A new city project in California, backed by prominent tech leaders, was recently publicized. The company is called Flannery Associates and the founder is Jan Sramek, who from his LinkedIn, appears to be a serial founder. According to the New York Times article, the group has committed $900 million. The Guardian reported that they have acquired 55,000 acres since 2018. This comes out to around $15,000 per acre, in line with the reported land acquisition prices.
This is one of the most serious and ambitious new city projects I have seen. Its proximity to San Francisco makes attracting residents easier than most locations. The backers are very serious people, and they have executed on acquiring a substantial amount of land. After years of talk in Silicon Valley about building cities, it is good to see something as concrete as this.
TB Storrs published this map on Twitter, where the red is acquired land, though his estimate from public records is 23,000 acres, about half the land reported from other sources. Nevertheless, the map gives an idea of where the land is located, in Solano County. Google reports the drive time from San Francisco to Fairfield of 44 minutes.
Nearby cities include Suisun City, Fairfield, and Vacaville, with a combined population of over 250,000 residents. There is no indication that these cities are meaningfully integrated into Silicon Valley. Their top employers do not include tech companies, nor have I heard them mentioned in casual conversation.
The thesis of the new city, hereafter Flannery City, is that demand for proximity to Silicon Valley can be redirected to a satellite city. The first part of this thesis is obviously true, there is a huge demand for living in or close to Silicon Valley. The second part is unclear. Housing prices in Fairfield seem quite reasonable at least compared to San Francisco, with a 3000 sq ft, five bedroom home selling for $820,000. The cheapest 5 bedroom, three bath, 3000+ sq ft house in San Francisco is listed at $1.2m. Demand for Silicon Valley and San Francisco does not appear to have significantly spilled over into Solano County.
Related to the challenge of attracting residents is the cost and timelines of new city projects. Private new city projects need to be financially viable. The value proposition is similar to most real estate development: buy land, develop it, then sell it. The difference is that new city projects require huge upfront capital commitments and have long time horizons.
First, however, it is useful to put Flannery City in historic context. Irvine and Disney World are probably the two most comparable projects to Flannery City. The similarities and differences between Irvine and Disney World can help clarify what Flannery City needs to do to be successful.
There are hundreds of examples of historic new city developments. Classic recent examples frequently include Dubai, Shenzhen, Singapore, and Hong Kong. However, as Flannery City is located in the US and not asking for any legal or regulatory autonomy, American comparables are more relevant.
Irvine is a master planned city in the LA metro area. It has a population just over 300,000 on 44,000 acres, hosts a University of California campus, as well as several other colleges, and hosts several large technology companies.
The land was originally a ranch owned by the Irvine family. In 1959, the University of California system asked for land to build a campus on. Given the increased demand that the university would create, the families developed a master plan.
Population growth was initially slow. Irvine took 12 years to reach 10,000 residents. By 1980, just 9 years later, Irvine had 60,000 residents. In the 1970’s, much of the population growth was driven by Vietnamese refugees after the fall of Saigon. For the next two decades Irvine’s population grew at 12% annually, before falling to just over 3% in 1990. The primary developer, Donald Bren, is America’s richest real estate developer.
Disney World is another example of a successful American new city project. Begun in the early 1960s, it opened in 1971 and is one of the world’s premier theme parks. While not a city in the traditional sense, it occupies 25,000 acres and has tens of millions of visitors annually, requiring comparable logistical feats to cities.
Disney World has some important distinctions with Irvine. Unlike Irvine, the land upon which Disney World was built was not owned by a single entity. As such, Disney had to secretly acquire the relevant land. Second, Disney did negotiate for substantial legal autonomy from the state of Florida.
The Reedy Creek Improvement District was a local government with substantial tax concessions that was voted on by amount of land ownership. As Disney owned the vast majority of the land, the district was controlled by Disney. Residents would not have to pay state taxes, and authority over land use regulation and planning, building codes, surface water control, drainage, waste treatment, utilities, roads, bridges, fire protection, emergency medical services, and environmental services were overseen by the district. Florida Governor Ron DeSantis recently eliminated most of the special privileges.
Mexico also offers illustrative examples. In the 1970’s the Mexican government began developing Integrally Planned Centers, tourism hubs that could develop into cities. Cancun is the most successful example, growing from a population of 1000 in 1974 to over 1 million today. Throughout the 1980’s it was growing at almost 20% annually.
Flannery City must make economic sense to be successful. New cities are, to a certain extent, real estate developers. The developer buys land, rezones it, services it, and then sells it for a profit.
Given the impetus for Flannery City is from the startup world, it is useful to consider the structural differences between new city developments and startups. Startups typically require small amounts of capital for a ‘product search/development phase’. The initial financing is typically done by seed investors taking a small equity percentage.
If the product development is successful, product market fit is achieved, which means there are willing customers lining up for the product. Once this metric is hit, the startup raises additional funding to further refine the product, hire a sales team, etc. Particularly for SaaS companies, there are relatively clear milestones and metrics for funding at relevant stages of a company.
Cities are basically megaprojects, comparable to dams, power plants, and ports. They require substantial initial diligence and planning, building out models, negotiating with relevant stakeholders, developing engineering and planning studies, etc. After completion of diligence and planning, the buildout can take hundreds of millions to billions of dollars and years to complete.
An important difference, however, is that power plants, for example, are relatively simple to model. You know how much electricity sells for, your marginal cost of producing electricity, and the capital cost of building the power plant. With new city development a crucial figure, demand, is difficult to estimate.
In this way a new city development is in part a cross between a megaproject and Open AI. OpenAI required hundreds of millions of dollars to build a product, and didn't know what the demand for the product would be, or even whether the product was technically feasible. It’s unclear whether Flannery City will be able to build the infrastructure, as it’s currently not zoned residential, nor whether there will be demand for moving there.
The economic challenge of a new city development, Flannery City included, is that they require huge amounts of initial capital, have long periods before sales and revenue begins, and have the regulatory uncertainty of dealing with relevant governing authorities, a particular challenge in California.
It’s possible to develop a simple financial model for Flannery City. Revenue comes from land sales. Additional key inputs are 1) costs, 2) time to first land sales, 3) profit per acre, 4) number of residents in the first year, 5) resident growth rate, and 6) density.
To illustrate the economic potential, as well as the challenge, I put in some optimistic numbers.
With these relatively optimistic estimates, IRR is 14% over a 40 year period. Here is the model, feel free to adjust any of the assumptions.
A major challenge of new city projects is attracting the initial residents and businesses. People are attracted to cities because of the job market and additional amenities. New cities, by definition, lack both.
The supposed justification for Flannery City is demand overflow from Silicon Valley. However, on first glance the demand does not appear sufficient to justify the investment. An acre in San Francisco is worth an estimated $3.2m. In Oakland the same acre is worth $1.4m. In Fairfield, a city of 120,000 residents close to the proposed site, Zillow lists lots including, $350,000 for 1.3 acres of serviced land, and $480,000 for .7 acres of serviced land.
Therefore, Flannery City will need to create its own economic center of gravity. Why would someone move to Flannery City over Fairfield? There is no easy way to do this, however, there are a few potential strategies.
As I drafted this blog post, more information about Flannery City is emerging. The New York Times published an article detailing the origins of the company. The parent company of Flannery Associates, California Forever, launched a website. They are now embarking on a publicity tour to get the necessary approvals to build a city. Scott Alexander has a good essay that goes into the political challenges.
I hope Flannery City succeeds. America needs ambitious new projects. However, the challenges they face are substantial. Irvine and Disney World were built in a different era. America was more confident, more pro-growth, less bureaucratic, and urbanizing more rapidly. Flannery City is building in one of the most NIMBY states, in an environment where interest rates have risen substantially, and without a clearly articulated value proposition for superiority over nearby cities like Fairfield.
Ultimately, however, cities are political projects. Getting buy-in from local stakeholders is critical to get the permits necessary to begin development. The lawsuit against local landowners is unlikely to win Flannery City any friends.
Nevertheless, it is a refreshing project. Given the skepticism from ‘experts’, as well as the potential positive impact of the city, it is hard not to root for them. It is obvious that the Bay Area, one of the most productive places in the world, is underpopulated. Flannery City is an important step towards turning the Bay Area into the 10 million person hypercity it deserves to be.