Suburban Migration to CBD Coming to an End
Chicago’s Central Business District (CBD) has long attracted companies looking to accommodate a young, constantly evolving talent pool. A prime location in the CBD means easy access to the hippest restaurants and the best residential options which, in turn, means easy access for a young, talented workforce. For years, the general trend has been migration into the City. Across all industries, major tenants have been making the move from sprawling suburban campuses to modern City location.
From 2014 to 2016, major suburban tenants like McDonald’s, Motorola and ConAgra announced moves from their suburban campuses to downtown space, leaving massive vacancies in their wakes. Like the City’s tech companies vying for modern space in locations, these migrating companies followed their young workforce to more desirable locations. The last several years have proven that a good location can boost a company’s footing with the young workers they seek.
Migrating companies have had to substantially minimize their footprints in order to get the most out of their new, higher-priced spaces. This means collaborative work spaces, fewer private offices and an increasingly modern, more efficient environment. Smaller footprints have been mirrored in some of the Northern and Western suburban submarkets as well, where major tenants like Allstate and AMITA Health have consolidated their multiple outposts into single buildings and campuses, moving their widespread workforce into closer proximity and opening even more space in the suburban submarkets.
In response to the growing vacancy rates, suburban development has all but halted. Although landlords do not have to worry about competition from new space, they must keep pace with improvements to the existing spaces. Landlords in the suburbs are in the midst of an “amenities arms race,” upgrading their amenities and accommodating tenants in an attempt to fill up their vacant spaces. While suburban users have traditionally opted for Class A buildings, well-located Class B and C buildings will be able to compete for major tenants in a way they never were before. These lower-class building owners are in the unprecedented position where tenants are coming to them to find their less expensive, ideal space.
This push for tenants has resulted in upgraded infrastructures base buildings and, ultimately, the urbanization of suburban space. In an attempt to attract users away from the City, landlords in the suburbs have been scrambling to meet the demands of the modern workforce. Tenants want city-like accommodations such as open work space and communal atriums combined with conveniences like parking garages and highway access, and suburban landlords are eager to provide them. With a combination of these modern upgrades and tenant concessions, the outlook for the suburban submarkets is positive going into 2018.
Despite several new deliveries and an increased vacancy in the CBD, rental rates have increased steadily throughout 2017 and will continue to do so into 2018. The lure of a desirable location and the promise of a talented workforce has managed to continue drawing new users into the higher-priced city spaces. In comparison, the suburban submarkets have experienced steadily decreasing rental rates in response to the growing vacancy rates. At the end of Q3 2017, the CBD’s average rental rate was over $12.00/RSF higher than the suburban average.
If suburban landlords continue to invest in their amenities and as the gap in rental rates continues to grow, it is likely that the flood of migration from suburbs to the City will slow in the coming year. The combination of upgraded space and affordable rental rates will draw new users and entice current tenants to remain. If the landlords can accomplish this, it will mean stabilized, and eventually decreased, vacancy rates for the hardest hit submarkets. With a wealth of modern space, upgraded amenities, and competitive rental rates, the suburban markets are well-positioned to compete with the CBD for major tenants.