How Financial Districts Are Born

What drives banks to move in herds? In the late nineties we saw a number of venerable so-called Wall Street institutions flee lower Manhattan for midtown. Now it seems that investment banks are clustering around the World Trade Center site. Today a bit of a debate has broken out across the internets about why these headquartering trends occur.

John Gapper of the Financial Times kicks things off by noticing the rapid development of West Kowloon, in Hong Kong. This seems to be developing into the prime alternative financial site, something like the local equivalent of London's Canary Wharf. He proposes two theories. First, it seems the banks are seeking to take advantage of cheap rents. And, indeed, there was a time before it became a financial center when Canary Wharf was a considered a colossal failure. But vacancies and lower rents helped lure many firms away from the City and now it's thriving.

[More after the jump.]

His second theory hinges on loneliness. With so many firms planning to locate around the World Trade Center site,"banks such as Morgan Stanley and Lehman Brothers, which are still firmly attached to Midtown, could start to feel a bit lonely," Now we firmly believe that loneliness, like boredom, is one of the greatest unheralded drivers of human behavior and, ultimately, human history so we're at least willing to consider this possibility, even if it does feel a bit squishy.

An alternative explanation comes from Felix Salmon this morning, who proposes that the biggest factor motivating such clustering is the availability of physical capacity for large trading floors.

Look where the banks are, in the area. When Goldman moves into its new headquarters, Deutsche Bank will be pretty much the only major investment bank east of Broadway. Everybody else – Goldman, Merrill, JP Morgan, Citigroup's investment bank, and probably another investment bank or two who will end up moving in to Larry Silverstein's new WTC towers – will be in the much more wide-open area west of Broadway, centered on the 16-acre WTC site. The old WTC only had one real trading floor, and even that was in Larry Silverstein's 7WTC rather than in the Port Authority'sWTC proper. The new WTC site, by contrast, will have well over a dozen, all told, if you include Goldman's tower.

This morning we spoke to a senior official at an investment bank to ask his opinion about these things and he proposed yet another factor: technology. It can be difficult to upgrade the technological hardware in an occupied physical plant, he explained. Sometimes, in fact, its cheaper to build a new building than to rewire an existing one. What's more, widespread tech-driven re-construction might not be possible in an occupied building. This could explain why banks sometimes seem to be trading building between each other.

But how does this explain the clustering? Why do so many banks move the in same direction? The banker thinks that Salmon is partly right. It's the availability of space to build new buildings. As midtown has mostly filled up, the banks had to look elsewhere. At first it was Jersey City. Now it seems to be lower Manhattan. Once again.

Canary Wharf, Kowloon and the World Trade Center [Financial Times]
How Trading Floor Availability Creates Financial Districts [Portfolio]