Has the Renaissance of Downtowns Been Overhyped?
When governments or companies fire workers, they reduce their need for office space; no one wants to pay for space they’re not using. It's unsurprising then that the recession and the massive drop in employment that accompanied it brought significant office vacancies across the country.
The relative resiliency of many downtowns in face of these problems encouraged some in the national media to announce an unprecedented shift back into central business districts following decades of the suburbanization of employment. After losing a significant share of the market to suburban office parks, could downtowns finally be hitting their stride?
Individual company moves were seen by some urbanists as indicators of larger changes; somehow the recession had awakened us collectively to the fact that years of profligate expansion into the hinterlands had been ill-conceived. Decisions by the likes of United Airlines and several other major companies to relocate thousands of jobs from suburban locales into Chicago’s Loop over the past five years was heralded as “a trend long in the making” by the Chicago Tribune; UBS’s flirtation with leaving Stamford for downtown Manhattan played into a “narrative of urban renaissance and suburban decline,” explained The New York Times (UBS eventually decided to stay in Connecticut).
But the facts, at least on the national scale, don't necessarily support this supposed trend. “We haven’t seen evidence of a shift in terms of demand,” says Arthur Jones, senior managing economist at real estate service firm CB Richard Ellis.
A review of data from a sample of 27 metropolitan office markets in the second quarter of 2011 reflects this assertion: Vacancy rates in CBDs are higher than those in suburbs in about as many markets as those where suburban vacancy rates are higher. Thanks to the general glut of office space everywhere, there hasn't been much new construction anywhere, so vacancy rates may be the best indication of the relative health of different sectors of metropolitan areas.
And changes over the past two years don’t look great for downtowns, either. “If anything, there was a smaller drop off in suburban office space,” says Jones.
Of course national variations, which may be cyclical more than anything else, mask success stories in individual markets.
Detroit—perhaps the United States’ most troubled central city and one of the country’s most sprawling metropolitan areas—is seeing its downtown fill up at a record pace. Though dozens of skyscrapers sit empty in the heart of what was once one of the country’s biggest cities, recent announcements that thousands of workers would be moved from the suburbs into downtown by Blue Cross Blue Shield of Michigan, Compuware, and others suggests that the city may indeed be seeing a growing office market share for its CBD.
“I think [Detroit's trend] is undeniable,” says Frederick Liesveld, executive vice president at Grubb & Ellis. Liesveld, based in Southfield, focuses on the Detroit market and predicts that its downtown will have lower office vacancies than the suburbs within six months, despite decades of abandonment. Huge suburban office spaces of up to one million square feet are now available, and there's few signs that they'll fill up quickly.
But Liesveld doesn't credit these changes to a shift in conventional wisdom in the real estate market. Rather, he sees individual business leaders who have played important roles in setting a precedent for change. “They have committed themselves to locating in Detroit,” Liesveld says, “and I think that’s the catalyst.”
Years of work set the stage for what is happening in Detroit now. “Traceable momentum [for downtown] couldn’t really be tracked until recently,” says Liesveld. So perhaps Detroit is at the forefront of a process that could extend to other metropolitan areas—if local leaders devote themselves to the effort. Or maybe this is just another stage in the constantly changing real estate cycle.
Where both Jones and Liesveld agree is that a major portion of company moves over the last several years resulted from a sudden increase in availability. “Across the country,” says Jones, “rental rates have adjusted so much that you can really move up.” When companies do move from suburban office parks into CBDs, they're following simple economic logic: For the most part, it’s cheaper than it used to be to do business downtown.