Wednesday, December 15, 2010

Are companies and firms moving downtown?

Yes, according to the Wall Street Journal. Using data from REIS, they point out that the vacancy rate for downtowns nationally is 14.9%, roughly the same rate as in 2005. Meanwhile the current vacancy rate of 19% is 2.3% higher than its 2005 counterpart. Similarly, since the beginning of the year, suburbs have lost 16 million square feet of space, compared to 119,000 square feet for downtowns. They also cited some real world examples in Detroit and Houston of companies relocating from their suburbs to the downtown area.

So what does it mean? Is it just a consequence of the current economic climate? Is it a trend of the younger generation wanting a more urban lifestyle? Is it a sign of downtowns reemergence as the center of the region? Is it that the firms who are downtown happen to be better off than suburban companies? Is it just a coincidence?

In my opinion, it may be some of it all. Obviously, when cities reinvest in the cores, there are bound to be upsides to it, though to be certain some expenditures have greater benefits to the public than others and not every investment will see an improvement in the payoff. Investing in transit will likely see a better return than convention center hotels. But overall, this has had some return in making the downtown area more appealing.

And certainly firms that office downtown are more recession proof. It is the clustering effect. If I am a law firm, I want to be near the courts. Law firms certainly have need for support services, which want to be near their clients. Since all levels of government and not just the courts, happen to be a major if not the biggest employer downtown, that helps keep every downtown stable.

But I think the biggest factor happens to be the younger generation, those that seek a more vibrant, car-less, healthier, environmentally-friendlier, culturally-filled lifestyle. They are what is known as the creative class. These folks are generally more educated and are vacating the suburbs for urban areas at a much greater rate than the rest of the population.

One thing that wasn't made clear is what is the definition of downtown? To use Dallas as an example, everything within the freeway loop is considered downtown. But the actual dense, urban area, primarily Uptown, extends much further than that. Uptown has had a low office vacancy rate. While it is not as urban as the stereotypical downtown, it is far more so than the standard suburb. I'm sure this example plays out all over the country. When that happens, it turns more into a city vs. suburb contest, rather than downtown vs. suburb.

Will this trend line continue? I doubt it. While I do see the downtown portion to continue, I just have a hard time believing the suburban office market will be continuing a downward trend. At worst it stabilizes. But, the likelihood is that American cities will start to achieve some balance between suburban living and urban. That in and of itself may be the best news of all.

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