Are Downtowns Becoming Cool Again? A Landlord's Perspective

Americans are changing the way we think about the urban core…again.

Since 2008, downtown office vacancies nationwide have increased to 12.4% — but suburban office vacancies are at a huge 16.6%.

What’s going on? Well, there are a lot of theories, but the one that’s gaining the most traction is that the post-WWII migration toward the suburbs is finally reversing itself. The evidence of this trend is disparate and not really united in any one place, but data shows that Americans have driven fewer and fewer miles each year for the past decade. This would seem to indicate that we’re moving closer to where we work as “work commutes” make up the largest percentage of miles driven. Leading they way are companies moving to downtowns. Furthermore, we’re in the process of proving that big cities don’t have to be dangerous places to live, and as this realization trickles into public consciousness, it just makes sense to live closer to downtowns where the action is.

Still don’t buy into this trend? Ask any college graduate under 30 where they want to live. Most will respond they want to live in a more urban environment – and many want a location that won’t require them to own a car!

So What Does This Mean for a Landlords?
From a landlord’s perspective, this means three things:

• Rental properties near downtown areas will be able to command higher rents, increasing their values.
• On the flipside, suburban properties are probably going to become less valuable over the coming decade as it becomes ‘cool’ to live downtown again’. The further a property is from a downtown area, the more pronounced this will be.
• Finally, it means that one of the most important factors in purchasing new rental units is going to be their convenience to a downtown area.

It’s already a pretty well-known fact that a commercial property that has easy access to a local traffic corridor is going to be easier to lease. Now consider that historically, people follow businesses, but it takes them several years (sometimes a decade or slightly longer) to catch up. During that time, however, people are still working and often playing downtown, but living in the suburbs.

If you’re a property manager, there’s two reactions you should be having to this. The first, in the short-term, is to invest in properties near the corridors and promote them as “easy access to downtown. The second, longer-term, is to invest in territory in a downtown core, and plan to spend as much as you can upgrading. Downtown vacancies are most likely going to get snapped up, and as they fill up, rates (and property values) are going to start rising. It may take several years to get there, but if you’re determined to make a long-term living out of this whole ‘investing in real estate’ thing, it’s a solid move.

Note for Detroit Area Investors

Since the late 1980?s, Royal Oak and Birmingham have been among the area’s hottest cities. Why? Because they have downtowns (albeit relatively small ones) and are located off a major traffic corridor called Woodward Avenue. Another major factor in their continued popularity is the availability of residential units in, or close to, their downtowns allowing residents to walk to downtown attractions. This has led to the development of lofts and condos in the downtown areas of both cities. Ferndale is close behind these two cities.

Other popular small downtowns seeing development – Rochester, Plymouth, Farmington & Clarkston. They all have a strong residential component of their downtown development. Now contrast this with Mt Clemens, which has a fairly large downtown in comparison and also has the additional benefit of being the seat of the Macomb County government. Its downtown is stagnant though because the residential component’s been neglected. Could it be ripe for development? Other cities that could be ripe for downtown development: Auburn Hills, Berkley, Clawson, Franklin, Lake Orion, Oxford, St Clair Shores, Troy (notice all new buildings are being built close to Big Beaver?), & Wyandotte. Keep in mind the further out a city is from a major employment center the riskier it will be.

By the way – don’t forget about Detroit’s Woodward Corridor and the light rail going in!