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STRATEGY

Here Comes the Neighborhood

Start-ups are reenergizing urban neighborhoods across the country.
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If it's all about the talent you have access to and how that talent interacts, then there may be nothing more important than where your company lives

In an old industrial building in lower Manhattan, Jon Kamen and the artists working with him are re-creating the urban economy. Kamen and his company, @radical.media, which produces television ads, graphic art, and films, epitomize a remarkable reversal: one in which a generation of entrepreneurs' drifting away from city cores has given way to start-ups' reenergizing dozens of once-decrepit urban neighborhoods across the country. That shift says much about the dynamics of the new economy in general and digitally driven industries such as the Internet and media in particular. When choosing where to locate, companies in those emerging industries are ignoring traditional factors, such as taxes, the cost of doing business, and convenience, that tend to be favorable in the suburbs. Instead, they are considering where creative workers want to work and environments that foster collaboration.

"You go where the creative talent is," says Kamen, whose office is spacious but cluttered with advertising awards and other honors won by his company. "In a creative community, social existence is very much part of the exchange of ideas."

Kamen did not come to that conclusion easily -- nor to the subsequent decision to locate his headquarters in a 27,000-square-foot space in New York City's Hudson Square neighborhood. In fact, after spending much of his early career in Manhattan, in 1975 he and his partners launched @radical.media's predecessor, Sandbank, Kamen and Partners, and in 1982 they moved to suburban Hawthorne, N.Y., not far from Kamen's home in bucolic Bedford. "We were fed up with Needle Park and all that," he recalls.


"How people feel about the neighborhood has an amazing impact on how they work together."

--Jon Kamen, @radical.media, New York City

Yet as the business grew, Kamen found himself going into the city more and more often, partly to see clients and hire artists but particularly to drink in the New York culture. Increasingly, he found operating out of Hawthorne, less than an hour from Manhattan, isolating and insulating. He needed to be back in "the media center." Finally, in 1990, Kamen and his partners shifted their main operation to an office on 61st Street.

Three years later, after buying out his partners, Kamen went looking for bigger digs -- and a different atmosphere from that of midtown Manhattan. Even though midtown is close to the hubbub of traditional media, Kamen wanted a neighborhood less corporate and conformist. He yearned for an open, airy space that would be able to accommodate the large cadre of freelancers who worked for his company on a project-by-project, ad hoc basis.

So Kamen headed south toward neighborhoods such as Tribeca and SoHo, which were emerging from long-term squalor and becoming fashionable. He found his present office -- in a former printing building that had been abandoned for six years -- toward the end of 1993. It not only was relatively cheap at $13 a square foot but also was airy and well lit and had high ceilings and sweeping views of the Manhattan skyline.

The company grew its New York staff to more than 100 people and in 1994 changed its name to @radical.media. The neighborhood also changed. Internet companies, graphics and media firms, fashion-design houses, and advertising agencies enlivened a forlorn collection of fading industrial buildings. New retail stores, new restaurants, new clubs -- a whole new feel -- transformed the once-lifeless streets.

In Kamen's estimation cool spaces, cool neighborhoods, places to lounge and get a coffee and feel the creative sense of the city -- ingredients that some would call peripheral -- are essential to many of the businesses that define the new economy. "How people feel about the neighborhood has an amazing impact on how they work together," Kamen says, looking beyond his glass doors at his staff. "A high-rise goes against community, and you can't negate community. I think that's what matters."


For the first time in decades many central-city populations are growing. They're expected to jump 50% by 2010.


The transformation of Hudson Square and much of lower Manhattan reflects a broader economic and cultural shift that is reenergizing urban neighborhoods, whether they're in old cities such as New York and Boston or in definitively 20th-century towns such as Dallas. In many of those communities the shift from forlorn to fashionable has taken place within the past decade or even more rapidly.

Yet the change is far more than the gentrification that was evident as recently as the 1980s. In those times, as urban economies rose along with the stock exchange and financial-services industries, large pools of workers -- brokers, advertising directors, accountants, secretaries -- poured into the traditional downtown business districts, many of which experienced rapid building booms. Some workers, particularly the young, single, and educated, preferred to settle in the city; in the process they gentrified formerly ungenteel districts by rehabbing cheap houses and attracting amenities such as new bars, restaurants, and shops.

The current wave of urban settlement is similar. Again, the vast majority of people moving into previously hardscrabble, blue-collar kinds of places tend to be young, affluent, and well educated; 88% of the residents of lower Manhattan are under age 45, most are single, and most earn upwards of $120,000.

But there remains a major and critical distinction. Many of today's improving neighborhoods are not merely convenient in-town bedroom communities for the affluent; they are becoming centers for businesses and residences and may best be termed "knowledge value" neighborhoods.

The Japanese economist Taichi Sakaiya developed the concept of knowledge value. Sakaiya predicted that future economic growth, which is more than simply a function of superior high technology, would accrue to nations, regions, industries, or companies that were adept at incorporating cultural knowledge, including know-how in such areas as design distinctiveness and fashionability.

In a knowledge-value economy, suggests Sakaiya, companies must do more than simply make products and dump them into the marketplace. The consumer has become more sophisticated, and the marketplace more fragmented. Information, packaging, and positioning -- the culturally intensive roles in "production" -- have become far more important factors in the selling of everything.

The Internet has changed the nature of technology and affected which areas, urban or suburban, edge city or edgy neighborhood, best promote technological development. Traditionally, high technology has been dominated by its "hard," highly rational side -- the building of hardware and sophisticated enabling software -- and high-tech companies have congregated in suburban locations such as the Santa Clara Valley, Orange County, Route 128, and the sprawling suburbs of places like Dallas or Washington, D.C.

But the emergence of the knowledge-value economy, sparked by the rapid evolution of the Internet and media industries, has spawned the growth of a "soft" side of the technology revolution. That side emphasizes the skills that have long been most common in cities and among urbanites: facility with culture, language, and graphics.


"A high-growth company needs a certain kind of space. You can't put people in cubicles."

--Aaron Cohen, Concrete Media, New York City

One critical sign of change has been the revival of entrepreneurial development in places like New York City, which typically has been death to new ventures. 83% of New York's new-media businesses have annual revenues of less than $1 million a year. In comparison with "hard" high-tech areas like Silicon Valley, pay is poor and companies are undercapitalized, but the rush of people and enterprises to the central core has turned New York into a far more amenable place for entrepreneurs, with a faster rate of job growth than the surrounding suburbs.

That is not merely a New York phenomenon. Cities as diverse as Chicago, Dallas, and Seattle are all experiencing a surge in high-tech jobs. In Boston, where technology companies once headed for the outer suburbs along Routes 128 and 495, there has been a rapid growth of "cyberindustry" in the city's old leather district, with another cluster in neighboring Fort Point Channel. Within a 10-minute walk of Boston's South Station, according to Shayne Gilbert, president of Boston's Cyber District Association, there are more than 75 interactive companies employing nearly 2,500 workers.

Even Silicon Valley, the epicenter of the digital revolution, has seen the steady growth of a high-tech-related rival in San Francisco, which formerly served merely as the Valley's financial, advertising, and entertainment annex. Multimedia Gulch, rising from the largely deserted industrial districts south of San Francisco's Market Street, houses 400 multimedia companies employing some 3,000 people in 4 million square feet of space. That activity has sent a formerly torpid property market soaring, with office rents, according to one study, more than doubling from 1996 to mid-1999.

But economic transformation has been especially marked and widespread in lower Manhattan. From 1993 to 1998, for example, the number of computer-service jobs in New York City more than doubled. The number of computer-related businesses there is now twice what it was earlier in the 1990s. Internet and media-related start-ups decreased the percentage of vacant properties to single digits in areas such as Chelsea and Hudson Square from 1993 to 1998, whereas rents have risen by 50% and have even doubled in some neighborhoods.

Although Hudson Square and other neighborhoods associated with New York's Silicon Alley may be the most hyped examples of knowledge-value transformation, other locales are experiencing it, too. For the first time in decades many central-city populations are growing. They're expected to jump 50% by 2010, pushed by a growing college-age population, singles, gays, childless couples, and empty nesters. San Francisco, Seattle, Philadelphia, and Chicago have all seen large influxes of such people.

New cyberfirms, ad agencies, and other knowledge-value businesses are moving into old abandoned warehouses and industrial buildings along Chicago's busy North Avenue corridor, which just a few years ago was a heavily blue-collar Polish and Latino area going to seed. Now in places like Bucktown it is not unusual to see houses selling for $1 million and condos for $300,000 to $400,000.

"When I first moved in here, you had to be careful -- you had to avoid the needles and condoms," recalls AndrÉ Fleuette, one of the founders of Lowtide Images Ltd., a Bucktown new-media company. "But the more the hookers are gone, the more the yuppies are here."

Perhaps even more surprising has been the transformation of Deep Ellum, an old industrial neighborhood adjacent to downtown Dallas. A decade ago the area was home to a scattered community of artists and a large homeless encampment. But during the past few years it has become a prime location for fashionable restaurants and clubs. In 1986 there were two restaurants and four bars there; today there are more than 30 eateries and an equal number of nightspots. The area's population, estimates local real estate agent Barry Annino, has risen during the past decade from 200 to more than 2,000. Several new projects and conversions are on tap, and 7,000 to 10,000 people may live in the 177-acre area by 2010.


"There's a talent pool in this location. It's a young industry, and this is a young part of town."

--Brett Strauss, Third Stone Productions, Dallas

As in other knowledge-value neighborhoods, the growth of the residential population has been accompanied by the development of new industries, from music and entertainment to a core of Internet-related businesses, anchored by the area's most famous company, Yahoo Broadcast Services (known as Broadcast.com before Yahoo bought it, in 1999). The growing nucleus of Net professionals -- artists, graphic designers, photographers, and programmers -- also has created an ideal environment for small Internet start-up companies.

"This location is very good," says Brett Strauss, whose 11-person enterprise, Third Stone Productions, has been in the area since 1997. "There's a talent pool. It's a young industry, and this is a young part of town."

Although the technology of the Internet and the concept of knowledge value are new, the phenomenon of vital urban neighborhoods serving as both residential areas and as centers of production has precedents in the cities of antiquity and the Renaissance and even in the early history of great American cities. Long before industrial districts became a prime focus of economic theory, the Venetians broke up their neighborhoods along distinct functional lines, with specific residential and industrial communities for shipbuilding, munitions, and glassmaking. By the 14th century more than 16,000 people worked in those varied industries. Venice was not only the West's trader and banker but its artistic workshop as well.

During the 19th and early 20th centuries such districts flourished in many American cities, both as residential and industrial areas. Hudson Street, greatly celebrated in the writings of urban theorist Jane Jacobs, epitomized the successful diverse urban neighborhood. Jacobs rhapsodized about its intricate street ballet, the goings-on of meat packers, warehouse workers, printers, and the families who lived in or near the neighborhood.

Yet by the second half of the 20th century, rail lines, electricity, and eventually highways encouraged further diffusion of the industrial infrastructure. Dependence on suppliers and pools of skilled labor dropped in many industries located outside the urban core. Many urban districts foundered, sometimes miserably. From 1978 to 1997, the nation's large city centers lost nearly two in five of their manufacturing jobs while manufacturing employment in the rest of the nation grew slightly. New York retained its culture of industrial diversity, in contrast to the doomed mass-production monoculture of a city like Detroit, but nevertheless began to decline, a process hastened by rising taxes, regulation, declining public service, crime, and general indifference.

The onset of the information economy in the closing years of the 20th century helped bring the street ballet celebrated by Jacobs back to places like Hudson Street. Much, of course, has changed. Gone, likely forever, is the family atmosphere of the 1950s and early 1960s. As blue-collar artisans and workers have exited, black-clad, mainly childless artists, video producers, hip advertising executives, and designers have replaced them.

The personality of those districts may have changed, but many places designed for the old industrial paradigm are perfectly well suited to the new one. Across the nation such areas -- Boston's Fort Point Channel; Hayden Tract in Culver City, Calif.; Seattle's Pioneer Square; San Francisco's South of Market; Chicago's Bucktown; and New York's Hudson Square -- boast concentrations of large airy buildings, usually fewer than 10 stories high, that house fast-growing new media, the Internet, and related businesses.


The "suits" in Chicago believe that creative neighborhoods and firms like Jen Arterbury's Boom Design possess a cutting-edge style not found in "the Loop."


New York's Silicon Alley, rather than clustering near Broad Street in the high-rise-dominated financial district -- as is often suggested in the media -- has in reality flourished in stretches of old industrial areas along the Hudson River and along lower Broadway. The reason, notes Aaron Cohen, CEO of Concrete Media, has to do with the nature of Internet businesses, which tend to expand, and sometimes contract, at lightning speed.

"You need a certain kind of space as a high-growth company," says Cohen, whose Internet professional-services company has grown from 13 to 100 employees in the past year. "You can't put people in cubicles," he says. "It's not an appropriate economic environment. This kind of contiguous space is the old industrial space -- for 10 people or 50 people. It's hard to do that in midtown or at 55 Broad Street."

But it's not just their ability to accommodate growth that makes these areas appealing. Unlike traditional high-rise downtown offices, old industrial buildings lend themselves to the work patterns of knowledge-value businesses. Elevators and cubicles designed for segmented workforces are nonexistent in the older spaces, which tend to have large floors and high ceilings. Those spaces accommodate workforces that rely on intense interaction and that grow and shrink on a project-by-project basis. In an age in which equipment is a critical part of work environments, large open spaces are ideal.

The space that @radical.media occupies blends individualist values with the latest high-tech concepts. The ceilings are unfinished, the walls and doors are made of black steel wrapped in tin, and the windows are large (from the pre-air-conditioning era) and open onto a sweeping view of the midtown Manhattan skyline. Yet the work space is crammed with television screens, computer monitors, and the latest film-editing, computer, and graphics equipment. There are few individual offices. Space is flexible. The common areas -- living rooms and a large dining area -- are comfortable and welcoming and encourage conversation and discussion.

More important, notes Kamen, the space fits the highly individualistic, creative spirit that animates the company. Instead of following the mass-oriented approach of conventional large advertising agencies, studios, or networks, @radical.media has a workforce of skilled artists that includes 100 on staff and 150 who work with considerable autonomy on a contract or freelance basis.

Kamen designed the space not simply to be an enlightened employer but to lure his workforce there. Attracting eclectic talent is particularly critical in the digital age. New technology allows companies to move effortlessly from producing commercials to producing television programs, CD-ROMs, and feature films in a way unimagined in the past, when each part of the visual-production business was highly segmented. Now the key is flexibility, attracting people who, like creative artisans of the past, enjoy diverse challenges more than working on one kind of project.

Perhaps most important, the knowledge-value neighborhoods -- with their plethora of warehouses and other funky buildings -- provide not only great individual spaces but a community of them. In the race to create new high-value services, notes Jon Kamen, no company, not even one as innovative as @radical .media, can flourish in isolation.

In ad hoc work environments, the ability to marshal and coordinate highly idiosyncratic, often freelance talent -- usually under time pressure -- can make the difference between success and failure. Therefore, companies would do well to reside close to businesses and professionals that can be called on to perform highly specialized tasks. To put together critical creative teams, the 21st-century organization must go to urban centers where reservoirs of talent are concentrated.

Businesses establish themselves in expensive places like Manhattan, Boston, or San Francisco not because of traditional "business climate" factors such as cost but because of two critical, and frequently linked, elements: access to qualified labor and perceived quality of life. Industries that attract highly mobile workers such as animators, graphic artists, or software writers increasingly need to offer them a place that is appealing and exciting and gives off the requisite buzz.


"In today's labor market you don't tell people how they want to live -- they tell you."

--Matthew Burkley Zefer, Boston

The buzz factor helps Zefer Corp., a leading Internet-consulting firm based in Boston's cyberdistrict, determine the location of its offices. As the company has expanded to 650 employees, it has opened offices in areas where the company feels the best talent is available, such as lower Manhattan, San Francisco's South of Market, Chicago's Bucktown, and Pittsburgh's Cultural District.

In the future, notes Zefer CEO Matthew Burkley, those workers will have even greater power to determine companies' locations, in large part because they are in such demand. As the sophistication of information increases, skilled employees become freer -- and have more leverage -- to choose their environment. Many of the most valued creative workers prefer to live in cities and have helped restore the old neighborhoods where they settle. "In today's labor market you have to be where your team members want to be," explains the 28-year-old Burkley. "You don't tell people how they want to live -- they tell you."

Typically, suggests Burkley, young people want a neighborhood filled with people like them, with the requisite clubs, bars, art galleries, and restaurants. Such conditions are critical for companies like Zefer and like @radical.media, which has put its other offices in such hip places as London, Sydney, and Santa Monica.

One important effect of buzz is on the "suits" who are frequently the clients of such knowledge-value businesses. Jen Arterbury, a 29-year-old cofounder of Boom Design, in Chicago, originally saw her niche in developing flyers for the underground clubs that proliferated in the Bucktown and Wicker Park areas. That led to some work for major record labels but gradually also attracted the attention of large traditional ad agencies -- some of which, she says with a smile, once "thought we were all slackers."

The key, Arterbury suggests, lies in the notion that suits perceive creative neighborhoods and companies like hers to possess a sense of cutting-edge style not found in "the Loop," Chicago's downtown. James Squires of Squires & Co. has found the same advantages in Deep Ellum, which is where he relocated his ad agency 12 years ago against considerable employee resistance. Today Squires says his urban location is a plus in recruiting employees for his 17-person agency and also appeals to his more conservative corporate clients, who enjoy the area's funky ambience and vibrant nightlife.

Ultimately, the cultural, demographic, and physical imperatives suggest that knowledge-value neighborhoods will not just survive but also expand, and not only in New York or Boston but also in urban centers across the country. Although they have lost many industries, the emergence of such neighborhoods suggests that urban spaces remain virtually unchallenged as incubators of artfulness and cultural innovation.

"It all falls back to community," suggests Jon Kamen, sitting back in his sunlit office. "The communities we surround ourselves with are in the cities. You are what you eat and what you are exposed to. You go where the creative talents are."

Shifting patterns in corporate structure are only abetting the new urban trend. Historian Manuel Castells says that one of the fundamental characteristics of "informationalism" has been a "shift from centralized large corporations to decentralized units made up of a plurality of sizes and forms of organizational units." Since the Internet and other advanced communications can link various aspects of a task, the need to do them all in one place has diminished. Larger companies may control more cash than smaller ones do but tend to distribute their workload across a broader network of suppliers that are more artisanlike.

At the same time, Castells points out, "electronic networks" enable small companies to tap into "global reservoirs of information" that previously were accessible only to large companies. As a result, a major client of a business like @radical.media does not feel that the graphics technology or marketing information available at the small firm is in any way less sophisticated than that back at its own headquarters. Technology not only allows easier access to a company located in a different place but also equalizes companies' ability to do sophisticated work.

What's more, says Concrete Media's Cohen, the old warehouse and industrial districts have allowed the new-media companies to stamp themselves with their own character -- one consciously distinct from the old buttoned-down corporate culture of midtown Manhattan or the outer suburbs. He says, "When you are at the forefront of an economic revolution -- and that's where we are -- I don't think you want to be in a salaryman's neighborhood."

Joel Kotkin is a contributor to Inc . and author of, among other books, the forthcoming The New Geography: How the Digital Revolution Is Reshaping the American Landscape (Random House, November 2000). Additional reporting for this story was provided by Mary Kwak.


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