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Growing Pains
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Source: The Industry Standard

July 10, 2000

Growing Pains

Across the country explosive Internet growth is producing evictions, traffic snarls and other woes of daily life. What's a dot-com to do?

By Rob Waters

After three straight years of spectacular growth, America Online's three buildings in Fairfax County, Va., were so crammed with young workers that company officials worried about visits from the fire marshal. "We had people sitting out in hallways," remembers Faith Denault, AOL's vice president of facilities and business services. Denault scoured northern Virginia for space and soon settled on a 154-acre tract of land in rural Loudoun County to build its sprawling headquarters that now includes five "creative centers," hundreds of servers and more than 3,000 employees. AOL's move in 1996, as well as cheap land, tax breaks and the proximity to a new toll road and Dulles International Airport, was enough to trigger an explosion of growth in the county, from 124 high-tech firms to 294 today.

"You have here now a density of people in the communications, dot-com or Internet space," says David Kunkel, PSINet's vice chairman. "It's a wonderful place to do business. This is one of the economic boom stories of the late 20th and early 21st centuries."

But the residents of Loudoun County are not so thrilled about the impact of the high-tech invasion. Endless traffic snarls the roads and a slew of new roadside strip malls and matching subdivisions is rapidly turning this charming and historic area into an overbuilt eyesore. "We're bringing people in at such a rate that we cannot absorb them," says Loudoun County Supervisor James Burton. "A thousand people a month are moving in, and one-third are children. We're building two or three classrooms a week, and our debt is piling up like crazy."

The spectacular technology boom is creating similar growth problems nationwide. In Manhattan, the price of real estate has surged so high � due in large part to the demand generated by the dot-com explosion � that 50-year-old sewing factories are being forced out of their homes in the historic Garment District.

The pace of change � and evictions � is even swifter in San Francisco. Internet companies are spilling out of their first homes in the South of Market area and setting up shop in other neighborhoods. The result has been huge rent increases for commercial space and housing and the large-scale displacement of small businesses and low-income residents.

Addressing these growth issues is not high on the agenda of many Internet firms. But perhaps it should be, considering the growing backlash against dot-coms in at least a few places. In San Francisco, residents in one neighborhood have protested in the streets � targeting Net companies as the enemy. "It's time to declare war on the dot-coms," wrote Juan Gonzales, editor of El Tecolote, a neighborhood newspaper. "With each passing week, the dot-com invasion of our community is escalating by leaps and bounds." And in Loudoun County, a grassroots group called Voters to Stop Sprawl led a campaign that radically changed the composition of the board of supervisors, electing a new crop of "smart growth" politicians.

Some firms like Bigstep.com, whose occupancy of offices in a San Francisco building led to the eviction of nonprofit groups, are trying to sooth neighborhood tensions in the form of internship programs and philanthropy. But to date, government officials and business leaders have not spent a lot of time thinking about how best to integrate the booming Internet Economy into local communities. Governments have been more concerned with attracting companies with tax breaks, zoning exemptions and other favors. And companies have focused on finding the best deal in places where they can attract employees, leaving the growth problems to the planners and politicians.

But that may be changing as Internet firms realize that they, too, are victims of sprawl. Recruitment becomes more difficult and employees have a harder time getting to work, among other problems. Already, traffic congestion in Loudoun County has prompted Internet firms to push for more highway construction so employees can get to work on time. And AOL's Denault sits on the Dulles area transportation authority board, which is wrestling with how to ease the traffic problem and whether to push for a rail link to the Dulles Airport.

"The county let sprawl happen, and now they are paying the price for it," says AOL's Denault. "The slow-growthers on the new board of supervisors are concerned about the need for infrastructure for all this new growth in the county. We feel we are contributing significantly," she adds, by building roads, contributing to fire safety and participating in the political process.

Thanks in part to the Internet, Loudoun is the third-fastest-growing county in the nation, with a population that has ballooned from 86,000 in 1990 to 172,000 this year. The number of approved but as-yet unbuilt homes in Loudoun now stands at 50,000.

It is no small irony that such a rapid pace of change has occurred in one of the oldest and most historic parts of the United States. The Loudoun area gave birth to many of colonial America's most important revolutionary thinkers and four of our first five presidents. Later during the Civil War, it would turn into a blood-soaked killing field.

Loudoun is not only historic, it's also � when you're away from the subdivisions and strip malls � incredibly beautiful. The county sits in the heart of the Piedmont region that stretches across northern Virginia at the foot of the Blue Ridge Mountains. The heritage and beauty of this county makes the high-tech-inspired development now under way all the more troublesome to many activists, such as Joe Maio, a retired computer engineer for the IRS. "This is one of my favorite views in Loudoun County," says Maio, pointing to a panorama of gently rolling hills, acres of trees and a pond. "What developers can do here is take this land and subdivide it into lots as small as 3 acres and destroy this view."

In Leesburg, Loudoun's county seat, a historic downtown of wonderfully preserved 18th century brick buildings has shrunk to an area of a few square blocks, surrounded by a sea of sprawl. On the city's perimeter, where the Dulles toll road comes to an end, a huge gas station, fast-food joints, chain restaurants and a new outlet mall cater to the families of the dot-com crowd. "The growth of retail is driven by the high-income, high-tech workers that live here," says John Henry King, Leesburg's chief of economic development. "That's been the magnet that's pulled the retail development this way."

Pam McMurray, a California transplant who operates the Norris House Inn in an historic downtown building, says she's seen it all before. "We're from Orange County, and it's like deja vu all over again � the loss of open space, the sprawl, the congestion. I hate what's happening in and around Leesburg," she complains. "Northern Virginia is the cradle of democracy, and now the sprawl is covering over all of it."

RED CARPET TREATMENT

Many residents pin the blame on local politicians who have rolled out the red carpet for developers and high-tech firms. In prior years, Loudoun's economic development officials had toiled to attract businesses to the county, often with little success. The residential population had been increasing � taxing the county's creaky infrastructure and depleting its budget � without a revenue-producing industry to support the growth. So when technology and Internet companies came knocking, Loudoun officials threw open the doors, offering modest tax breaks, fast-track permitting and a willingness to rezone land. MCI WorldCom was among the hundreds of high-tech firms that found Loudoun an attractive place to settle.

In June 1998, after several months of secret negotiations with county officials, MCI WorldCom announced plans for a massive 500-acre high-tech campus just down the road from America Online. It would become MCI WorldCom's largest facility and the headquarters for its Internet subsidiary, UUNet. The company's plans called for constructing up to 13 buildings to accommodate as many as 9,000 WorldCom employees, in addition to selling or leasing large chunks of the site for office, retail and hotel use. At full buildout, as many as 25,000 employees would be working on-site.

Though MCI WorldCom touted the benefits of its project to the county, a local planner projected that the development would generate up to 75,000 daily car trips on Loudoun County roads � a huge increase. And an analysis of the project's impact on local finances sounded some surprising warnings. The report, coauthored by planning consultant Michael Siegel, found that the project would probably not be the economic savior many had hoped for.

Siegel found that Virginia would benefit handsomely from income taxes paid by the project's high-salaried workers and the county's coffers would be enriched to the tune of nearly $7 million a year by 2003. But when he factored in the costs to the county of providing services to employees who would come to Loudoun to live, the results were different. "We found it would create a fiscal deficit if more than about one-third of the employees lived in Loudoun," Siegel explains. "The county basically had to hope that at least 66 percent of the workers would choose to commute in from outside. Otherwise, it would lose money."

In the week following the release of Siegel's analysis, the planning commission and board of supervisors held public hearings on the project. A number of citizens voiced concerns and urged the boards to study the proposal more closely. Joe Maio's wife, Peggy, representing the Piedmont Environmental Council, expressed fears that MCI WorldCom's plans would lead to major traffic congestion. Marcia de Garmo, an activist who had fought against subdivisions, criticized the board for fast-tracking the proposal and not taking time for an adequate review.

Despite these concerns, the board voted unanimously to rezone the project area and give MCI WorldCom the green light. Supervisor Burton says he had misgivings but voted for the rezoning partly for a reason that didn't get discussed at the time. He says board members knew from closed-doors negotiations with company representatives that an MCI-owned parcel in Fairfax County, just across the Loudoun border, was also a potential site for the project. If the board failed to act quickly to give MCI WorldCom what it wanted, the company might build in Fairfax. "Had that occurred," Burton believes, "we would have gotten the same number of families moving in and we would have had to provide services for them. But we would not have gotten any of the taxes. We would have gotten the burden without the benefit."

The Maios and other activists felt ignored by their elected representatives � on WorldCom and numerous other projects � and they were tired of the enormous sway that land developers held over local and state politicians. So they took a page from their county's history as a birthplace of the American Revolution and launched a revolt of their own. They formed Voters to Stop Sprawl, and recruited, endorsed and helped finance a slate of candidates for the board of supervisors who committed themselves to slowing and managing the county's wild growth.

For nearly one year, activists like Joe Maio and Marcia de Garmo put in 18-hour days, hoping to win a few seats on the board. Instead, they swept eight of nine seats. "I was absolutely stunned," says de Garmo. "It was beyond our wildest dreams."

The advocates are calling for end to uncontrolled growth in which tech firms and developers build campuses and subdivisions wherever they please. Instead, Maio and his allies want to slow growth, and cluster new development around neighborhood services and transportation.

But the fight is far from over. Local governments in Virginia have little authority not granted by the Statehouse in Richmond, so the Loudoun board may be unable to make some of the planning and zoning changes it would like. So the Loudoun activists and their "smart growth" allies around the state aim to take their antisprawl agenda to the next state elections. "I'm signed on until 2003," says Maio. "We hope to take some of the bad guys and move them out. I think you'll see a very different Richmond if we're successful."

What does MCI WorldCom think about its impact on Loudoun and the controversy it generated? Through a UUNet spokeswoman, the company declined to answer questions. "We love being here in Loudoun County," says UUNet's Allison Tobin. "But we don't comment on real estate issues."

NEW YORK CITY: Garment Shops Out, Dot-Coms In

For 56 years, four generations of the Cohen family have operated a garment shop in Manhattan. For the last 28 years, the family firm, VC Sportswear, has made its home in an industrial building on Broadway and Houston. But that will soon change. "They want to triple the rent from $10 to $30 per square foot," says manager Michael Cohen. "We can't afford it. We'd be out of business if we had to pay $30 a square foot."

The other garment shops that once filled the building have left, and Cohen says he too will be moving soon, leaving the building to Net-related firms like Algorithmics, Creative Communications and Jupiter Communications. The same thing is happening in industrial areas throughout Manhattan. The city's Internet boom, which has created more than 40,000 jobs since 1997, has sent the vacancy rate on office and industrial space plummeting and pushed real estate prices through the roof, a trend that so far shows little sign of slowing despite the Nasdaq shakeout. One result is that traditional industries such as apparel, printing and light manufacturing, along with artists who have studios in industrial spaces, are fleeing to the other boroughs � if they survive at all.

"A lot of the owners are old guys, and they're packing it in," says Cohen. "The sad thing is that 50 to 60 people in each shop will be out of jobs." VC Sportswear's lease is up in two years, and Cohen figures he will probably end up in Long Island City, Queens or New Jersey.

Alice Rodd O'Rourke, executive director of trade group New York New Media Association, isn't surprised by the displacement. It's the law of the real estate jungle. "There is a fairly immutable rule of real estate and that is that real estate seeks the highest and best use of itself," she says. "[The Internet industry] has grown at such a rate that they've outstripped available Class A real estate, and have had to look in other areas of town including the Garment District, where landlords are happy to have these profitable, fast-growing businesses be their tenants."

DOT-COM WELFARE

Internet companies unable to find offices in the hip Internet neighborhoods in Manhattan can get a helping hand from the Giuliani administration's Economic Development Corp. EDC has set up a high-profile program called Digital NYC: Wired to the World, which will provide up to $250,000 in matching funds for business development agencies that work with landlords to set up buildings for Net companies. The goal is to prevent tech companies from fleeing the city altogether.

"Manhattan is filled to the gills right now," said EDC spokesperson MacLean Guthrie. "We're creating a tremendous opportunity for digital companies to find below-market rates and Internet-ready office space beyond the traditional boundaries of Silicon Alley." The EDC sniffs out spaces, and the landlords agree to leases that won't exceed $20 per square foot in the next three years. So far, the city has set up tech centers in four locations in Brooklyn and one in Harlem, with sites in Staten Island, the South Bronx and Long Island City to come. Guthrie says the dot-coms will move into vacant "raw industrial space" and won't dislocate other businesses. One of the projects now under way, HiWay (Harlem Internet Way) 125 is expected to create 2,500 jobs in the next four years, one-third of them for local residents. And the garment industry hasn't been completely forgotten. In Brooklyn, the borough president has set up a small incubator for garment industry startups. And the EDC offers financing and tax breaks to manufacturers, including garment firms.

Still, critics argue that the city is bending over backward to help dot-coms, but not doing enough to help the needle trades in the city. A study released earlier this year by the Center for an Urban Future, a New York think tank, said the city had lost 14,500 apparel and textile manufacturing jobs since 1993, due in part to rising rents. The study's author, Jonathon Bowles, took New York to task for not doing more to enforce zoning restrictions designed to protect the garment industry.

"City Hall's actions suggest it is more willing to go to bat for dot-coms than garment makers," says Bowles. "The city should be commended for helping dot-coms find office space, but they also need to make sure there are safe havens for the manufacturers that the techies are displacing. There will be no other place for these workers, mostly immigrants, to get jobs. Not everybody has the skills to get a job in a dot-com."

SAN FRANCISCO: Old Neighborhoods, New Companies

San Francisco's Mission district is the place where raw emotions over dot-com growth have reached their most fevered pitch. This large neighborhood has been the center of the city's Latino community for the last 50 years. Today, it is ground zero in an economic and political war over the future of the city and who gets to live and work there.

The Mission borders the exploding South of Market district, the birthplace and center of the city's Internet industry. The streets here buzz with Spanish conversation, Latin music and, lately, the sounds of buildings getting renovated and milk being steamed in upscale cafes.

Until a few years ago, the Mission was one of the last affordable parts of the city. But rents and real estate sales prices have soared here too, as well-paid, young dot-com workers have migrated in, searching for the funky, edgy ambiance they are now helping to end. Now firms are moving into this neighborhood's many industrial buildings and warehouses.

Dot-coms come to neighborhoods like the Mission, says Pamela Laurence, director of corporate communications at Bigstep.com, a business services site, because "this is where our employees want to be, in the non-Financial District part of the city. You don't see suits walking around here."

But the problem with that, says Calvin Welch, a longtime San Francisco community activist, is that "large, intense office space workforces aren't good neighbors to residential neighborhoods. They create traffic and parking problems and push up rents and real estate prices, gentrifying the neighborhood in the process."

A SPATE OF EVICTIONS

Just outside an old brown-shingled building that houses the Mission Neighborhood Center, Mission native Ingrid Mezquita, the center's associate director, points up and down the block at the two- and three-story flats that line the street. "I can tell you about six buildings on this block that were sold recently," she says. "This one sold" � Mezquita points to a blue-and-white building with scaffolding around it � "and that one and that one. Who's moving in? Not our folks. One of our preschool teachers, who was paying $400 a month, was displaced."

A few blocks away at 17th and Treat streets, Mezquita stops at an old industrial building covered with white paint. "This," she says, "is what started a war." For several years, the wall was decorated with a mural commissioned by the city and painted by the late Mission artist Jesus "Chuy" Campusano. But last year, the building's new owners painted over the mural without first discussing it with the city or the community.

The whitewashed mural angered community activists who held demonstrations, but changes inside the building have been more telling. This building, and one across the street, had been garment factories that employed scores of community residents. Today, two men are unloading office dividers off a truck and leaning them against the wall of the building. Upstairs, young men and women clad in jeans work at computer terminals in the offices of AreYouGame.com and another online gaming site. Down the hall is the building's third tenant, iQuantic, a benefits consulting firm serving Internet companies.

An equally dramatic change has taken place in a building a few blocks away on Mission Street, the district's commercial center. The Bay View Bank building, the tallest structure in the neighborhood, has been home to dozens of nonprofit agencies, community businesses and professional offices, all paying rents as low as 50 cents a square foot.

Last summer, the building was sold, and tenants soon received memos that their leases would not be renewed, says Luis Granados, executive director of Mission Economic Development Association, one of the former tenants. A few months later, they learned that the new anchor tenant that would be replacing them in the building would be an Internet company, Bigstep. "What's happening at the Bay View Bank building is direct competition between dot-coms and nonprofits," he says, sitting in his agency's new office on top of a Mission Street doughnut shop. We were displaced because we can't compete with the rents they can pay."

Granados' agency, which assists small businesses in planning and packaging loans, had little trouble finding a new site. But he is worried about some of the other tenants. "They're really good at providing immigration services and child care, but they don't know about real estate and finding space," he says.

NEW DOT-COM DIGS

The fifth-floor offices of Bigstep are already occupied and buzzing. The largely open space is decorated in the company colors of orange and blue. A sea of monitors are set up so that most of the young employees face a stunning view of the downtown skyline and the San Francisco Bay.

Bigstep, which assists small businesses in developing e-commerce, has grown rapidly since its founding in 1998. Its first home, says COO John Spottiswood, was in the Potrero Hill neighborhood, where the company launched with 45 employees but soon ran out of space. "We were up to two people to an 8-foot desk," he recalls. The company started looking for bigger offices last summer, he says, concentrating on Potrero Hill and the Mission "because our employees lived in these neighborhoods." The company has since grown to 130 employees and should hit 200 by the end of the year. At this point, it has taken over part of the second and seventh floors, and all of the third, fourth and fifth. The company also plans to take the ninth floor when it becomes available, Spottiswood says.

"We knew it would be sensitive coming to the Mission," Spottiswood says, acknowledging that there was some tension with the departing tenants."That's probably natural. I think we have pretty good relations with some of the tenants. We have done our best to work with the [owner to assist] folks who haven't found space. We're trying to be as accommodating as possible."

Spottiswood is upbeat about what dot-coms can bring to the Mission. "Internet businesses moving into the Mission is probably a good thing for the area, and I think it may take a while for the community to realize that and for the potential to be realized," he says. "Businesses that move in can't just bring in resources, money and jobs, but [they] actually need to be proactive in bringing those benefits directly to the community, making jobs available where they can." The company is developing a training program to assist neighborhood businesses in building Web sites and will bring in five to 10 local or minority interns this summer in positions that may lead to jobs.

Granados and other Mission activists say they've heard talk about jobs before, and they've rarely seen the results. "People talk about how high tech is a good thing because they're creating jobs," says Granados. "We say, 'Jobs for whom?' You're bringing in people from outside who are making $50,000 to $75,000; the median income in the Mission is about $15,000. What does that mean for people in this neighborhood? If you're both competing for the same apartment, guess who's gonna get it?"

SPECIAL DOT-COM EXEMPTION?

The outcome of the battle over San Francisco's landmark Proposition M, a growth-control measure, could either slow or speed up the gentrification of the Mission and other neighborhoods in the city. Proposition M limits annual office development to 1 million square feet. But Internet companies, facing an extremely tight real estate market with only a 1.5 percent vacancy rate, argue that the popular city measure is a major obstacle in their path to rapid expansion. "The limiting factor is Proposition M. If it weren't in place, there would be plenty of space," says Dan Cressman, managing director of Grubb & Ellis, a commercial real estate brokerage.

San Francisco Supervisor Leslie Katz, a former VP of Petstore.com, introduced legislation that would carve out an exemption from Proposition M for the construction of new space for Internet use. It has wide support among dot-coms, but community activists argue it would accelerate the dislocation now taking place in the city's neighborhoods.

However, a deal may now be emerging from talks among community activists, the chamber of commerce and dot-com representatives. The agreement would trade off some increase in the Proposition M annual growth limit for guarantees that would restrict where tech firms could build � essentially the creation of dot-com-free zones. "If we lift the cap for these guys," says Rene Cazenave, a representative of the community, "they have to agree that they will build only in certain areas." The idea is to steer development away from neighborhoods and toward downtown and underdeveloped parts of the city.

SMART GROWTH

The possible San Francisco compromise contains pieces of what some planners call "smart growth." Concentrating growth in higher density areas near mass transit can reduce traffic congestion as well as neighborhood dislocations, though the cost of renting property is often higher in these areas.

Portland, Ore., is attempting to manage its Internet growth in this way. Regional planning in the city with the cooperation of dot-coms has helped preserve the quality of life for employees and residents alike.

Several years ago, when Intel needed a place to grow, it chose Portland, in large part because of the area's strong regional planning. Intel's Portland-area plants currently employ 13,500 workers, more than the company's workforce in any other state.

"We saw that what was happening in Silicon Valley � the expensive housing, clogged freeways and long transit times � was going to inhibit our ability to grow our facilities and to attract and keep employees. That's our bottom line," says Bill Mackenzie, Intel's Oregon communications manager. "Oregon had ample land, a good quality workforce and the high quality of life that we thought would provide the foundation for a good business climate."

In Loudoun County, "smart growth" advocates argue that the spread of big high-tech campuses are the root of the problem. "Locating a bunch of jobs on a campus creates one big origin of jobs and then those people who hold those jobs have a 45-minute radius to look for a place to live," says Ed Risse, a planning and development consultant in Reston, Va. "It is a physical impossibility to serve those scattered origins and destinations in an effective way. So you end up with congestion. And people end up being dissatisfied with their lifestyle."

Risse and others say dot-coms could locate in higher-density areas like the Ballston-Roswell corridor in Arlington County, Va. Outside each of the four subway stops in the corridor are a variety of businesses, including technology firms, and a wide choice of housing options. Here, says Risse, employees can walk to work and to stores.

As growth issues continue to mount, some high-tech business leaders are beginning to see the wisdom of avoiding sprawl and other problems. PSINet's Kunkel attended the University of Virginia 35 years ago and remembers the area before it was overrun by development. "There are places where the growth is pure sprawl. In some places it gets a little ugly," Kunkel says. "Without thoughtful planning, regional development and a hard look at not developing certain areas, you're just going to increase the problem. And that's where it's been going lately."

Rob Waters is a senior editor at WebMD.

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