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Berlin and Brexit a great opportunity but beware the Mega Deals...

Summary

Following its troubled 20^th Century, Berlin will grow significantly because of its attractiveness for existing residents, migrants and humanitarian refugees. It is also attractive for global companies looking to relocate as a result of Brexit. Although it is good for Berlin to accommodate global corporations, companies may use ‘mega deals’ as part of relocation considerations. Mega Deals are likened to city v city wars, which are initiated by global organisations where cities bid for new company headquarters. The winners being cities that offer large tax equivalency incentives to global companies if they were to relocate to their city. Such an approach could risk city tax revenue and land being redirected away from essential infrastructure needed to support population growth. Using the European Union can be an effective tool for European cities like Berlin to mitigate the impacts of company mega deals.

The European war period is over, Berlin is free to grow

During the 20^th Century, generations of Berliners suffered from world wars, a Cold War, the Berlin Wall, East/West division and then the complex task of reunification. As a result, sustained long-term economic and urban growth that other cities around the world experienced during the same period was absent in Berlin. Now in the 21^st Century after the wars that wrecked Europe are over, Berlin stands free and ready to reclaim itself as one of the global city giants. Strong urban growth is likely to occur over the next few decades and already over 50,000 new residents every year are calling Berlin home.

Many city officials believe urban growth is nothing but good news. After all, as the economy and urban environment grows, it generally means there are more jobs, more wealth is created, more ideas are generated and therefore more people, organisation and governments can economically benefit sharing the fruits of growth. But sometimes city officials often don’t realise there will also be a need to pay for growth’s demands in infrastructure, housing, transport, social services and open and green spaces. As other cities around the world have found out, these costs can be considerable to city Treasury departments. And if not paid for in a timely way in line with the speed of growth, it affects city cohesion, business productivity, environmental amenity and residential liveability.

Why Berlin is attractive for urban growth and Brexit affected companies

Some European cities like Berlin stand to potentially gain from the relocation of global company operations from UK cities like London (either company headquarters or new satellite offices). This in itself can bring about stronger urban growth than what was originally planned for. There are many reasons why Berliners (and current UK based companies looking to relocate) can feel upbeat about the city’s future. Berlin has many of the characteristics that make it attractive for existing and new residents, migrants, refugees, small to medium sized businesses and global companies, including:

Liberal and progressive government policies in a stable political environment with immigration, diversity and pluralism – which are key attributes for successful global cities,
Favourable small business regulations which has enabled Berliners to trade in diverse and low cost, goods and services, which helps keep the costs of living low,
A population of more than 3.5 million residents in the city proper and over 6 million throughout the surrounding region, which provides for a large labor market to draw from,
Over half of the population is 45 years old or younger, which has helped to generate a local innovation industry of technological, hospitality, art and fashion start ups,
Nearly 20% of the population is foreign, enabling collaboration among people of diverse backgrounds to create globally accepted ideas to sell and trade,
The cosmopolitan city means language is less of a barrier than it once was. English is widely spoken (as is other key European languages), particularly among the younger generations,
Large areas of park and space reservations for health, sport and recreation, and many other life/work balance opportunities,
Infrastructure to build on including high speed auto-bahns, a global airport, high speed rail connections to regional and capital cities, local underground and S-Bahn (light rail) and bicycle lanes, which all provide efficient connectivity,
Large plots of land that have potential for redevelopment and renewal. The impacts of WWII on the urban environment have meant that much of Berlin was destroyed in bombings and ground battles. Among European cites, this gives Berlin potential land use development opportunities without the impacts that redevelopment and urban renewal would otherwise have on historic building fabric,
Germany is a country where around 48% of householders rent under tenant favourable long-term agreements, which make cities like Berlin more amendable to population mobility and low cost housing.

Whilst Berlin is not experiencing the significant growing pains currently experienced in other cities like Sydney, the signs are emerging in gentrification, urban renewal and net positive population growth. And this is before the full impact of Brexit is known and understood. As Berlin will naturally grow, Brexit should be an important additional consideration for city planning as global companies may also seek to relocate to Berlin.

Brexit and global company mega deals – know the potential costs and what to do about them

There are benefits that cities like Berlin could gain from the UK’s decision to exit the European common market, but there are some potential traps to look out for. Despite Berlin’s attractiveness, global companies currently located in London and other parts of the UK who are looking at continental Europe for business location, may do so by playing off city against city for their relocation with ‘mega deals’. Mega deals can be defined as an agreement with more than 50 million Euros in incentives to a company to relocate (or continue operating) in a city.

Mega deals are becoming popular with global companies, particularly in the USA, where cities and their corporate partners have announced approximately 25 mega deals per year since 2008. A recent example of a mega deal in process is Amazon, who in September 2017 released a ‘Request for Proposals’ to North American cities to bid for their No. 2 headquarters – Amazon is looking at investing in a $5b facility with 50,000 full time jobs. Amazon expects bids to be determined by consideration of “incentives offered by the state/province and local communities to offset capital and operational costs” – in particular incentives involving land, site preparation, tax credits/exemptions, relocation grants, workforce grants, utility incentives/grants, permitting and fee reductions. Amazon posted a $2.3b after tax profit for 2016, which has many questioning why global companies like Amazon should be granted publicly funded incentives. Global companies however sell mega deals to city leaders and politicians because of the reported economic benefits and jobs they would deliver to a city (Amazon claims direct and indirect economic benefit ratio of $1 in its investments generates an additional $1.40 to the city’s economy).

Mega deals are favourable to companies rather than cities because companies benefit from a competition playing field that places cities under competitive tension conditions. City officials on the other hand, generally cannot collude with each other in response. A city v city war for ‘economic growth’ bought about by company-induced competition is the result. And cities that do not have disciplined decision makers can get caught up in a bidding frenzy, giving away substantial incentives in tax, rates and land holdings to otherwise very profitable companies. Which some argue it should be the other way around as revenue and land will be needed to fix up, improve and expand city infrastructure and services for a growing population.

There are also longer term impacts of mega deals, one being the value uplift of existing city land and housing in order to support global companies and their large and well paid workforce (Amazon employees earn on average USD$100,000 per year). This can impact on existing residents and businesses whose wages and revenues are at pre value uplift rates, and again on city departments, who are often required to hire staff and purchase new land and facilities to expand public infrastructure.

Whilst cities in America and Australia will have to individually assess and draw the line in the sand on mega deals and their costs and benefits, Berlin and other European cities have an advantage by potentially coordinating their responses under the umbrella of the European Union. A coordinated response to mega deals can mitigate the risks of cities losing more than they gain through a company initiated competitive bidding process. Being careful not to scare away potential UK based global companies, some simple yet effective strategies may help protect cities like Berlin from bad mega deal making such as:

Use of a EU initiated standard Cost Benefit Analysis to assess mega deal making proposals transparently and independently.
Publishing the costs of all direct incentives to be made by the local, state and federal Governments, the corresponding direct government owned land acquisitions, tax and rate payments to be made by the company, and the net difference. This transparently tables the direct costs and benefits to the community and enables informed debate.
Agreeing on tax and land incentive cap across EU member nations.
A public consultation process so that communities can be informed about mega deal making and the estimated costs and benefits.
Having the EU Parliament a right to review, modify or veto a proposed mega deal.

Brexit is likely to make Berlin’s population grow even more than anticipated as the 21^st century progresses. For global companies, mega deals offer a viable pathway to facilitate relocations forced by political decisions based on ‘nation first’ geopolitics. While each global city on their own will have to determine where to draw the line on company initiated mega deals, European cities have an advantage by using the European Union as a tool for a coordinated mega deal response – effectively mitigating the competitive tension environment that companies seek to create as part of the mega deal play book. As city planners who have gone through growing pains have learned, what is good for the city is good for the company – not the other way around of what is good for the company is good for the city

Martin - October 1, 2017

Diversity and housing affordability – what Sydney can learn from New York City

I’ve been lucky to spend time in New York City, and I asked myself what can Sydney learn from the world’s leading global city? Great cities have always thrived and been attractive because of the 3 D’s – Density, Design and Diversity. And New York City thrives because it has all these characteristics but none so more than diversity. Sydney is by all means a diverse city with its vast immigrant community. But it does not have the same depth of diversity one sees in New York City, particularly in technology, fashion, food, art, retail and hospitality, and Sydney’s economic diversity is geographically polarised – remember the ‘latte line’?

What do we mean by diversity? Defining urban diversity and measuring it is difficult and not so straightforward. Richard Florida says of diversity being “Places that are open and possess low entry barriers…to attract people from a wide range of backgrounds”. Whilst defining and measuring urban diversity requires far more academic research and consensus among urban planners, there does appear to be more consensus on the importance of diversity to the city. The importance to create and maintain diversity can be said no better than in the City of New York’s Housing New York, A Five-Borough 10-Year Plan (read it here):

“New York City’s pre-eminence as the world’s leading city stems in large part from its unparalleled diversity. That diversity allows people from every imaginable background to live and work side by side, share aspects of their cultures, exchange ideas, then mix, match and innovate to generate the art, literature, fashion, technology, and conceptual breakthroughs that are the envy of the world. And that diversity drives economic growth, as employers decide to locate in the city to take advantage of its incredible and multidimensional talent pool.”

The key phrase in this paragraph is “people from every imaginable background to live and work side by side”. New York City has managed to maintain diverse neighbourhoods all over its five boroughs of Manhattan, Queens, Brooklyn, Harlem, Bronx and Staten Island. People from all types of economic, social and cultural backgrounds have the opportunity to live and work in any given neighbourhood of the City enabling people to mix and mingle in ways they otherwise could not.

New York City officials realised long ago that diversity relies on affordable housing because it delivers that critical part of the diversity equation of living side by side. What Sydney could do well to learn from New York City is acknowledging the vital link between affordable housing and diversity, and diversity as a driver of both a strong and resilient economy.

Sydney’s housing affordability crises is now at an all time high. And it seems anyone with an interest in city planning, or living in Sydney, has had a say on why and what to do about it. The strongest and loudest voices are those that blame red tape in the planning industry and then advocate for increased supply as the solution. However decreasing planning approval times and increasing supply are insufficient on their own, especially when the vast majority of the new supply created is relatively expensive and basically unaffordable to low and middle income households.

As New York City has long known, it is a classic city failure when investors and developers only build for the high-end market and employers pay wages that are too low to keep up with rising housing costs. When this occurs, we do not take into account the effect it has on the city’s diversity. Where do the city’s lower and middle income earners end up? Either living in financial stress, pushed out to the city fringes to do the long commute or, away from the city all together. This further compounds economic and social inequality, places enormous stress on government costs for transport and infrastructure, and ultimately affects the diversity of a city’s character across all its districts.

And if middle to lower income earners could get access to home ownership via 1^st home owner grant or stamp duty concessions, and non-home owners a rental, they are purchasing or renting high-end new housing products or existing dwellings at the highest prices ever experienced. In doing so there is a good chance they would be experiencing financial stress by allocating more than 30% of their household income to housing. Income that could otherwise be spent in non-housing areas of the economy that would have the effect of helping to create the key secondary part the diversity equation – to work side by side. Working side by side in a collection of small and large businesses and industries provides a far more diversified and resilient economy and not be so reliant on, or impacted by, property market cycles.

New York learned that the enormity and complexity of affordable housing to create diverse communities demands a significant investment and a far more dynamic and compassionate policy response. New York City’s multi-dimensional approach to maintain its diversity is based on a USD$41B plan for housing affordability over 10 years, funded by various government and private sources. It consists of around 50 initiatives targeted at a range of household income levels and housing stakeholders. Broadly it includes:

Recognition that housing affordability is critical to create diverse and liveable neighbourhoods,

Accepting that market led increase in supply is insufficient on its own to address housing affordability,

Leveraging local, state and federal tax and regulatory tools are the best ways to finance, purchase, create and maintain affordable housing,

Understanding that ongoing preservation and quality of existing affordable housing stock is just as important as creation of new affordable housing stock,

Acknowledging housing affordability affects a range of households and not just the very low income households,

Implementing multidimensional strategies to address different levels of affordability across the entire City to maintain and promote diversity in all neighbourhoods,

Knowing that the measure of any great city is how effectively it cares for the most vulnerable – the homeless, those in need of support, seniors and people with disabilities,

Undertaking strong coordination and partnerships across all local, state and federal jurisdictions, the private and not-for-profit sectors,

Leveraging of the affordable housing industry to improve access to quality jobs for City residents. These jobs range from opportunities in private, not-for profit groups and government agencies in creating, implementing, managing and monitoring affordable housing programs, as well as planning, construction, asset management, and compliance and enforcement jobs.

New York City has done and continues to do what Sydney now needs to do more than ever – start working on and implementing better strategies to create and preserve affordable housing relative to what lower to middle income households in the local community can afford. In addition, a more compassionate and serious response is required for the homeless and those in need of critical housing support.

Only then can the City create the diversity where people can live and work side by side. Where people can mix, mingle, exchange ideas, cultures and generate a diversified economy of small and large businesses within all districts and their neighbourhoods; creating an environment where diversity in art, technology, fashion, finance, education, literature, retail and hospitality thrives. In doing so, a great place to live and work emerges to compete with other global cities. The cost to a City for not having strategies to create and promote diversity is too high. And affordable housing is the first, and most critical, diversity related building block from which all other things flow.

Martin - August 28, 2017

Why we need our strategic plans to meet the needs of the Millennium and iGeneration

In between sightseeing and marathon training in Central Park, New York, I’ve made some personal observations that I would like to share with you and seek your opinions and thoughts on.

As I absorb the local and national issues from other countries and cities, one of my first observations is about the Millenniums and iGeneration, and how leaving them out of the urban planning agenda, we do so at our own peril. The Millenniums (those age up to 35) and the next generation to follow (the iGeneration), are now starting to dominate the workforce structure and consumer market. But what does this have to do with our urban environments and more specifically, strategic urban planning? It’s actually pretty significant and if we don’t plan carefully, we can make some bad decisions. If, after reading these rambling thoughts, you think we have already made some bad decisions, perhaps the first step is to better understand the needs and motivations behind the Millenniums and iGeneration by inviting them to the policy making table?

Its significant to include the Millennium and the iGeneration because they have the IT skill set and consumer demands that will drive the next generation of product and service development – computer coding, app development, complex data analytics, data security, counter terror surveillance, artificial intelligence, clean technology etc, etc. As the world and organisations becomes more digitalise and cyberised, the Millenniums and iGeneration, as both savvy digital customers and IT know how, are at the digital and technological frontier. Wether this results in ordering McDonald’s on an app, pay waving your train ticket with your phone, creating places and devices where its harder for terrorism and data hackers to wreck mass scale disruption or to use driverless electric cars, the Millenniums and iGeneration hold the aces to make these products and services real.

But here is the urban planning issue. When the Millenniums, and the iGeneration leave home, they are currently limited on how they live their lifestyles by the historic development of our cities. Organisations (government and private) have located where the previous generations, particularly the War Generations through to Generation X, were born, raised and are still living. These communities have generally clustered in very concentrated forms in traditional global cities, like Sydney, and for the high end economy elite, mega global cities like New York. But unlike for Generation X and those before them, there is now little space for the Millenniums and iGeneration in these places. Unless of course they are willing to pay high housing prices or travel a long way each day to what effectively adds up to a 12hr work day (sound familiar?).

Sydney is choosing to be a high priced global city and is sucking the wallet dry, forcing the Millenniums and future iGeneration to make a lifestyle choice between high priced housing and daily living against one that involves global travelling, bar hopping with friends and long Sunday morning brunches. This will not work. The Millenniums and iGeneration will go to other urbanised areas where the impact of compromise between living and paying off a mortgage, together with the inefficient daily commute, is felt less than it currently is in places like Sydney. And smart global companies, including today’s startups that are tomorrows Fortune 500, will meet them there.

What I see around America and Europe, is that the Millenniums and iGeneration are voting with their feet. They will not be living in high priced global cities that suck their wallet dry just to have a roof over their head. And they will not be living in socially and culturally isolated rural and regional towns where the local RSL, with 1980s cover bands, is the main nightlife feature. They will look for urbanised places that are affordable, fun, creative and provide the technological work they can excel in – as well as secure and reasonable housing tenure.

The smart organisations are realising this and are relocating and rebuilding their industries and services to where the Millenniums and iGeneration will be living (or can be in the future) in order to hire their unique skills and understand their emerging consumer preferences. Recent examples include McDonalds, Caterpillar and General Electric, who are all relocating from suburban areas to urban places such as Boston and Chicago (but not New York or Los Angeles). While in Europe, as Brexit rolls out, global companies and startups will look for cheaper urban places to set up their new European headquarters and R&D arms. Away from high cost London (who now don’t want them) to low cost of living, digitally connected and socially inclusive places like Berlin and Tallinn. It’s these places where the Millenniums and iGeneration can set up their lives, and lifestyles, in affordable and progressive ways.

You start to put these two observations together – the Millennium and iGeneration, high end technology that are also IT powerhouses, and a tinkling of the global economic future becomes clearer. Telsa, a car manufacturing company in Palo Alto California, have just release the first affordable, electric driverless car at a cost to the consumer of around $35,000. It follows China’s lead in aggressively pursuing 20% of car sales to be electric by 2020 and other countries like Germany and France who are keen to phase out combustion engine cars. The next step, being driverless cars, is expected be a $7trillion industry by 2050 and is being pioneered by Google and Microsoft. Meanwhile a $3b government incentive package for Foxconn to set up a $10b factory in southeast Wisconsin (of all places), to build iPhone screens and other LCD digital screen devices. While in Cupertino, California, Apple is spending $5b on their new global headquarters – Apple Park.

High end, clean infrastructure technology and IT driven organisations will be the future economy and they need a digital savvy customer base and workforce to create and use these new product lines. And you know what, neither of these places mentioned above, where these new industrial technologies are being pioneered, created and produced, are in the traditional global city. They may be used and consumed in a global city, but are not being produced or created in them. They are being produced and created in lower order urbanised places where Millenniums and iGeneration can live and prosper and share in the economic growth and success with affordable lifestyle rewards. Small and large governments who implement policies that help create urban places for the Millenniums and iGeneration to meet with technological and IT powerhouses and start ups, are literally in the drivers seat of the future global economy.

So maybe our future strategic plans need to push towards a bigger and bolder vision? One where it involves dispersed city making and promotes the concept of spill over cities? A strategy that integrates with the global and national economy in a multifaceted way instead of the traditional one global city approach, based on high end services like banking and finance. Maybe we need strategic land use plans that are backed up with economic polices that support and lay the groundwork for clean technology industries, both within and outside of the traditional global city? In short, does NSW need a visionary “Plan for 5 Cities” that informs other lower order plans like the “Plan for For Growing Sydney” and their associated regional plans?

But here is the real reason why we should be doing this type of strategic planning – the Millenniums and iGeneration, will not only demand it, they will do it in the future when they themselves really are at the policy table making crucial decisions. The organisations and governments doing this today are simply getting a head start on the rest of the world. Cities, places, countries that do not create a long term strategy that includes the needs of Millenniums and iGeneration, and their employers, do so at their own peril.

Martin - 1 August, 2017