What's Really Driving the Urbanization Trend?

ORLANDO—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?

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.

“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.

“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.”