It can be said that the “innovation economy” has become synonymous with the “digital economy.” To point to one factor, even after some dramatic declines in the value of the tech sector in recent months, Apple, Microsoft, Amazon, and Alphabet (Google) remain the most highly valued companies in the S&P 500.
While more than 200,000 people have been laid off in the U.S. tech sector in the past six months, to be sure this doesn’t mark the end, or even the decline, of digital companies and the cities they call home, which will continue to play a significant role in our economy for many years to come. But it may mark a turning point for the innovation economy as a whole from being digitally driven to becoming more multi-faceted, observes Resonance, a global advisor on tourism, real estate, and economic development. And, this shift presents potential benefits for cities of different shapes and sizes, with far-reaching implications for commercial real estate.
Here’s a look at five key forces reshaping the geography and evolution of the innovation economy, courtesy of the team of advisors at Resonance.
In 2020, new businesses started to form in record numbers — almost a million more than in the year prior, rising to 5.4 million in 2021, the highest number ever recorded. Unlike during the 2008 Financial Crisis, new business applications have continued to surge even into 2023 — particularly in professional/scientific/technical services, and (non-store) retail and restaurants.
While the decline of populations in the largest urban centers has been much publicized, the rise of entrepreneurship and micro businesses is still largely concentrated in these large metropolitan areas — LA, NYC, San Francisco/San Jose, Atlanta, Dallas, Houston, and Miami. Other mid-size metro areas have also seen similarly high rates of growth in micro business activity, including Raleigh, San Diego, Denver, Austin, Minneapolis, and Phoenix, to name a few. The boom in start-ups appears to be happening throughout the country—and cities now have an opportunity to incubate and develop homegrown, diverse enterprises.
2. Life Sciences
Over the past decade, employment in the Life Sciences sector in the U.S. grew at an average annual rate of 6.6%, while total employment grew at 1.2% per year. Canada, the UK, and other countries have seen comparable growth rates. While cities like Boston, San Francisco, San Diego, and Raleigh are home to the largest clusters of Life Sciences employment, New Jersey, Greater DC, LA, Denver, Philadelphia, and Seattle are also home to significant clusters, along with Montreal and Toronto in Canada. As the population in most countries continues to get older, the demand for pharmaceuticals, biotechnology-based food and medicines, medical devices, biomedical technologies, nutraceuticals, cosmeceuticals, and other products will continue to grow faster than the economy overall and the cities that develop and grow clusters of employment in this sector will benefit.
3. Energy Transition
Energy transition refers to a shift from fossil fuel-based energy production and consumption to the generation and use of renewable energy sources in order to reduce carbon emissions and combat climate change. The U.S. Inflation Reduction Act and the REPowerEU plan in Europe have created massive incentives for renewable sources of energy that will accelerate the demand for wind turbines, solar panels, heat pumps, electric vehicles, and batteries to store and distribute that energy. This in turn will create tremendous demand for the minerals used to manufacture these materials and increase demand for the recycling of rare earth elements. Leaders in the production of clean energy and batteries aren’t found in Silicon Valley, but places like Baltimore, Reno, Juno Beach, FL, and Guelph, ON.
Between 2010 and 2020, more than a million jobs were reshored back to the U.S., particularly in the transportation equipment industry and computer and electronic products. Thanks to the pandemic, trade wars and tariffs — along with the ongoing supply chain disruptions that resulted — companies are further accelerating reshoring efforts. This presents an opportunity for cities across North America to localize advanced manufacturing and transition their workforce into better paying jobs in these sectors.
5. Aerospace & Defense
While not a positive development for the world writ large, the war between Russia and Ukraine has been a boon for the defense industry. The U.S. military budget is projected to rise to a record $858 billion. Production lines for commercial aircraft are also fully booked with orders until 2029. Seattle, LA, and Dallas are among the centers of aerospace and defense production in the U.S., but there are 32 other cities in the country where these sectors contribute more than $1 billion a year to local economies, including Cincinnati, Denver, Huntsville, Tucson, Manchester, Cedar Rapids, and Tulsa. The benefits of the expansion of the nation’s military-industrial base are going to be spread far and wide across the country, and the funding available will spark new innovations in these sectors.
A common thread between all of these forces, as observed by Resonance, is that they will all require more physical space — just not of the “central business district office” variety. Whether it’s for a wet lab, ghost kitchen, distribution center, or manufacturing facility, the demand for commercial space in and around cities as these businesses grow will be significant and different than in the past. This will require rethinking zoning and land use policies to allow for new types of industrial uses and rethinking the purpose and design of so-called innovation districts to allow for and provide spaces for more than coding and software development. Technology, of course, will still be a significant driver of economic growth, but it won’t power the innovation economy alone. Nor will the benefits of this growth be captured by just a handful of cities like we’ve seen in the past.
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