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For commercial real estate developers, urbanization is the new black. Of course, it's not urbanization for urbanization's sake. Savvy developers are following—and fueling—this trend.

For decades, most Americans settled in the suburbs. Now, there's a mass exodus—or at least a growing movement—toward urban cores. According to Census Bureau data, American cities are witnessing a renaissance, of sorts, as residents migrate to downtown areas.

In 2013, 2.3 million more people were living in metro areas than in 2012, the Census Bureau reports. All told, 269.9 million people are living in and around cities. The population shift started in 2010, igniting a rate of urban growth that reverses the century-long norm. In fact, McKinsey & Co.'s research concludes that the speed and scale of urban expansion is unprecedented and growing cities could inject up to $30 trillion a year into the world economy by 2025.

It's no wonder, then, that commercial real estate has embraced the trend, directing more focus—and capital—to the more highly populated city centers. This reality begs three multimillion-dollar questions: What is driving this trend? How has urbanization changed the landscape? And what can we expect in the future?

WHAT'S DRIVING THIS TREND?

Urbanization is undeniable—and spreading. Commercial real estate industry researchers have identified at least two contributing factors that developers need to understand. One of them comes from population shifts and the other comes from capital markets shifts. According to CBRE Global Investors, Americans once flocked to the suburbs in search of a better life. Now, America's cities are enticing younger workers with better options for careers and lifestyles. Talent, more than ever, is clustering in urban areas because of the locational advantages of living and working in cities.

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“Millennials, people born between the early '80s and late '90s, are driving the steady movement toward more compact suburban growth,” CBRE reports. “This 80-million-member demographic is entering the market for housing and jobs, and they tend to favor the convenience of urban-style environments. Millennials have a stronger preference for city living and a high propensity to rent—factors that have contributed to urban gentrification, strong apartment demand and development activity in markets across the country.”

On the other side of the demographics chain are Baby Boomers. Like their mllennial counterparts, Baby Boomers—people born between the years of 1946 and 1964—are choosing to rent in cities to leverage an urban lifestyle. Many Baby Boomers are downsizing. According to a survey from real estate advisory firm RCLO, 75% of retiring Boomers said they want to live in mixed-age, mixed-use communities—that is, in urban settings.

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“The age of suburbanization and growing homeownership is over,” John McIlwain of the Urban Land Institute said in a report, “Housing in America: The Next Decade.” “The coming decades will be the time of the great reurbanization as 24/7 central cities grow and suburbs around the country are redeveloped with new or revived walkable suburban town centers.”

Beyond sheer demographics, there are capital markets factors en force. Joel Shackelford, a partner at Boca Raton, FL-based Kaufman Dolowich & Voluck, says huge amounts of foreign investments into American real estate is also driving the urbanization trend. He points to China as a “big player” in urban development stateside. Chinese investors are behind Brickell City Centre, a $1.2-billion mixed-use development that's transforming Miami's urban core, for example, as well as a project to revival Los Angeles' historic Downtown.

“Demand for such new construction has been exceeding supply, in my experience, causing property values and rental rates to increase,” Shackelford says. “This will encourage more development, as will the low interest rates for borrowing—though, I don't think interest rates will affect urban building much because those deals are largely cash-based from foreign investors who don't need to borrow. Whether for business, pleasure, or residence, people want to be in thriving cities for the time being. I don't see that trend shifting any time soon.”

HOW HAS URBANIZATION CHANGED THE LANDSCAPE?

Next question: How has urbanization changed the landscape? What tangible impact has commercial real estate development in metros made on the development and capital markets strategies? According to Hugh Finnegan, partner and co-director of real estate at Sullivan & Worcester LLP in Boston, there is no single answer. In other words, the landscape has changed in many ways.

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“The thought of commuting is very unappealing to a lot of people in the new workforce. People simply do not want to commute and they want their amenities centrally located near where they live and work,” Finnegan says. “Although lending parameters may not be changing, there seems to be a greater comfort with multifamily construction loans because lenders know the demand is there. I'm also familiar with a retail REIT that is getting rid of its suburban portfolio and is now focused solely on urban retail.”

According to a ULI survey, 61% of Americans would choose smaller housing in favor of a shorter commute to work, and 53% prefer neighborhoods close to shops, restaurants and offices.

Hotel brands are discovering a similar preference among extended-stay guests. Hilton's most recent survey of business travelers revealed 55% of respondents prefer walking over other forms of transportation for traveling in and around their destination. That finding is significant, considering the same survey found 66% of travelers are booking hotels based on locality versus price.

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“Understanding this trend, Homewood Suites and Home2Suites has made a dedicated effort to open new hotels in urban locations such as New York, Chicago, Denver, Dallas and Atlanta,” says Bill Duncan, global head of Homewood Suites by Hilton and Home2Suites by Hilton. “Although extended stay hotels typically have been developed in the suburbs, in the past year Homewood Suites and Home2 Suites have increased their urban footprint significantly.”

Combined, Hilton's extended stay brands have 23 properties in metropolitan centers, with 15 more urban properties slated to open before the end of 2016. In fact, 20% of Homewood Suites' pipeline is in urban developments. Of course, Duncan says that has shifted the brand's development strategy to consider more adaptive reuse developments that convert defunct condo buildings or abandoned office space into hotels, or dual-branded hotels where two hotel brands are developed on the same site and share operating expenses.

HEADQUARTERS MOVING DOWNTOWN

For all the talk of residential, retail and hotels moving into urban cores, some industry watchers report a wave of suburban companies moving their headquarters downtown or establishing second offices in city centers to bolster hiring and enhance employee retention. Studies show Millennials, in particular, are driving the trend toward alternative transportation issues like Uber and Divvy bikes because they don't want to own a car.'

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“Growing tech companies are at forefront of recruiting young, smart talent in urban areas, and now traditional firms are following their example,” says Chad Bermingham, vice president of Cresa's Chicago office. “In Chicago, Mayor Emanuel has been enticing traditional companies to come downtown since he took office. Also, the City has been renovating subway stops, building new parks, and generally improving the look and feel of the Downtown area, at the neglect of outlying areas.”

Bermingham points to several large corporations moving from Chicago's suburbs to Downtown, including Lenovo, United Airlines, Hillshire Brands and ConAgra. Kraft-Heinz is moving its headquarters from Northfield into 175,000 square feet at the Aon Center in early 2016 and Motorola, currently headquartered in Schaumburg, is currently seeking 150,000 square feet of space and is focused on 500 West Monroe.

“As a result of the new focus on downtown areas, office rents are rising and developers are scrambling to build high-rise office towers as quickly as possible,” Bermingham says. “Other landlords are spending significant capital to renovate existing buildings in order to keep up with the competition. Many new buildings are currently under construction in Chicago, and many of them are already pre-leased.”

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Until high office rents outweigh the advantage of being able to recruit young talent for companies (or high apartment rents outweigh the advantages of living in urban centers for Millennials), Bermingham says, these trends will continue. Steve McKendry, branch manager of Daum Phoenix, agrees, but notes that not every corporation will choose a metro like Chicago, New York City or Los Angeles. Urbanization is also impacting smaller cities.

“Cities that offer the millennial employment opportunities and an affordable style of life will be competing with the larger, urban core markets that are too expensive for most of that demographic,” McKendry says. “In an effort to be competitive in the job market, corporations often select locations other than major urban centers for their expansion or will move their corporate headquarters to cities that offer a more affordable cost of living. This trend is creating more demand for office, retail and industrial space in those markets.”

WHAT TO EXPECT

How will the urbanization trend continue to evolve? Are suburban developments a dying breed? It's clear that cities are witnessing a development boom in neighborhoods that were once neglected or underserved. Development breeds development, but some urban areas are still lacking necessary retail to sustain residential, according to Barbara Anne Spignardo, a real estate attorney with Shapiro, Lifschitz & Schram in Washington, DC.

“There have to be commercial and lifestyle components developed to keep those that moved into the city staying in the city,” she says. “Developers can't just continue to build multifamily structures without grocery and retail components or plans, or else creep back to the suburbs will occur. It's all about convenience. People don't want to spend time in their cars or on their commute, and want to work, live and play in relatively the same area with access to the same needs, like grocery and shopping.”

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Urbanization is cyclical. Freeways and rail systems are built around a city center so people can travel to and from the city easily. But as populations grow and the traffic woes rise, people don't want to commute from the suburbs anymore. So they get rid of their cars and come back to the city center. Martin Caverly, senior vice president of Resource Real Estate, says every major city around the world has gone through this approximately 50-year cycle.

“Different cities are at different points in that cycle, based on their age. For example, we are just starting to see the urbanization and redevelopment come to Los Angeles, as they are the last ones to the party,” Caverly says. “Ultimately it's a global trend that's here for the next 20 to 30 years—cities expand and grow, but then come back to the core and increase in density. The US has a lot of catching up to do to get anywhere near the population density seen in other parts of the world.”

Although there's unprecedented migration to urban areas, the suburbs will not turn into ghost towns. Shackelford, for one, is still seeing considerable interest in real estate outside of cities.

“Suburban triple-net retail centers and hotels are still very successful investments across the country, especially in California, and foreign investments are going to those development projects through EB-5 investments, as well as other direct investments,” he says. “Domestic developers and investors are also very interested in the suburban plays especially since the urban markets are believed to be too crowded.”

Shackelford points to one client that had a tract of land in Downtown Los Angeles tied up in escrow at $40 million last summer. Two years earlier, the tract was sold for $24 million. His client's partners thought the deal was too expensive though, and ended up taking their money to suburban apartment plays. “That Los Angeles property now has a thriving multi-use building on it, and the owner is happy they held onto it,” he explains. “My clients are happy too as they went out and bought 6% cap rate apartments outside of town. In the end, it's good to be an owner in this market.”