The Fading Metropolis : Can Big Cities Survive the Onslaught of Digital Commerce?

In a modest warehouse on the south edge of this city, workers at Amazon.com are packing books for shipment to such locations as Tokyo, New York and even towns in Bosnia. The orders were placed over the Internet by customers choosing from an electronic catalog of more than 1 million titles.

Meanwhile, from its headquarters in New York City, book retail giant Barnes and Noble has been shuttering hundreds of its mall bookstores in recent years to battle declining business. Instead it is struggling to survive by opening up superstores that cover acres of costly land yet offer a comparatively meager 150,000 titles.

The explosion of the Internet is only a recent phenomenon. But already there are signs that the ethereal world being built in cyberspace will have a significant impact on the “real” world of brick and mortar.

Cities grew in importance because they provided the physical places where businesses could connect with their customers and suppliers. But today, an increasing number of those transactions can take place over communications lines.

As surely as highways drained out inner cities and spawned the creation of large, prosperous suburbs, the growing tendency for activities such as schooling, medicine, banking and shopping to take place over the Net will once again transform our physical spaces.

“It’s an invisible revolution,” says Thomas Haran, research director of the Claremont Research Institute. Although the scope and direction of the change is still unclear, Haran says, “it all spells troubled times for cities.”

Already facing weakening demand for their large, low-skilled labor forces, cities could find their troubles multiplied as new technology drains off economic activity.

“The Technological Reshaping of Metropolitan America,” a report from Congress’ now-defunct Office of Technology Assessment published late last year, concluded that new technology is creating “footloose” companies that no longer need to be based in high-cost, highly congested city centers. “Metros, cities, or parts of cities that will not or cannot adapt run the risk of being left behind to face stagnation or decline,” the report concludes.

Even if cyberspace never comes close to matching the real world in providing a quality shopping experience or a visit to the doctor, experts say, even a relatively minor shift to the use of electronic services could go a long way toward undermining the economics of the modern city.

Already, some are predicting that new work patterns made possible by technology, combined with a wave of downsizing, will greatly diminish the role of urban office towers in providing the nation’s primary workplaces.

“The information revolution is just beginning, but within 5 years technology is going to dramatically reduce the demand for (commercial) real estate,” says Barry Libert, who heads the new Real Estate Transformation Group at the consulting firm Arthur Anderson & Co.

Libert believes that real estate values could decline as much as 20% as new work patterns reduce the demand for office, retail and warehousing space. That would represent an $800-billion decline in asset values over the next 5 years, discouraging new investments in cities and cutting into their existing tax bases.

Geographers, who specialize in the study of space and distance, are looking closely at what they call “spatial technologies” such as e-mail, video telephones and information-sharing software that tend to shrink distances and alter the way people interact.

“Networks allow organizations to include people spread across space,” says Ed Blakely, ageographer at USC. Already software developers and manufacturers tap high skill, low-wage labor in places such as India to participate in major projects.

“As telecommunications get better, you begin to substitute electronic connections” for personal interaction, says Bishwapriya Sanyal, an urban studies professor at the Massachusetts Institute of Technology.

Demographics are also contributing to the shift away from city centers. More young people are comfortable working with computers from home, and more baby boomers are retiring early to work at home or on the road as consultants.

By signaling the waning economic importance of major cities, telecom techologies are creating new rifts in society. Once it was assumed that healthy urban areas were a prerequisite for a healthy economy. Today, some are suggesting that cities have simply dragged down the rest of the nation.

Techno-futurist George Gilder calls cities “parasites” because of the huge federal subsidies they require to keep going. Projects that encourage downtown construction, such as Los Angeles’ new subway, critics say, cost taxpayers and do more to hurt than help the urban economy by contributing to the overhang of office space.

Among the beneficiaries of the new trend, the report suggests, will be “edge cities” close to metropolitan centers that began as bedroom towns and are quickly turning into centers of their own.

“If more people work at home, then you get more daytime population in suburbs that support local services,” says Sanyal. “You get a re-nuclearization of small-scale communities.”

Still, Skeptics argue that major changes will come slowly, if at all.

“It will take more than the Internet to radically change the way work is done,” says Ronald Abler, executive director of the Washington D.C.-based Association of American Geographers. “Human beings are herd animals when you get right down to it.”

Futurists have wrongly predicted for decades that telecommuting would be the death of cities. A massive effort by the California Department of Transportation to get employees to use satellite offices, for example, was largely a failure, according to a recent study by the Ontario-based Institute for Telework, part of the Center for the New West.

Van Romine, director of the institute, says CalTrans was to rigid in its approach. Successful companies, he says, are cutting real estate costs by offering employees a “cafeteria-style” option to choose their workplace each day, whether it is in the home or at a coffee shop.

“It’s as ridiculous to tell people where to work as it is to tell them what pencils to use,” Romine says.

Indeed, in spite of well-publicized failures, the practice of telecommuting continues to grow steadily. Last year, 8 million Americans worked one or more days out of their homes, double the level of 1990. Of those, 1.6 million used e-mail, twice the level in 1994, according to Find/SVP a research company.

Advertising firm TBWA Chiat/Day revamped its Venice headquarters two years ago, eliminating private offices in favor of open spaces to encourage collaboration. Key materials were put on computer servers, making them accessible to employees wherever they happen to be.

Chiat/Day Chief Operating Officer Laurie Coots says the move not only helped energize the company, but also enabled it to keep expanding without adding office space.

Consulting giant Ernst & Young says the use of such practices as hoteling, whereby employees reserve office space when they need it, has cut the firm’s need for office space by 30%, freeing up about 1.5 million square feet of space and saving $30 million a year in real estate costs.

With savings like that possible, says Larry Ebert, the firm’s Atlanta-based national director for real estate services, “I assume there will be a stampede now to follow.”

Savvy real estate investors say it is just a question of time before such practices affect the commercial real estate market.

“It’s like the emperor with no clothes. Some people see it, some people are in denial,” says Richard Scott, chief executive of Ares, a subsidiary of Mutual of New York, one of the nation’s largest property holders. “Rent is often the second-highest cost after labor.”

Prudential, another major landowner, has already announced plans to substantially reduce its real estate holdings, while some developers are exploring ways to turn office buildings into condominiums.

There is no greater symbolism of the shift from real estate to cyberspace than the decline in the importance of trophy buildings and the rise in corporate Web sits. Sears, Roebuck & Co. has moved out of its namesake building, for example, but companies such as Pennzoil Co. and AT&T; Corp. are spending huge sums on new Web sites to give themselves a hip image.

As cyberspace takes on many of the characteristics of its physical counterparts, its language is also drawing from the real world. The artists and programmers who design these Web sites are called “builders.” Everybody is rushing to put up electronic shopping “malls,” and the computers that store corproate information so it is more easily accessed are called data “warehouses.”

Much of this cyber activity has a direct effect on demand for real estate. Law libraries that once took entire floors of office buildings have shrunk dramatically as CD-ROMs and online database services replace books. Just-in-time delivery made possible by improved computer and communications systems is reducing the need for warehouse space, and new banking and retailing services over the Net promise to reduce the demand for bricks and mortar.

To be sure, technology doesn’t change society overnight. But then, the technologies that are changing the workplace and the world of retailing haven’t emerged overnight either.

Take banking. In the 1970s, people wanted to go to the bank to deposit their money, and most bank processing took place in offices behind the teller. “As the (younger) generation came along, the desire for physical interface was replaced by the desire for convenience and control,” says Dudley Nigg, executive vice president at Wells Fargo Bank.

New communications technologies first made it possible to handle back-office processing at distant locations. Then automated teller machines emerged to handle cash withdrawals and deposits. Now Wells Fargo is taking the technology a step further with online banking.

“Over the next 10 years, over 50% of our customers will do their banking by PC or some such device,” Nigg says.

One result: fewer bank branches. By the end of this year, Wells Fargo will cut its 1,140 branches to just 300. It will open new supermarket branches and ATMs, but those use one-hundredth the space of the old 3,000-square-foot branches.

Deloitte and Touche Tohmatsu, an international accounting firm, concluded in a report last year that as many as half the developed world’s bank branches could disappear by the year 2000.

Retailing is also in the throes of technological change.

Take Amazon.com. It’s customers can look for books over a computerized search system by author or subject title. They can discuss books with other customers over bulletin boards, participate in forums with authors or read book reviews on the Amazon Web site. For those who want it, Amazon will automatically send e-mail notifying customers of new books that have appeared on a given subject.

“We’re part store, part entertainment and part community,” says Amazon founder Jeff Bezos. By selling over the net, Amazon can offer seven times the choice of the largest bookstores while spending one seventh the amount on real estate, Bezos says.

While people will continue to go to bookstores for the pleasure of picking up books to read passages, says Bezos, to survive, “every bookstore will have to be a better bookstore.”

Distribution is another area in which technology is drawing activity away from major urban areas. The onset of just-in-time delivery, made possible by improved communications systems and automated warehouses that use machines to move freight from storage areas, has reduced the demand for in-city warehouses.

Who is benefiting from these changes? Outlying areas that were once bedroom communities are turning into little cities with their own town centers. Towns like Pasadena are getting more business as workers choose to work at home or in offices closer to home. Smaller urban centers like Ovum, Utah, and Boise, Idaho, are seeing revival as technology frees companies to move to low-wage, low-cost real estate areas.

Big cities still have their strengths. They remain centers of culture, education and entertainment, and usually have good telecom networks to boot. They attract high-skilled workers who want access to such activities.

And there are many jobs in which technology cannot easily substitute for physical location. Lawyers still need to be near the courts. Architects still need to work closely with engineers. Complex business deals are still best made in person.

But many of these functions may no longer take place in office towers. Workers may only occasionally go to work. They may meet in coffee shops or at the offices of clients. Cities will still be around, but they will be vastly different.

Says Haran: “Once stays asleep at one’s peril.”