Unable to compete globally on the basis of cost, major U.S. cities during the 1990s leveraged their superior transportation and telecommunications infrastructure to compete successfully on the basis of accessibility, speed, and agility (Kasarda, 2001a; Moss, 2000). Only a dozen or so cities in other parts of the world offered such extensive, quick and efficient movements of people and products to domestic, regional, and international markets. Led by their world-class aviation hubs, larger U.S. cities and their broader metropolitan areas attracted new economy businesses and industries that increasingly emphasized intra-and inter-firm global networking, international sourcing and sales, flexible, customized production and rapid delivery of products and services, domestically and world-wide. Time-sensitive high-tech manufacturers, e-commerce fulfillment centers, information and communication technology (ICT) and third-party logistics firms were drawn to urban areas with extensive domestic and global flight networks (Kasarda, 2000).
As the world's service economy likewise shifted into fast-forward, major cities further leveraged their international gateway airports to attract foreign regional corporate headquarters, trade representative offices, and professional associations that require officers to undertake frequent long-distance travel. They also utilized their gateway airport accessibility to attract large consulting, marketing, advertising, legal, financial, and auditing firms, which often send out professionals to distant customers' sites or bring in their clients by air. The same attraction held for high-tech industry office complexes. Research shows that executives and technical workers in these industries travel by air 40 percent more frequently than other professionals (Erie, et al., 1999).
With the U.S. high-tech sector rapidly expanding, air cargo became the preferred mode of shipping of components and finished goods in micro-electronics, pharmaceuticals, mobile phones, digitized auto parts, aerospace equipment, optics and small precision manufacturing tools and medical instruments. As illustrated by Dell Computer's global supply chain (see Figure 1) these industries rely extensively on international air cargo shipments of parts and components. In fact, by year 2000, the value of U.S. exports by air substantially exceeded that by vessel (see Table 2), with approximately 85 percent of air cargo imports and exports passing through the nation's ten largest hub airports (U.S. Department of Commerce, 2002). When the high-tech bubble burst in early 2001, air freight started to decline. The events of 9/11 accelerated this decline, with U.S. air exports dropping by nearly $33 billion in 2001 (Table 2).
FIGURE 1: Global Supply Chain-Dell Computer.
Source: Abbey, Twist and Koonmen, 2001.
TABLE 2: United State Merchandise Exports by Air and Vessel, 1990-2001 (Millions of constant 2001 US$)
Source: U.S. Department of Commerce, 2002.
Air commerce and business travel essentially stopped for four days following 9/11. When airlines resumed service, a series of security regulations impeded both product movement and business travel. Virtually all packages weighing more than 16 ounces were excluded from the cargo bellies of passenger planes (Krause, 2002). This still holds for U.S. mail. Scheduled air cargo products that took a few days to move between the U.S. and both Asia and Europe shifted largely to unscheduled charter air cargo service and alternative forms of transport, often resulting in weeks (and sometimes months) for international shipments.
With declining passengers and cargo, many flights were eliminated in the year following 9/11 and cargo belly capacity reduced as U.S. airlines shifted to smaller planes. Numerous direct air route options were lost and frequencies on existing routes diminished, all impacting speed and flexibility in product sourcing and shipping (Reconnecting America, 2002). Cities, whose gateway airports provided them with competitive advantages of speed and agility in supply chain management, were most affected as just-in-time manufacturing, third party logistics functions, and order fulfillment slowed. Productivity was reduced and hundreds of thousand of jobs were lost in these sectors (OECD, 2002).
Business travelers, already under pressure to cut travel costs, faced significant time delays in getting through airports (an additional indirect cost burden) as well as personal hassle. Many shifted to driving for trips under six to eight hours while others simply cancelled long-distance business travel entirely (Miller, 2002; Reconnecting America, 2002). The urban convention business was markedly affected and is still down considerably. Tourism and tourist-related industries were hit even harder. This industry, which contributed $272 billion in Gross Metropolitan Product in the nation's largest 100 metropolitan areas, accounted for 7.1 percent of the total Gross Metro Product in the top 20 metro-areas in year 2000 (DRI-WEFA, 2002). Most of this tourism revenue was concentrated in the central cities.
Impacted by decreased business travel and tourism, city hotels reached a 40-year low in occupancy level in 2002, while taxi drivers, restaurants, and city tourist attractions continue to suffer (Loose and Lee, 2002). DRI-WEFA (2002) estimated that due to a curtailment in aviation-linked business travel and tourism alone, the 20 largest metropolitan areas lost $11.7 billion in 2001 and $18.9 billion in 2002.
By September 2002, many city airports had at least 20 percent fewer scheduled flights compared to September 2001. These included Boston Logan International (-23 percent), Los Angeles International (-20 percent), Newark International (-20 percent), and Washington Dulles (-20 percent), with Miami International (-19 percent) and San Francisco International (-18 percent) closely behind (Reconnecting America, 2002). The absolute numbers of flights lost were dramatic in some cities. For example, Los Angeles International had 1,239 fewer weekly flights in September 2002 than in September 2001 (Reconnecting America, 2002).
Surface movements have not been spared either, particularly on the bridges and the tunnels leading into and out of many major U.S. cities. Trucks often continue to be backed up for hours (and sometimes days) at international border-city crossings (OECD, 2002) with traffic from the Canadian border to Detroit down as much as 40 percent in 2002 (Dolan, 2002). Prior to 9/11, trucks used to breeze across the Ambassador Bridge from Windsor, Canada to Detroit, the busiest commercial truck crossing in North America. A year later it took three to four hours (Blustein, 2002) and sometimes longer, resulting in just-in-time supply chain disruptions, especially in Detroit's automotive industry.
Rail and ocean cargo, which initially escaped the heavy post 9/11 constraints placed on air cargo, are now receiving much more attention by the Transportation Security Administration (TSA). TSA is requiring closer scrutiny and potential complete inspection of shipping containers, 21,000 of which enter U.S. ports each day. Should the latter occur, the competitive advantages that port cities and the entire U.S. economy obtained through relatively quick and efficient goods movements will be affected.
Los Angeles exemplifies the importance of efficient air and vessel product movements to the local and national economy. A 1999 economic impact analysis showed that Los Angeles International Airport is responsible for over 400,000 jobs (direct, indirect, and induced) in the greater LA region, 80 percent of which are in Los Angeles County. The study also showed that the airport generated $61 billion dollars in regional economic activity in 1998 (LA World Airports, 2002).
Over 40 percent of all maritime containers that arrived in the U.S. in 2001 came through the ports of LA-Long Beach. When these ports were closed for five days by the dockworkers strike in October 2002, the cost to the national economy was estimated at $1 billion per day (Hart and Rudman, 2002). The consequences of a terrorist explosion on a vessel container, which would likely close all U.S. ports for an indefinite period, would be immense. Container movements on airplanes would also be slowed and possibly stopped for an indefinite period. Our largest cities and metros, where most of the nation's major airports and seaports are located, would be most affected, at least initially.
Firms will likely take such potential disruptions into consideration in redesigning their supply chains and backing up their inventories. They will also likely move single concentrated operations near large ports and airports to multiple smaller city and possibly even non-urban locations as a hedge against terrorist attacks. In any event, costs will be raised, productivity cut, and jobs lost in these cities, weakening their overall competitive position in the fast-paced global economy.
Evidence has revealed that the 19 terrorists responsible for the September 11 attacks took advantage of several loopholes in U.S. immigration laws and breaches in national security infrastructure (see Schemo and Pear, 2001; Johnson, 2002a). With broad-based public support, the Bush Administration and the U.S. Congress acted quickly in the attacks' aftermath to plug these loopholes and address infrastructure security shortcomings.
The most far-reaching reforms are contained in the USA Patriot Act of 2001 and the Enhanced Border Security and Visa Entry Reform Act of 2002 (Jencks, 2001, 2002). By imposing new constraints on the movement of foreigners into and out of U.S. metro areas, and the nation more generally, these reforms may well reduce what had been a significant competitive advantage for our major urban centers (Carr, 2002; Johnson, 2002a; DRI-WEFA, 2002).
In an effort to weed out potential terrorists, the federal government, under the USA Patriot Act, launched sweeps of workplaces where large numbers of undocumented immigrants were thought to be working. Sweeps of airports have garnered the greatest media attention. Until late 2002, for example, roughly half of the San Francisco International Airport (SFO) screening workers -- about 500 people -- were non-citizens. Pursuant to post-9/11 legislation stipulating that security workers must be U.S. citizens, all of the SFO non-citizen screeners were laid off in mid-October 2002, even though some of them had held their jobs for 15 or more years (Jouvenal, 2002; Davis, 2002). Other workplaces scrutinized for undocumented workers post-9/11 included hotels and motels, restaurants, sports and entertainment complexes, construction sites, and grocery stores (see Johnson, 2002a). These so-called "enforcement actions" have generated considerable controversy, especially in instances where there is no evidence of ties to terrorism, as in the case of undocumented Hispanic immigrants (Vigh, 2001; Dillon, 2001).
For the foregoing reasons, the enforcement actions may well lead to animosity and longer-term ill will among people from the very countries with whom the Bush Administration is now proposing to develop stronger trade relations as part of the government's overall counter-terrorism strategy (Vigh, 2001). These enforcement actions may also discourage foreigners from desiring to come to the U.S. as visitors or tourists in the future (DRI-WEFA, 2002).
Similarly, the Justice Department's decision, pursuant to the Enhanced Border Security and Visa Entry Reform Act of 2002, to launch a new program of finger printing and photographing certain foreigners at the U.S. border -- beginning with people from Muslim and Middle Eastern Countries--is likely to stem further the flow of foreign visitors.1 The economic impacts would be powerful, especially in New York and Los Angeles, which captured the largest shares of the overseas visitors market in 2000, as Figure 2 illustrates. Most of the 25.9 million overseas visitors were better educated, higher income individuals and their families who spent an average of $1500 per visit (DRI-WEFA, 2002).
FIGURE 2: Overseas Visitors to U.S. Metropolitan Areas: 2000 Market Share and Percent Change 1996-2000.
Commercial real estate investment is also likely to be dampened in our major cities. One corporate relocation consultant indicated that the flow of investments from the Middle East slowed dramatically after the terrorist attacks due to extensive questioning and body searches of Middle Easterners at airport security and immigration check points when the Department of Justice targeted Muslim and Middle Eastern men for extensive questioning about possible ties to terrorist organizations (Manning, 2002).
There is another reason to think through the consequences of the post 9/11 immigration and foreign entry reforms for urban and national competitiveness. During the 1990s, immigrants and foreign green-card holders were key drivers for much of the nation's high-tech expansion (Johnson, 2002a). Studies have shown that well-educated Asian immigrants spawned approximately half of the high-tech start-ups in Silicon Valley during the 1990s (Saxenian, 2000). Foreigners also provided a huge portion of the talent in U.S. engineering schools and R & D sectors of firms (Johnson, 2002a).
Studies further suggest that numerous industries, including meat packing, agri-business, construction, and hospitality services would nearly collapse if undocumented immigrants were summarily swept up and deported (Johnson, Johnson-Webb, and Farrell, 1999). And, because of the aging of the post-World War II baby boom generation, population projections imply that if the U.S. is to sustain labor force growth, it will need a continuous influx of immigrant labor in the decades ahead (Johnson, 2002a,b; Bernstein, 2002; Baker, 2002).
In summary, post-9/11 laws and regulations have made it much more difficult for many immigrants to enter the U.S. Foreign visitor entry requirements have also been raised with extra security such as photographing, fingerprinting, and body searches, creating a sense of "unwelcoming" to business travelers and tourists of a substantial number of nationalities. This will likely take a toll on the future competitiveness and prosperity of U.S. cities as quality immigrant labor is diminished, real estate and business investment foregone, and as foreign leisure travelers choose other nations for their vacation and tourist activities.
Over the last three decades, corporate and municipal leaders have worked closely with commercial real estate developers to transform major city downtowns into national and global administrative, financial and transactional nodes. Huge and sometimes grandiose skyscrapers, typically housing headquarters of firms with global reach, have been erected as prominent symbols of U.S. economic success and influence in the international marketplace. Interspersed between or among the skyscrapers are smaller structures housing a range of businesses that provide an array of professional, technical, logistical and other support services to these global firms (Sassen, 2001).
Urban planners and local economic development officials also have encouraged cluster development in varying degrees of intensity beyond city boundaries. These outlying economic nodes include suburban office parks, regional shopping malls, edge cities or multi-functional centers, and exurban corporate campuses, which are linked by information technology and limited access highway corridors (Van Ambrugh, 2002; Kasarda, 2001a,b; Johnson, 1998; Rusk, 1998; Downs, 1998; Katz and Bernstein, 1998).
After 9/11, perceptions of locational risks changed dramatically -- among corporate leaders, their employees, and the insurance industry (Levine, 2002; Mills, 2002; Weston, 2002). For corporate leaders, "risk management has moved beyond its traditional spheres of technological and financial risk assessment and now permeates virtually all aspects of corporate decision-making," including safety and security, facility site selection, and relocation decisions (Levine, 2002). Not surprisingly, downtown high-rise office properties have generated the greatest concerns. In the immediate and near-term, this resulted in increased security costs and visitor screening (Lyne, 2002). For example, the Empire State Building in New York City has increased security personnel by over 250 and added scanning machines to all five entrances, costing several million dollars and creating serious delays and inconvenience for tenants and visitors alike (Dolan, 2002). This raises a question as to whether these entry delays and inconvenience together with employee fears will reduce current tenant propensity to renew their long-term leases in downtown high-rise office buildings when they expire in the years to come.
There is some evidence that market demand for super-high rise properties was on the wane prior to the terrorist attacks (Reason Public Policy Institute, 2001; Wright, 2001). But commercial real estate brokers and corporate relocation consultants report that since 9/11 an increasing number of their clients are expressing a heightened aversion to locating in so-called trophy properties, especially those taller than 30 stories, and "run of the mill" properties within the "shadow" of such facilities, or near other large gathering venues (stadiums, arenas, major retail establishments), energy generating facilities, and infrastructure projects (bridges, tunnels, natural gas pipelines, water and sewer plants; Lyne, 2001a,b; Kilborn, 2002; Feinberg and Clair, 2001; McCallister, 2001).
Even companies with operations in suburban and rural locations are changing their site preferences after 9/11. According to corporate relocation consultants, some are "...now opting for no interstate visibility...locations in the rear of business parks...[and] sites outside of airport flight patterns" (Lyne, 2002). Non-descript, dispersed, low visibility structures have become more in vogue not only for back-office functions but for high-level executive activities, as well, with multiple sites located on different power and communication grids serving to back up each other (Hughes and Nelson, 2002). Moreover, many firms reportedly are evaluating more carefully co-tenants after 9/11, avoiding buildings where they will have to share occupancy with a U.S. government agency or high-profile U.S. company. In short, "What may have been perceived as isolation in the past is [perceived as] safety and security [today]" (Kilborn, 2002).
Firm-level reassessments of facility and site location are driven, at least in part, by employees who have raised concerns about working in or within the shadow of super high-rise office buildings like the Sears Tower in Chicago. Reacting to employee concerns, some firms that were concentrated in Lower Manhattan prior to 9/11 reportedly turned down incentives to stay in the area and have made moves resulting in some cases in a doubling of the rent, "to keep people focused on their jobs and not on worrying about coming to work everyday" (Bagli, 2002b).
Firms are likewise re-evaluating their facility and site location in terms of safety and the higher occupancy costs associated with additional building security (McAvey, 2002). Most high rises erected prior to 9/11 were not designed for mass evacuations. According to building design experts, "the stairwells are too small, there are not enough of them, and [oftentimes] the stairwell door[s] open into the fire stairs, impeding passage" (Lyne, 2002). Also, as noted, in the post-attack environment, building owners are hiring more security guards, installing surveillance cameras, requiring screening badges for all building employees, and reducing the number of entry points. Along with the delay and hassle factor, this beefed-up security poses increased costs for tenants because, "almost all commercial leases contain pass-through provisions that leave [them] responsible for common areas maintenance costs" (Lyne, 2001d).
Paralleling the re-evaluation of risk among firms and their employees, especially those occupying high-rise buildings, the business of insuring commercial real estate changed dramatically after the terrorist attacks (Coleman, 2002; Beans, 2002; Harris, 2002; Hillman, 2002; Levy, 2002; Journal of Property Management, 2002; Starkman, 2002; Lyne, 2002; DeLisle, 2002). Prior to 9/11, insurance rates were on the rise -- increasing 20-25 percent on multi-year renewals -- as insurers sought to recover investment losses due to declines in the stock market and large scale payouts following several major disasters, e.g., Hurricanes Andrew and Fran, the Northridge Earthquake, etc. (Staff, 2002).
As illustrated in Table 3, insurance premiums skyrocketed after 9/11 for businesses and properties perceived to be high potential targets for future terrorism, including Class A high-rise buildings, stadiums and entertainment complexes, and convention centers (Walker, 2002). Exacerbating this problem, by February of 2002, 45 states, the District of Columbia, and Puerto Rico had approved terrorism exclusion provisions for property and casualty insurance, which meant it was unlikely that such coverage would be available to property owners in these states at renewal time (Warson, 2002).
The increased cost and the declining availability of terrorism insurance coverage sent shock waves throughout the commercial real estate industry (Mattson-Teig, 2002). It is affecting both new construction and resale markets, particularly in large cities, as, "financing is contingent upon full insurance coverage for collateral assets backing the loan or investment" (Hillman, 2002). Table 4 indicates that during the first half of 2002 at least $8.2 billion in commercial property developments were cancelled, delayed or altered due to the high price tag on terrorism insurance or its unavailability.
TABLE 3: Examples of Property/Casualty Risk Insurance Price Hikes
Source: Compiled by authors from various newspaper sources.
TABLE 4: Impact of Lack of Terrorism Insurance on Commercial Property Development
Source: Mortgage Banks Association, Survey of 25 Commercial Real Estate Firms (Murray, 2002).
Table 5 lists some of the commercial mortgage-backed securities projects that were placed on the rating companies' "watch list" due to the lack of terrorism insurance coverage ("Rising Insurance Rates," 2002; Grant, 2002; Mattison-Teig, 2002; Blackwell, 2002). The retail, industrial, and multi-family housing sectors also face rising insurance costs and coverage issues with those in major cities most impacted (Gair, 2002; Hotel, 2002).
TABLE 5: Securities Placed on Ratings Watch List for Lack of Terrorism Insurance Coverage
Source: National Mortgages News, 2002.
In fact, approximately two-thirds (65 percent) of the companies surveyed recently by the Risk and Insurance Management Society (RIMS) have no terrorism insurance and 71 percent found it virtually impossible to obtain coverage (Insurance Day, 2002b). The mushrooming cost and decreasing availability of terrorism coverage are forcing many property owners to self-insure, that is, to establish disaster funds using money that otherwise could be used for business investments and new job creation (Harrington, 2002; Mariani, 2002; Felsted, 2002).
The problem is not limited to commercial real estate or just large cities (Cohn, 2002). Studies reveal that municipalities are facing spiraling costs of insuring city halls, stadiums, public parks, and other public infrastructure like bridges, tunnels, and ports (Mann, 2002; McAvey, 2002; Levin, 2002). Property insurance rates reportedly have increased between 45 percent and 75 percent over the last year in small and medium-sized cities as well (Perez, 2002; Jones, 2002b; LMC, 2002; Beisiegel, 2002; CIAT, 2002).
Insurance rate hikes have been substantially higher in larger metro areas (Mattson-Teig, 2002). For example, as Table 3 revealed, the risk insurance package for Miller Park Stadium in Milwaukee, Wisconsin increased from $250,000 annually prior to 9/11 to $2.25 million annually afterwards (Walker, 2002). These added costs will likely reduce the attractiveness and competitiveness of large cities and metro areas, as the cost of doing business in them increases correspondingly.2
This problem arises in part because re-insurers, who typically backstop primary insurance carriers, raised their rates threefold following 9/11. In fact, as noted, most now exclude terrorism coverage, which leaves, "many [primary] carriers liable for 'first dollar' coverage with no backup from reinsurers" (Jones, 2002a, p. 26). Industry analysts contend that the only way to solve this problem is for the federal government to provide a financial backstop, as it does in the case of natural disasters (Pierce, 2002; Magu-Ward, 2002; Meiners, 2002). A GAO report concluded that the federal government's failure to address this problem would likely slow the economic recovery by placing thousands of businesses (especially small businesses) at the risk of bankruptcy, layoffs, and loan defaults (Hillman, 2002).
Despite the prognosis of these adverse economic impacts, Congress did not fully embrace the federal insurance backstop idea for more than a year following the terrorist attacks (Labaton and Treaster, 2002). Indeed, it was not until after the Fall 2002 elections, when the Republicans swept most of the Senate and House races -- purportedly on the basis of their strong stance on post-9/11 national security issues (PR Newswire, 2002)--that such legislation was enacted into law.
The Terrorism Risk Insurance Act of 2002 provides, "for the federal government to pay up to $100 billion in terrorism losses annually for three years" (Treaster, 2002). The Bush Administration believes that the new law, "will aid the economy by allowing the resumption of thousands of building projects stalled by lack of such insurance" (Fram, 2002). Others proponents contend that the law, "could free up $15 billion in construction and real estate business and 300,000 jobs," although some analysts argue that these figures are overblown (Fram, 2002).
Notwithstanding the passage of the Terrorism and Risk Insurance Act of 2002, real estate developers and property owners in U.S. cities still have to contend with accelerating costs of insurance coverage as well as increases in deductibles in the post-9/11 environment (Sherman, 2003; Said, 2002). In 2002 alone, New York City's insurance premiums for large accounts (greater than $1 million) increased 73.3 percent, for medium-sized premiums ($50,000 to $1 million) 49.5 percent, and for small premiums (less than $50,000) 39.3 percent (Matthews, 2002). Industry analysts conclude that, "insurance rates will continue to rise in 2003 and into 2004 on a national basis before this so-called hard market has run its course" (Matthews, 2002).
Commercial real estate analysts predict a lagged effect of these developments on leasing activity in U.S. cities and metro areas (TenantWise, 2002). The general consensus is that the real effects will not be evident until at least 2004 when many multi-year commercial real estate leases will begin to expire. This raises several related yet critical questions about the impact of 9/11 on the economic prospects of U.S. cities and their downtown office markets (Lyne, 2001c; Glaeser and Shapiro, 2002; Leonard, 2001; New York Metropolitan Transportation Council, 2002; Hughes and Nelson, 2002; Dittmar and Campbell, 2002; Giglio, 2002).
Answers to these questions will require carefully designed longitudinal research. To rigorously assess the economic impacts of the terrorist attacks, this research will have to monitor business demographics (i.e., firm births, firms deaths, expansions, contractions, in-migrating firms, and out-migrating firms) by location, and assess their employment and leasing dynamics by type and sector of establishment across a representative sample of U.S. metro areas. Investigators should monitor establishment turnover and employment change across various metropolitan geographic sub-areas, including the CBD, the balance of the central city, the inner-ring suburbs, the outer-ring suburbs, and the exurbs, as well within the vicinity of properties (e.g., skyscrapers, sports and entertainment complexes) and public facilities (e.g., airports, seaports, electric power stations, etc.), which are deemed to be high-potential targets for future terrorist activity.
Micro-level databases that provide annual employment information down to the establishment or street address level (such as Dunn and Bradstreet Market Identifier files or State Employment Security Commission ES-202 files), though not without certain methodological shortcomings, should permit researchers to assess such outcomes (Veraway, 1980; MacDonald, 1985). Ideally such secondary data research should be supplemented by surveys and case studies of corporate relocation activities (e.g., Tenant Wise, 2002). It is through such monitoring and analysis that evidence will accumulate on whether the negative consequences of 9/11 for major cities turn out to be as serious as we have postulated.