Why Smart Money is Investing in “Cities of Aspiration”

[Account Closed]

Several trends are occurring as a result of the economic restructuring and impact of technology on virtually every type of business. One of the major trends is that increasingly middle class Americans are finding it difficult being able to afford living in “Superstar Cities” like San Francisco, New York City, Chicago, and Boston and are moving to markets that provide a better balance of low-cost housing and quality of life. These "Cities of Aspiration" aspire to be like "Superstar Cities" and included among them are Charlotte, San Antonio, Dallas, Austin, Phoenix, and Atlanta.

In addition, in order to attract businesses and new jobs, these cities are also providing a low-cost of doing business, pro-growth tax policy, and therefore, they are enjoying strong population and job growth. The population growth that these cities are experiencing provide added income tax base that enables the cities to further enhance their infrastructure and attract additional capital and population... These infrastructure improvements like new highways, new rail projects, etc. are helping to attract new companies and jobs to their city. Thus, many of these markets are creating a virtuous cycles of job, population, and wealth attraction.

As a real estate investor in several markets countrywide, I am experiencing these shifts first hand. Middle class New Yorkers moving to Charlotte and other cities in NC and SC to afford a decent sized home for their family. San Franciscans moving to Austin for new jobs and the unique culture ("Keep Austin Weird" is the city slogan). Folks from Los Angeles moving to Oklahoma City for a lower cost of living and better life for their family. Companies are moving to locations that offer a low cost of doing business and their workers are following them, resulting in enormous population shifts.

Based on these trends, the high-speed and national rail system currently being developed, and the fact that the worker of the future will be much more mobile, America in 2050 will look very different than it is today.

In a recent article in the Smithsonian, Joel Kotkin highlights the following shifts:

Increased Population. The population will grow by 100 million to 440 million by 2050.

More Diverse. Whites will no longer be in the majority. Immigrants will play a leading role in our economy.

Rise of “Superstar Cities”. “Superstar Cities” like San Francisco, Boston, Manhattan and western Los Angeles—places adapted to business and recreation for the elite and those who work for them.

Growth of “Cities of Aspiration”. The middle class will relocate to “Cities of Aspiration” such as Phoenix, Houston, Dallas, Atlanta and Charlotte, cities that are more spread out.

Growing Suburbia. Suburbia will continue to be a mainstay of American life. One in four will work from home full or part time. Internet, smart phones, video conferencing and other communication technologies will allow more people to work from home.

Growth of “Flyover Country”. Migration of technology companies, business services and manufacturing firms to the heartland is likely to accelerate.

Completion of Nationwide High-Speed Rail System. Will increase links between intercity, regional, and local rail networks and enhance mobility options for 440 million Americans.

[Brie Schmidt]

We are seeing the opposite in Chicago.  Each dreadful trip to the burbs to see my in-laws I see more and more vacant office parks.  This was a recent article about the migration back to the cty

The suburban office market already lost its mojo. Now it’s losing its Moto.

Motorola Mobility, via its purchase by Google Inc., is trading in its digs in Libertyville for prime space in Chicago’s Merchandise Mart, becoming the latest jobs installation from the suburbs to make the transfer downtown.

It’s another example of how the isolated, splendidly landscaped corporate base in the suburbs has fallen out of favor. Motorola Mobility joins many other companies moving some or all of their work forces from outlying areas to what used to be called, with negative implications, the “inner city.”

BP Amoco, United Airlines, and that part of the old Sara Lee that won’t be based overseas have made the change or are planning it. Willis Group Holdings consolidated offices around the Chicago area into Sears Tower and bought the naming rights.

Even the other half of the reconstituted Motorola, now called Motorola Solutions, is sending some workers from Schaumburg over to Michigan Avenue with fanfare that includes putting a Motorola sign on top of a Daniel Burnham building.

What does this mean for the office parks left behind? In the immediate term, it means emptiness and distressed valuations. Beyond that, it means developers and suburban officials need to put on their thinking caps.

Office space in the suburbs has been a hard sell since the financial crisis struck in 2007 and entwined with the collapse of the housing market. As of this year’s second quarter, the marketwide vacancy rate in the Chicago suburbs was 23 percent, a rate that’s close to a post-crisis high, according to a report by MB Real Estate.

The downsizing AT&T is a drain on the suburbs. It has for months listed its 1.5-million-square-foot facility in Hoffman Estates for sublease.

MB noted that other former single-user buildings are on the market. Available for sale or lease is a large former Kraft building in Glenview, a vacant Allstate campus in South Barrington and the former United Airlines home in Elk Grove Township, MB said.

They’ll be joined on the market now by Motorola Mobility’s lush Libertyville location.

I can think of one or two of these properties that might make a good park and recreation center. The United property even has some desired facilities already built in — a swimming pool and four tennis courts.

But these compounds by and large must look to the private market for a new reason to exist.

Daniel Miranda, president of HSA Commercial Real Estate, said possibilities include turning some campuses into retail centers, perhaps outlet malls, or converting them for medical or educational uses. Some suburbs, Miranda said, may wish to convert the campuses into a carefully planned “mini-town.”

Some buildings could be renovated to accommodate multiple tenants.

Miranda said that about the only type of company that remains committed to the suburban campus environment are pharmaceutical firms such as Abbott Laboratories or Astellas, which opened a new U.S. headquarters in Glenview. “It’s a business with a lot of intellectual property involved and they don’t want to share it,” he said.

Many analysts have said a desire to recruit younger, tech-savvy workers drives the job shift to downtown. Tony Smaniotto, senior managing director at Studley Inc., said cost control is another factor.

Downtown space is associated with higher rent and taxes. But Smaniotto said companies can realize savings by putting people in space that’s more efficient than a suburban campus, where grounds must be landscaped and atriums heated.

“When companies are under financial pressure, labor and real estate are two expenses to throttle down right away,” Smaniotto said. “The corporate real estate needs to be much more nimble and flexible.”

What we have here is a full-bore real estate trend, but nothing like it lasts forever. Some of the companies marching downtown marched out of it decades ago, when CEOs were more concerned about their own commutes than those of their employees. Not everyone wants to work near bars and theaters, so the market’s pendulum might reverse some day.

Art Burrows, senior vice president at NAI Hiffman, said the suburbs will come back when there’s a clear price advantage and housing improves. Already, he said, taxes that office tenants pay are helping collar-county buildings at the expense of those in Cook County, where commercial property is assessed at a higher rate.

“A tenant in Oak Brook [in DuPage County] might have to pay $1 a square foot in taxes. In Schaumburg [Cook County], that becomes $5 a square foot,” Burrows said.

But for now, he said, suburban buildings that are poorly located or have few amenities will be in weak positions.

As of now, just about every economic and social trend, from high gas prices to corporate priorities for a diverse workplace, works in favor of downtown Chicago.

Motorola Mobility is bringing 3,000 people, mostly young, into the Merchandise Mart. But will a suburban job look better to those folks when they start raising families?

David Roeder reports on real estate at 6:22 p.m. Thursdays on Newsradio 780 and 105.9 FM WBBM. The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday.