Off the Cuff: William C. Strange, Urban Economist

William C. Strange, economics professor

William C. Strange, economics professor

Oliver Bok, News Editor

William C. Strange is a professor of real estate and business economics at the Rotman School of Management at the University of Toronto. He is currently the editor of the Journal of Urban Economics. His research has focused on the real estate market, with an emphasis on commercial real estate. Strange served as president of the American Real Estate and Urban Economics Association in 2001. The paper that he presented Thursday was titled “The Vertical City: Rent Gradients and Spatial Structure.”

This interview has been edited for length and clarity.

I saw that your talk was about the changing in differences in rent between floors of a commercial building —

I can fill it in quickly for you. So urban economics is largely about explaining where stuff is. And among the facts that we want to be able to explain are why downtowns have so much stuff there, and then why so much of the country has nothing whatsoever. This paper is doing that kind of urban economics, except we’re doing it within buildings rather than across the city. Most urban economics has treated stuff that happens at any particular street address as being undifferentiated, as if everybody were down on the ground floor. And the reason for that — and it’s not out of any special wickedness or stupidity — the reason is that people just don’t know what happens within buildings. And the reason people don’t know what happens within buildings is that people who own it don’t really want to let the information out, so the tenant stacks, and especially the rents, are held fairly close.

We’ve been given a chance to look at some of those things, and so we’re able to explore the differences in use within buildings, which we think of as an interesting urban economics thing. But it also says something about a really big asset market. So commercial real estate — partly because the people who know about it aren’t sharing their information — the commercial real estate market is bigger than the corporat e bond market. It’s not as big as the stock market, but it’s getting there. It’s not as big as the housing market, but it’s getting there. It’s this really big thing that we don’t know that much about.

So you got information from the landlords at these buildings?

We got information, the most useful of which was that for a small set of buildings we know who all the tenants are, where they are in the building and how much they’re paying, which is the stuff that’s really hard to get. We get two results.

The first result is that there is differentiation at a location, both in what rents are charged and how space gets used. Now if you look back to, say, 1850, the tallest buildings you’d typically see in the city were six-stories tall — the pattern would be very different. So 1850 is before there are commercially developed elevators. … The rents would be decreasing every floor that you go up because the access is worse; the people you see at the top are the people who can’t afford anything better.

Nowadays, we know for sure that there is something other than just access going on in this post-elevator world. We do see rents starting to go down as you move above the ground floor — it turns out there’s a premium of around 50 percent at the ground floor — second-, third-, fourth-floor suites are worth a lot less than the ground floor because they don’t have as good access. But as soon as you move above that, you initially start seeing a gentle increase in rents which becomes a secure increase in rents as you get near the top. So the people at the top are paying more than the people at the bottom, even though they are pretty far away from the bottom, and it’s going to cost them to get there.

So clearly there’s an amenity that’s attracting those folks. Two possibilities: that it could reflect signaling or reflect perks.

The signaling story is: I’m working with a lawyer. I don’t really know if the lawyer is any good. I’m going to use various resources to decide if the lawyer is good. One of them is if the person looks like a good lawyer, with a nice suit, a fancy haircut and they have a really fancy office. Then I’m going to infer that they’re pretty profitable, and the fact that they’re profitable means they’ve been delivering good services and maybe I should do business with them.

And the fancier office is at the top of the building.

And the fancier ones are at the top of the building. In principle, we could look at the corner-office phenomenon literally, but we don’t have the data coded right now in a way that we could do that.

So it could be that, it could be perks. People’s offices are really visible badges of social status. By and large, people don’t really know how much money someone makes, but you absolutely know if someone gets a nicer office than you. And that’s one reason why one of the most vicious fights you have at any organization is over who gets the cool office.

The idea of agglomeration economies is that there must be some pretty big benefit that cities offer to people because it’s costly — costly in the sense that if you’re in the city, you have a longer commute than otherwise, you probably live in a smaller space than otherwise and you’re probably paying more for it than otherwise.

So there must be something you’re getting back, and these ideas of agglomeration economies that go back to the 19th century is sort of like what you see in the Silicon Valley. People can do the computer industry better when they’re around a bunch of other people in the computer industry, learning from each other and using the same resources and stuff like that.

We find evidence that there’s some of the same kind of stuff operating within buildings in the office sectors that we look at, which is important, both because the asset class is important and because downtowns matter. Preserving downtowns as centers of employment matter for a city’s prosperity and life, and if a downtown is not delivering value to the people who paid to locate there, that’s bad form.

How do you explain the fact that despite the internet allowing people to work remotely, more people are moving to the cities?

That’s got to be one of the big things that urban economics has to explain: you can do stuff in little places that you didn’t used to be able to, like if you wanted a really good book, you can have it tomorrow from Amazon if you want. When I was a kid growing up in Eugene, Oregon, or when I was an assistant professor teaching at Bowdoin in Brunswick, Maine, that was just not true. I had to go to a big city to get cool books. Those kinds of things seem to argue for the fundamentals of less traditional, but nice locations.

For instance, [Oberlin] is the kind of place that would seem to benefit from that aspect of the internet. But you’re right; at the same time, Toronto is six-million people — half a million more than when I moved there in the early 2000s. And it’s really costly to put so many people in one place. A fifth of Canada lives in Toronto. If you look at the U.S. using satellite data, … 2 percent of the country has been built on. Most of the country is fields and other non-built-on stuff. 80 percent of Americans live in cities on 2 percent of the space. Is that going to persist? That’s just a huge question, socially and for business.