On the heels of the great recession in December 2010, I wrote about whether the trend of office tenants moving to urban areas is a secular shift or an aberration (“Downtowns Drawing Tenants Over Suburbs: Secular Shift or Aberration?“), concluding that companies that are location neutral (i.e., don’t need to be suburban or urban) will be driven by qualitative factors including, most importantly, labor. Here in Chicago and many other markets nationally, we’ve seen an increasing number of companies relocating all or a portion of their operations to the Central Business District (or surrounding areas). Most recently, it was announced that McDonald’s Corporation will relocate their HQ from west suburban Oak Brook to Chicago. With urban office rents being considerably higher than suburban, these companies are not looking at real estate from purely a cost perspective, but rather how it can be a strategic tool in driving their core business. In this post, I summarize the reasons underlying this trend, what we can expect in the future and what is happening in Chicago as an illustration of this national and global trend. I also explore why some companies have decided to stay in the suburbs.

1. What’s Driving the Urban Migration?

Talent. For the same reason companies fled cities to the suburbs in the 60’s – 80’s, they’re following the talented workforce whom are mostly younger workers preferring to live and work in urban areas. For many companies it’s a “coming home” as they originated in the urban core, e.g., before Oak Brook, McDonald’s HQ was in Chicago from 1955 to 1971. We’ve also seen a resurgence of empty nesters return to city living; however, as explained further below, suburbs hold value for families for quality of life and education reasons. Many of these younger workers are putting off having children until later in life.
External Collaboration. As most products and services these days are a joint effort with external partners, many companies see value in being down the street from existing and future business partners. A suburban campus, by contrast, promotes a sense of isolation. Along these lines, there was a recent article in the Harvard Business Review (“Why Today’s Corporate Research Centers Need to Be in Cities” ) about a trend among major corporate research centers relocating from the suburbs to be near urban universities and forge relationships with external partners. Historically, many big companies innovated in silos; but today that is not feasible. For example, in the past decade, Midtown Atlanta’s Tech Square has attracted the corporate research centers of 12 Fortune 500 Companies, due in part to the area’s proximity to Georgia Tech. Another example is here in Chicago where UI Labs recently created a $320 million, public-private partnership aiming to boost our nation’s sluggish manufacturing economy through encouragement of digital innovation. UI Labs houses university researchers and teams of private sector engineers and software developers working to help integrate digital innovations into the U.S. manufacturing infrastructure.
Walk, Bike & Public Transit Friendly. As many younger urban workers do not own cars, they are looking to commute to work by a short walk, bike and/or public transit. The Chicago metro area has an extensive mass transit system of trains feeding the suburbs into Downtown Chicago, allowing companies to tap the widest possible labor pool; however, the reverse commute (Chicago residents commuting to the suburbs) is not as efficient and the suburb-to-suburb commute is mostly car dependent.
Reinvigorate corporate culture. For many mature companies, the move downtown reinvigorates the company’s culture. Anytime a company moves offices, it reenergizes the company and it’s more the case when moving from the suburbs to downtown.
“Juniorization”. Frankly, it also is an opportunity for the company to rid itself of older, more expensive workers and replace them with younger, less expensive people. As recently reported in the Wall Street Journal, (“Juniorization: When Young Workers Replace the Old”) this is a concept that first began in investment banking, where veterans where laid off for less experienced and cheaper talent. It has now spread to other industries.
Reduce Headcount. Along with bringing in younger, less expensive workers, many companies making the move are also reducing their overall headcount. Kraft Heinz, for example, in relocating from the north suburbs to Chicago’s East Loop, has downsized from 2,100 to 1,500 employees, which is partially driven by their merger. We also saw Hillshire Brands reduce their headcount from 1,000 in Downers Grove to 544 in Chicago, which is also related to some divestures. Crain’s Chicago Business had a great article about this trend “The Incredible Shrinking HQ“.

2. What’s happening in Chicago

Having tracked this urban movement over the past 9 years, suburban companies have leased 6.2 msf of office space in Chicago. That has included complete HQ relocations to establishing satellite offices in Chicago. As the total Chicago Downtown office market is 134.8 msf, the suburban migration represents 4.6% of the total inventory, so it has not been a major demand driver; but has garnered headlines and has been a major punch in the gut to the suburban office markets. The trend is supported and made more convenient by the extensive metro mass transit, which allows companies to reach virtually the entire metro area’s labor pool.

As reported by Crain’s in their article, “The Incredible Shrinking HQ”, regionally, these moves have not resulted in a net gain of new jobs for the area. Also, the amount of space leased in Chicago is less than their prior suburban location, which is in keeping with the increasing trend towards densification of office space, as well as outsourcing of non-core functions. For a summary of those companies that have moved to Chicago, see “Who’s Moving to Chicago“

For annual perspective of this migration since 2007 tracking which suburban submarket these tenants are leaving, see Graph Chicago Urban Migration. The greatest migration we’ve seen is from the North and Northwest suburban office markets. The table below summarizes the impact to each suburban submarket of those tenants moving (all or partial operations) to Chicago since 2007.

Suburban Submarket Leaving	Space Leased in Chicago	% of Suburban Submarket Inventory
North	2,167,643	11%
Northwest	2,205,727	10%
East-West	1,530,306	4%
O’Hare	256,656	2%

3. Future Trends: Urban & Suburban Office

We expect the urban migration trend to continue, however, the universe of major companies located in the suburbs is limited. Some of the challenges facing tenants, whether in Chicago or any other major city are:

Rising costs, particularly in Chicago with its significant financial issues and a credit rating of junk status due primarily to deferred pension fund obligations.
Rising Rents
Overtaxed public transit
Crime
Low quality public schools and pricey private schools, which will drive the majority of the younger workers to the suburbs when they have children as have prior generations.

Suburban office space will still remain relevant and in demand. From speaking recently with companies that have elected to stay in the suburbs, here’s what we are hearing:

“Moving Downtown was never on the table as our CEO believed he’d lose key people in doing so”
“Our suburban location gives us a competitive advantage in hiring talented mid-career people who live in the suburbs and are tired of commuting to Chicago.”
“Chicago is too costly”
“Convenience of O’Hare Airport”
“There is still an equal or greater migration to the suburbs as families grow and over concerns about high taxes in the city”
“We find that keeping a small footprint in the city along with a larger suburban presence helps to balance RE costs and find many people (who live in the city or suburbs) spending time in both facilities depending on work/life needs. The talent pool is becoming less geographical – not only city/suburban, but also national.”

Don Wenig
Blackacre Advisors LLC
info@blackacreadvisors.com
312-345-4778

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).