You can always go…downtown–but does it always make sense?

The urban migration paradigm

From 2010 to 2015, approximately 2.5 million SF was absorbed in the CBD, reflecting 43 relocations from the suburbs. Some of the significant moves include Sara Lee, Motorola Mobility, GoGo, Kraft/Heinz, and ConAgra. These are undoubtedly headline suburban real estate relocations; however, during the same period, the suburbs had more than 16 times that transaction volume by square footage, with over 40 million SF completed, and 17 consecutive quarters of positive net absorption.

 

Suburban Real Estate

Conventional wisdom maintains that the reason for the urban migration is talent attraction, or access to high-skilled labor and a younger, more tech-oriented worker that thrives in an urban environment. True, companies are attracted to young, urban talent, but there is a larger phenomenon of urban migration at play, one that extends from coast to coast. Since the 1970s, many cities have gone through a revitalization, with government funds and private development pouring in to build up infrastructure, housing, and public health and safety programs. For many years leading up to this renewal, the cities were dramatically less safe or healthy, and corporations fled to the suburbs. Fast forward 30 years, and you’ll see many urban dwellers benefiting from access to high-wage jobs, educational opportunities, cultural amenities, walkability and mass transit options. With those changes, companies made a swing back to the cities. Chicago is no exception to this paradigm shift; that is why it is common to see so many young professionals, or Millennials, being attracted to the urban core. A breakdown by submarket shows the West Loop gained 46% of the total space taken by tenants who relocated from the suburbs, and River North absorbed 31%. The results are unsurprising given the access to public transportation and amenity-rich buildings these submarkets offer. Meanwhile, in terms of transactions by volume SF, 45% vacated the North Suburban submarket — in search of a more centralized location closer to younger “tech talent” — with River North absorbing a large portion of the square footage.

Suburban Chicago Real Estate Chicago Real Estate

 

Demographics in Perspective

 

It is important to define “Millennials” and how this age group differs from other generations. According to the Urban Land Institute (ULI), Millennials (also known as Generation Y) are ages 18-36, the most culturally diverse generation and the most likely to live in cities. They are also the most likely to expect to move int he next five years. Generations Xers, ages 37-49, are predominately owners of single-family homes and the least likely to desire urban amenities. Many expect to move to larger quarters within five years. Baby Boomers, likely the Millennials’ parent generation, are ages 50-68 and the most likely to live in the suburbs. Unlike Generation X, boomers are more likely to move to a smaller home, and many are even moving to the city after they retire. Millennials are also more inclined to have large amounts of student loan debt. The Institute for College Access and Success estimates that the average U.S. student debt was $28,950 in 2014, rising 56% from 2004-2014. This increase is double the rate of inflation (25%) over the same 10-year period. In the state of Illinois, the change in average debt was much greater, increasing by 85% during that time frame to $29,984. The growing debt issue has undoubtedly influenced Millennial behavior such as delaying purchasing homes and starting families. According to the ULI survey, 37% of Millennials own, versus 68% and 78% for Generation X and Baby Boomers, respectively.

Generation Comparison

Considering the challenges Millennials face with student debt and lack of access to homeownership, many young people are sticking around in the city. In fact, Nielsen data forecast that the median age will be 36 years in Chicago in 2020, up from 32 years in 2000. The change in age in the city is 14.9% over the 20-year period, compared to 12.6% in the suburbs, suggesting that people will stay in the city longer and delay moving out to the suburbs. Access to talent is clearly one of the main concerns of any company looking to grow and remain competitive, so it is important to consider the labor pool in Chicago. it is evident that the West Loop labor pool is much more robust than the average suburban labor pool, 5,051,218 versus 2,582,875 overall. The size of the labor pool is more than double in the 18-34 age group, the likely target for entry- and mid-level positions.

chicago workforce

The West Loop offers a large office building stock, with 44.2 million SF of rentable building area comprising 19% of the overall metro Chicago market. The submarket also offers proximity to major transportation hubs, including Ogilvie Transportation Center and Union Station. Therefore, it makes sense that this would be a target area for business activity. It is true that the West Loop has a much higher draw for talent; however, suburban labor pools should not be disregarded. To put it into perspective, the suburban labor pools are on par with numerous mid-sized metro areas– such as Denver, St. Louis, Baltimore, Charlotte, and Pittsburgh-all of which have populations (MSA) ranging from 2.4-2.8 million, according to the US Census Bureau. When looking at the overall workforce in Chicago, though, most people work outside the city center. The suburban workforce is nearly four times that of the city, with a total of 2,939,714, according to the US Census Bureau. Also, it is clear that significantly more people live in the suburbs than in the urban core. According to Nielsen data, the total suburban population ages 25-65 is 3,586,985, while the city contains less than half that, housing just 1,535,995. DuPage workforce Furthermore, some business sectors in the suburbs have a larger footprint in the office market, including pharmaceutical, healthcare and telecommunications. The industry breakdown in figure 7 shows the popular industries among occupiers in the suburbs versus the CBD. It is evident that pharmaceutical and healthcare companies as well as telecom tenants have a strong presence in the suburbs, something not seen downtown given the current office stock, which caters to more legal, financial and technology tenants with less-specific building requirements. Thus, companies associated with the pharmaceutical, healthcare and telecom industry sectors would be apt to choose the suburbs over the CBD. occupier industry breakdowns

Cost Component vs. Office Requirement

When looking at wage rates, it is evident that people earn more in the CBD. For example, IT operators with seven years’ experience earn 3.5% more downtown than they would in Deerfield; however, the workforce is generally younger and less experienced in the CBD. If work experience is a high priority for a company, then moving downtown may not be the best option. The cost of real estate is much more expensive in the CBD than in the suburban real estate market – 68% higher for the average asking gross rent. Should space requirements remain the same or grow, staying in the suburbs would be a viable option to save money on real estate costs. suburban real estate costs vs chicago real estate costsWhen occupiers choose the CBD over the suburbs, they are paying a premium for a higher-quality office product. With that choice comes access to younger talent; denser space options; a dynamic business environment; proximity to downtown amenities, clients, and competitors; public transit options; LEED-certified buildings; and the potential to alter the corporate culture or branding.  

CBD Has a Strong Pull, But Suburbs Have A Lot to Offer

Downtown has much to offer companies targeting a younger workforce, or interested in leasing space in trophy buildings, but the suburban real estate market is still a viable option for companies that need to access a more experienced labor pool while managing real estate costs. Other reasons a company would benefit from occupying space in the suburbs include:

  • The suburban real estate market caters to companies having strong programs related to engineering, research and development, pharmaceutical/healthcare, and operations.
  • The corporate environment is strong, with 21 Fortune 500 corporate headquarters.
  • Collar counties offer stable tax rates.
  • Young families continue to migrate to the suburbs, attracted to affordable housing options and strong school systems.
  • The suburbs offer a highly educated workforce. In DuPage County (the second most populous county in Illinois), 46.3% have a bachelor’s degree or higher, according to the US Census Bureau 2013 American Community Survey.
  • Institutional investment is healthy, with investors taking interest in the suburban market and noticing the positive office market fundamentals.
  • There are nearly 40,000 businesses in DuPage County alone, with a labor force of 515,781.

What do companies care about?

CBRE Research conducted a survey of 229 corporate real estate executives in the Americas from a broad range of industry sectors, notably banking and finance, and tech and telecom, which account for 23% and 22% of survey respondents, respectively. The survey found strong consistency among executive mandates in three focus areas: enabling talent, managing costs and expanding influence. Of the survey respondents, 57% see employee attraction and retention driving workplace strategy, while 44% see cost escalation as a leading challenge. Throughout the survey, executives repeatedly noted a need to address ‘skilled labor shortages’, ‘cost escalation’ and ‘economic uncertainty’. Furthermore, demographic shifts have introduced a workforce that is more generationally, culturally and ethnically diverse than ever before. As a result occupiers often make people-centric decisions when selecting markets. While the issues above are common for most companies located in the suburbs, it is important to acknowledge that needs vary, and companies should weigh their options when deciding to stay in the suburbs or relocate. For example, if attracting younger tech talent is in the best interest of the company, then CBD might be the right choice, but if the desired employees need to be more experienced and less costly, then it may be in the best interest of the firm to stay in the suburbs. Ultimately, the choice depends on the needs of the company with regard to cost, labor and office requirements. The following are common deciding factors for and against a suburban to CBD relocation: suburban real estate White Paper Published by CBRE | Matthew Walaszek, Senior Research Analyst  Click here to download a PDF of this white paper