As members of the millennial generation continue to choose downtown living, the companies that follow them may be the bigger story of the economic recovery. But this flight to urban cores is coming at the expense of suburban class-A office parks.
Suburban Chicago’s 155-million-sq.-ft. office market, which now has approximately a 23 percent vacancy rate, shows a continued struggle for relevancy. The Windy City’s suburbs experienced 1.2 million sq. ft. of negative space absorption in the first quarter, with demand stunted in part because large firms were either packing up and moving downtown or consolidating multiple uses in single locations. The moves included Motorola Mobility’s removal from 1 million sq. ft. in Libertyville, Ill. to the Merchandise Mart in the Chicago Central Business District (CBD), and Capital One leaving 200,000 sq. ft. in Mettawa to move to the former United Airlines space at 77 West Wacker.
Andy Davidson, executive vice president and managing director of corporate services with Chicago-based MB Real Estate, says in a recent study of the suburban market that the exodus will continue. Walgreens, a suburban stalwart, is considering a move from its Deerfield, Ill. campus to the former Old Main Post Office building downtown, for example. Other companies that have left the suburbs include Gogo Inc. and Hillshire Brands, which together vacated more than 460,000 sq. ft. in O’Hare and Downers Grove markets, respectively.
Across the country, even in major markets such as San Francisco, workers are moving away from the suburbs to experience the 24/7 lifestyle. “The move downtown by office giants is mostly about access to labor,” Davidson says. “With 11,000 baby boomers retiring every day, the firms are trying to appeal to the younger generation.”
Technology workers have led new office employment for several years since the recession, and it’s these workers who are hard to find in the suburbs, he notes. Companies are either paying a premium for relocation to the pricier CBDs, or are opening up satellite offices there. AT&T moved about 500 employees to downtown Chicago during its suburban consolidation efforts, and Discover Financial Services has leased 26,000 sq. ft. in River North. “In many cases it’s the IT and web services groups being moved to the city,” Davidson says.
The result is an emptiness in the suburbs, with 41 properties (27 of them considered class-A) that now have more than 100,000 sq. ft. available, according to a first quarter report from Colliers International. Vast headquarters complexes sit vacant, and there’s been no new construction in the suburbs since 2010, with very little planned for the future. Today, the only recorded occupancy growth has been in the health care and education sectors, Davidson says.
“Truly class-A properties, in this flight to the urban center, will probably fare okay,” he says. “When Hillshire left 3500 Lacey in Downers Grove, they were able to backfill that space. But the class-B and class-C product is just going to get really hurt, there’s just not enough demand. And it’s not like in the downtown, where during the recession the non-class-A properties got converted to hotels or residential… In the suburbs, a lot of these properties will face economic obsolescence.”
This article was republished with permission from National Real Estate Investor.