Downtowns Drawing Tenants Over Suburbs: Secular Shift or Aberration?

The December 13, 2010 Wall Street Journal has an interesting article entitled “Downtowns Get a Fresh Lease: Suburbs Lose Office Workers to Business Districts, Reversing a Post-War Trend” by Anton Troianovski.  The article summarizes a trend that we have seen across the country in office markets over the past few years where downtown markets have drawn more tenants than the suburban markets.  This is largely due to a difference in tenant demographics between suburban and downtown markets in today’s economy.   Specifically, many suburban office tenants are directly or indirectly involved with the housing industry where we have seen the largest job losses.  Whereas downtown tenants are government entities, banks, financial services companies, law firms and professional service companies.  This trend is also being driven by the redevelopment of many downtown areas around the country.

Keep in mind that most office workers are in the suburbs where they live.  Nationally, there is roughly three times as much office space in the suburbs than in downtown areas according to CoStar property database: Downtown 2.3 BSF; Suburban 7.5 BSF.  In Chicago, for example and according to CoStar property database, the office space inventory Downtown is 170 msf compared to 275 msf in the suburbs.  Given lower costs, shorter commute for most of its workers in the suburbs, here’s the big question for tenants and landlords:  Is this trend a secular shift or an aberration?

My take is that I don’t see a mass exodus of suburban tenants to the big city.  I think location has been and will continue to be largely driven by: costs; nature of a company’s business; location of its employees and future hires; public transportation; and don’t underestimate the location of where the executives live.  At the peak of the economy, some suburban companies in the Chicago area (like in other large metropolitan areas) relocated downtown or seriously considered relocating downtown to compete for younger workers who live in the city.  For example, after relocating to Chicago’s western suburbs from Downtown in the 1990’s, BP recently reversed course and relocated 1,200 employees back Downtown.  Given today’s economy and job market, competing for younger workers might be less of a concern for some; however, businesses long-term need to be sensitive to the location of their highly-skilled employees. 

Also, it’s hard to analyze this question of “Downtown vs. Suburbs” on national basis.  There are certain areas of the county that don’t neatly fall into the category of “Downtown” or “Suburban” which are very attractive to tenants offering rich amenities, public transportation and networking opportunities.  One such area is in Silicon Valley where I am currently representing a tenant in establishing a new office.  There, office space in Mountain View and Palo Alto is a very hot commodity. 

In short, there are businesses that must be located downtown or in the suburbs, but others are more location neutral.  It is these location neutral businesses that will be drawn either downtown or suburbs based upon quantitative and qualitative factors.

Don Wenig
Blackacre Advisors LLC

DISCLAIMER.   Our writings are from a real estate transaction perspective and for informational purposes only. Nothing herein shall be considered legal, accounting, tax, or architectural advice. Please consult with the appropriate professional(s).

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