MONEY & ENTERTAINMENT

The early evolution of America’s commercial districts closely followed models developed earlier in Europe. North America’s greatest metropolis, for example, was built along the commercial model of its Dutch namesake.

Most development clustered at the point --- first identified by the Dutch ---where the two rivers surrounding Manhattan Island, the East and the Hudson, converged. Starting in 1792, the burgeoning financial center for the city formed in the area around Wall Street, providing the “seedbed” for the city’s later development into the nation’s burgeoning information, financial and media capital.

Immigrants crowded into lower Manhattan and, by 1860, Gotham’s population had topped one million, 42 percent foreign born. New York was already becoming a rival to London in many ways --- as a port and business center.

Other American cities --- Boston, Baltimore, Charleston, and Philadelphia --- resembled smaller versions of New York. They focused heavily on their port districts, and saw the growth of adjacent business districts that served as both centers of retail trade and specialized services such as insurance, banking and accounting.

Today many of these cities retain these districts, with their characteristic red-brick construction and dark roof tops. Usually no higher than five or six stories, they often now serve primarily as entertainment and commercial districts, and are often highly prized for their architectural uniqueness and human scale.

The Inner Harbor in Baltimore, for example, had once been the thriving commercial center of Baltimore. By the 1950s, as the center of Baltimore declined, warehouses stood empty and derelict. Under the leadership of Mayor Donald Schaefer and the business community, the old red-brick commercial area was redeveloped. Harborplace, developed by the Rouse Company and opened in 1980, served as a turning point, encouraging other developers to build office buildings, hotels, entertainment venues and condos along the waterfront. Although the rest of Baltimore faces many challenges, the redevelopment around the old commercial core continues, including such projects as the new Ritz-Carlton condominiums.

The American urban experience changed dramatically with the new technologies created by the industrial revolution. In America the center of the factory belt, Chicago, suffered all the ills of the congested, polluted, and poverty-wracked industrial city. It appeared, as a Swedish visitor commented in 1850, to be “one of the most miserable and ugly cities” of America.

Cities like Chicago decided that the best course would be to separate their industrial districts from the commercial center. This process was accelerated by the evolution of new construction technology --- most particularly steel frame buildings --- that allowed for larger, multistory structures. The first example of this new form was the Home Insurance Building, built in 1885 at the northeast corner of LaSalle and Adams streets (on the site now occupied by the west portion of the Field building) in Chicago.

The development of the "Chicago skeleton" form of construction, as well as the new elevator systems perfected by the Otis Company, allowed buildings to rise to unprecedented heights.

Perfected by master architects like Chicago’s Daniel Burnham, the high-rise allowed cities to accommodate more functions in one place than anytime in history.

The high-rise building allowed for the creation of something very new --- the modern downtown.

First included in Webster’s in 1881, “downtown,” notes historian Robert Fogelson, grew to mean something more than the traditional marketplace or industrial warehouse district. These areas often usurped the roles previously played by older, more specialized districts. Even the largest central business districts contained but one or two percent of the city’s land areas, but they were universally seen as what one Boston planner called “the natural center” for everything except manufacturing, which alone seemed better suited for slightly less valued real estate.

Downtowns also became the primary retail centers as vast new department stores increasingly supplanted local neighborhood shops.

New York’s annexation of Brooklyn and other adjacent areas in 1900 --- followed by the opening of the subway system in 1904 --- allowed increasingly large numbers to be shuttled between residential neighborhoods elsewhere on the island and the downtown and midtown office districts. Burrowing under the East River, New York’s subways carried ever more workers, inciting ever more office construction.

Dramatic changes have taken place in the real estate world in the past decades, and they involve every aspect of the field - design and construction, a bewildering variety of financial vehicles, new or modified forms of ownership, and so on.

The Greek philosopher Heraclitus, who first recognized the "permanence of change," and Charles Darwin, who grasped the concept of evolution, would feel at home in the real estate world of today.

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Architects of a generation ago wouldn't believe that the most expensive housing units today are designed with dazzling kitchens that, in actual practice, are used chiefly to warm up Chinese take-out food; that the library of the past is now a media room -without a printed book in sight; that maids' rooms have gone the way of the buggy whip and the quill pen; that the luxurious baths and home spas today would please even a Roman emperor; and that residents of virtually all economic levels today demand exercise and health facilities that were undreamt of a few years ago. Most interestingly, they would not believe that some of our most lavish and expensive housing units are in old converted factory and warehouse structures in the heart of former industrial districts.

The jargon in the office development field today includes vocabulary that can elude even seasoned real estate professionals, with terms like "broadband on-ramps," "optical fiber maps and metropolitan loops," "local exchange carriers," and the like.

Even apartment buildings are now going "green" and high-tech, with buildings now on the drawing boards with solar energy collectors, water re-use programs, and dedicated air systems.

In real estate finance, J.P. Morgan himself would probably be bewildered by the more complex derivatives now available for ultra-sophisticated investors who seek high returns with proportionate risk.

It seems only yesterday that the real estate field was bowled over by William Zeckendorf, Sr.'s introduction of his "Hawaiian technique," in which he divided a property's values into a fee position, a ground leasehold, an operating leasehold, and a residual position. Today one hears of a "collateralized mortgage obligation" (CMO) with seven "planned amortization class" (PAC) tranche, one "retail" (RTL) tranches, two "support payer" (SUP) tranches, one "support Z" (SZ) and one "jump-Z" bond and a "PAC residual" (RPC).

The values of all of those fluctuate with the rate of prepayments of the many individual mortgages in the underlying portfolio. At each level, an investor selects his degree of risk in line with his hope of reward. Needless to say, these are not markets for amateurs.

Changes in technology, in building design and in financing have been accompanied by other changes no less striking.

Only a few years ago, New York structures were built, financed, owned, managed and occupied by New Yorkers, just as those in Chicago or London, San Francisco or Paris were controlled locally. In today's globalised world, capital, ideas, and people flow freely across state and national borders. American developers, financiers, brokers, architects and technicians are active anywhere in the world where the rewards justify the risks.

Today, globalization and securitization mean that the home mortgage of a worker in, say, Richmond, Virginia can be financed by the life savings of a worker in Brussels or Stockholm, at the lowest interest rates the world's free capital market permits.

All of us are aware of several powerful trends that are likely to continue, such as the population movement away from cold, dark and wet areas of this country to warm, sunny, and dry ones. The relentless shift in economic primacy away from blue-collar employment in heavy industry and manufacturing and toward a broad range of white-collar activities (in reality, they now wear sport shirts!) is an old story. We will continue to see the surge of population and jobs beyond the city limits of our largest cities, and certainly a group like this is aware of the increasing degree to which we are becoming a knowledge-based society where electronic handling of information is changing all our lives.

Demographics, too, present facts that must be faced. Thanks to immigration, the U.S. population is expected to grow some 20% in the next 20 years, adding 50 to 60 million people, overwhelmingly from Latin America and Asia. The ramifications of this immigration will be complex, especially in the West and South, where most are expected to settle. But the spillover will be felt everywhere, in center cities, in "edge cities," in older suburbs and in fringe areas that are being called "edge-burbs."

How we deal with older, deteriorating suburbs and with dysfunctional older industrial centers is one of the great challenges of the decades ahead.

In the decade of the 1990s, Las Vegas had a population growth rate of 85%, and Scottsdale, Arizona grew by 56%, and Austin, Texas grew by 41%. In the same period, other cities shrank. Hartford, Connecticut, for example, lost 13% of its population, St. Louis, Missouri lost 1.2% and Baltimore lost 11%. And that was at the height of a boom.

When we add the next 20% to our population, we will not expand our road networks or our parking by 20%, and worsening congestion will force new approaches to density, telecommunications, public transportation, and the needs of pedestrians.

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