Today’s Wall Street Journal features a story on the recovery-related trend of increased commercial leasing in downtown as opposed to suburban areas. Currently, national vacancy rates for downtown areas are lower than suburban by about 25%. Statistics also suggests that Downtown vacancy rates have recovered from pre-recession levels, while suburban rates remain at least 20% higher than they were 5 years ago during better economic conditions.
Why is this the case? The article looks at several suggestions, from differences in the types of businesses found in each area to changes in preferences among the growing, younger workforce. The article does not ignore (thankfully) the prevalence of government investment and incentives and their role (from infrastructure improvements and redevelopment initiatives, to employee and corporate incentives for businesses willing to “move in” downtown).
Even some forlorn cities are showing signs of revival. In Detroit, Health insurer Blue Cross Blue Shield of Michigan next spring will start moving thousands of suburban employees into the downtown.
Like many cities, Detroit offered an incentive package, including giving Blue Cross employees free annual passes to a public-transit system that connects its downtown buildings. Another motivation: to have more people in one place as the insurer adjusts to the health-care overhaul.
Statistics show that suburban office markets were hit harder by the recession than their downtown counterparts and are recovering more slowly. The national office vacancy rate in downtowns was 14.9% at the end of the third quarter, the same level as in early 2005—while the suburban vacancy rate hit 19%, 2.3 percentage points higher than in 2005, according to data firm Reis Inc.
In the first three quarters of this year, businesses in the suburbs vacated a net 16 million square feet of occupied office space—nearly 280 football fields—while downtowns have stabilized, losing just 119,000 square feet.
Suburbs have been clobbered harder by a recession that hit businesses that are often based there, including mortgage lenders and home builders. Downtowns, on the other hand, have benefited from being home to less hard-hit sectors of the economy, such as government, and companies that have recovered more quickly, such as big banks.
To be sure, most American office workers continue to work in the suburbs—home to nearly twice as much office space as in central business districts, Reis says. And many real-estate developers largely expect suburban office markets to recover when job growth strengthens.
But some scholars, urban advocates, and developers believe a secular shift is under way in the American workplace.
“Young people don’t want to be out on the fringe…and as people are beginning to figure that out, it’s beginning to get factored into office relocations,” said Christopher Leinberger, a real-estate developer and a visiting fellow at the Brookings Institution. “It’s a major structural trend that we in real estate are going to have to adjust to.”