CHICAGO—Across the US, corporate users continue to migrate into downtown office properties as they hunt for those younger employees who reject suburban lifestyles. But yesterday, at Marcus & Millichap Real Estate Investment Services’ CRE Forum in Chicago, several executives grappled with this trend at a morning panel, and the general feeling was that the present imbalance between city and suburbs would not last.
“What we are seeing throughout the country, but very prominently in Chicago, is a renaissance of the urban setting,” Alan Pontius, the San Francisco-based senior vice president of M&M’s national office and industrial properties group and moderator of the panel, tells GlobeSt.com. The millennial generation, especially those looking for jobs in high-tech fields, or with companies involved in creative work such as advertising, want access to amenities, such as restaurants, nightlife and public transportation, not as available in suburbs. “That talent is attracted to city life right now.”
And it’s not just Google and other giant firms that have decided to settle in the country’s CBDs. “Small businesses have become noticeably more attracted to downtowns because they feel it gives them a certain cachet,” says Pontius.
However, he adds, “if you take the long view, there is still a strong likelihood that this trend will turn around.” One of the panelists, for example, pointed to a friend in the audience, a young banker that had chosen to work and live in the city but now has a young family, and has begun to consider the suburban option. This leads Pontius to believe that once the millennial generation starts going through these life changes, and begins desiring larger homes and yards, suburban offices will hold greater appeal.
But the suburban office market will need more than a revival of demand, says Pontius. Many metro areas, including Chicago, currently have vacancy rates over 20%, a sign of past overbuilding and the presence of too many obsolete structures.
“It’s just going to take time and a good amount of capital investment in these buildings to rebalance the situation,” he says, and there are signs it’s starting to happen. For example, in the 1990s State Farm Insurance built a 400,000-square-foot regional headquarters in Woodbury, MN, a suburb of the Twin Cities, but left in 2006, and the site has been vacant ever since.
But earlier this year, Minneapolis-based Kraus-Anderson and Florida-based Elion Partners created a joint venture to redevelop the property and give it the amenities it will need to compete. The partners plan to renovate the existing building and add 300,000-square-feet with shops, restaurants, a hotel, a bank, medical offices and a day care center.
Some US cities already have a better spread of demand between the suburbs and the CBDs, Pontius adds. “For San Francisco, the Silicon Valley is the suburbs and any market that is heavily influenced by technology or energy is outperforming the rest of the country.” Seattle and Houston, for example, are other metro areas where demand is strong enough to sustain suburban office complexes. None of these areas are immune to the current tilt toward central cities, “but their economies are strong enough to let this trend play out.”
And when the city and suburban office markets do start to regain balance, Pontius expects many companies, especially those in technology, will have enough agility to respond. “The technology industry needs to be so fast and adaptable,” he says, “and many of its executives are accustomed to making decisions on how they can be relevant this minute.”
Therefore, even though tech giants like Motorola Mobility and Google have placed big bets on Chicago’s downtown, including a hot new neighborhood like the West Loop, Pontius says they can just as easily establish new offices in the suburbs if their workers start families in the coming years and begin migrating out of the city. “I don’t think Google is worried about the ramifications of these city moves, or what will happen 20 years down the road.”