – Chicago Blocks (1 block = 1/8 mile = 660 ft) Distance from Intervention – Chicago Blocks (1 block = 1/8 mile = 660 ft)

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Specialized Tools - From Diagnostics to InvestmentIV Specialized Tools - From Diagnostics to InvestmentIV

Applying the Estimator to a Specific Project: New Shopping Center in Chicago

New Shopping CenterNew Shopping Center


What It Does: Estimates how drivers of neighborhood

change vary by neighborhoodPossible Applications: Analyze impact of policies and interventions Tailor strategies to specific neighborhood

types Define geographic scope of intervention



Example: Impact of Supermarkets


Effect of 1990 supermarkets on 1990-2000 appreciation

Agenda





I


II

IV

V

III

Innovation in Economic DevelopmentWhat is Innovation?What is Innovation? “The specific instrument of entrepreneurship... The act that endows resources

with a new capacity to create wealth.” (Drucker) “The process whereby ideas for new or improved products processes or

services are developed and commercialized in the marketplace.”

Innovation is not just thinking something; it’s doing something. In the Innovation is not just thinking something; it’s doing something. In the field of economic development, that means it entails making a real field of economic development, that means it entails making a real difference in the world.difference in the world.

The field suffers from an “Innovation Gap”:The field suffers from an “Innovation Gap”:

Outstanding academics, researchers and think-tanks who develop critical new ideas, but whose job is not to convert them to practical, applied products.

Accomplished practitioners with deep expertise in particular subjects or places, but rarely with time, capacity or resources to undertake new product development and deployment.

Lack sophisticated processes, systems or collaborative institutional framework for large-scale R&D, product development and scaling.

Context and OpportunityInnovation has always been the only long term driver of growth. This is just as true for economic development as

it is for the private sector. Innovation drives growth largely through product development: new technologies, goods, services and methodologies which change individual, organizational or systems efficiency, productivity and performance. The knowledge economy enables, accelerates and places a premium on innovation and product development, particularly through knowledge networks and synergies, as information technologies have made knowledge content a greater part of value added, enhanced networks for exchange of knowledge content, accelerated change and rewarded flexible adaptation.

This is a fertile time for product development in the economic development field. Market-based approaches to economic development create major new avenues for developing products to enhance particular

markets to include and invest in underutilized assets. A more holistic approach to development heightens the need for new ways to identify and leverage the linkages across subject

areas and geographies. Organizations are looking for opportunities for cross-subject learning and collaboration, and see the need for new institutions to consolidate our knowledge base and develop the next generation of products.

Increased focus on entrepreneurship, urban efficiencies, linkages of neighborhoods and regions, individual driven systems, “bottom of the pyramid” business strategies and social venturing all create opportunities, as does the emergence of “disruptive technologies” (e.g. smart documents, smart cards, web 2.0 platforms).

As the field becomes more business-like, opportunities for adapting private sector internal business systems products to development organizations expand, including established systems for innovation.

Product development for the economic development field is happening ... The Center for Financial Services Innovation: assisting the financial services industry to identify, develop, and implement new

products that deliver asset-building opportunities to the underbanked market and are profitable for both company and customer. The Urban Markets Initiative: improving the availability of information and seeding information products to enable expanded

market activity in urban communities. The Dynamic Neighborhood Taxonomy Project: developing new tools that community based organizations, local government

agencies, businesses and foundations can use to better target their investments and interventions to different types of neighborhoods.

… but the field lacks the institutions and incentives for large scale product development.The timing is right for a new institution that would build on these trends, more deliberately and

systematically foster product development, create new tools to enhance the effectiveness of economic development organizations, and bring products to scale.

Building on Solid FoundationsThe private sector invests hundreds of billions of dollars in research and development. A

vast body of work describes the mechanisms of product development and innovation. Private sector R&D consortia prove the value and enhanced productivity flowing from

collaborative knowledge networks focused on applied research and product development. These consortia provide important models for how collaboration is structured, how research and product development proceeds, and how innovations generated through collaboration are adopted and deployed in the marketplace.

What makes these models successful? They have established comprehensive systems and resources for moving

through the stages of product development from opportunity identification to scaling.

They bring a broad cross-section of the right people from multiple organizations (users, experts, designers, etc.) to the table. The collaborative sharing of knowledge and resources leads to cross-fertilization of ideas and fosters innovation. The broad participation also facilitates the dissemination of cutting edge analysis and products.

The recognition and trust that the consortia gain enable them to define protocols and standards for entire industries.

Examples of private sector R&D consortia include the Semiconductor Manufacturing Technology, the International Electronics Manufacturing Initiative, and the Financial Services Technology Consortium. The type of collaborative research and development process carried out by these consortia has generated major innovations that shape our everyday life, from the Universal Product Code (UPC) to the transistor.

Why Isn’t This Happening Already?Despite the vast current opportunities, product development does not happen as

naturally or readily in the economic development field, perhaps due to structural challenges characterizing the field and its organizations.

Different incentive structures: in the private sector, financial returns motivate entrepreneurs to continually develop new products and ideas and test them in the marketplace. Non-profit organizations are naturally more risk-averse and have more complex, less predictable incentives to innovate.

Lack of direct user feedback: the marketplace provides rapid feedback on the value of new products and services through consumer response. Assessing the value of economic development interventions is more difficult and less rigorous. Poorly designed subsidies sometimes prevent market feedback or reduce incentives to innovate.

Less capacity: organizations generally have fewer, shorter term financial resources; more narrowly focused skills, with less product development expertise; challenges attracting talented entrepreneurs, technologists and product developers.

Fragmentation: smaller organizations, focused on narrower issues or places. Lack of well developed networks, systems for product development, and

organized markets.

The Innovation Network for Economic Development

The Innovation Network for Economic Development (INED) would be a new large-scale, collaborative institution devoted to fostering innovation and productivity in the economic development field.

Building on models already tested in the private sector, INED would identify and undertake high potential applied research and product development, through a user-driven process engaging practitioners, researchers, businesses, technologists, policy makers, foundations and other stakeholders.

INED would constitute a knowledge network, able to identify needs and opportunities across sectors, and to develop, test and scale practical development products, filling the existing gap between academic research and economic development practice.

The network would also enable cross-fertilization, consolidation and certification of tools, and development of operating platforms, standards and business technologies for the economic development field.

Discussion

General Comments and Questions? What are You Trying to Better Understand

About Neighborhoods? What Impacts are You Trying to Achieve

and Measure? What Tools and Applications Would Be

Most Useful? Partners: Corollary Research, Tool

Development and Testing, Other?

Innovation CapacityIV

Analyzing Local Economies

Presentation to:

The Aspen InstituteROUNDTABLE ON COMMUNITY

CHANGEThe Funders’ Exchange on Community Change,Poverty Reduction and Prosperity Promotion

Robert WeissbourdRW Ventures, LLC • January 15, 2008

Economy & Finance

Analyzing Local Economies