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Corporations are leaving suburbs: Can anything reverse the trend?

The U.S. headquarters of McDonald's, on McDonald's Drive in Oak Brook, Illinois,
Lee Powell | The Washington Post | Getty Images
The U.S. headquarters of McDonald's, on McDonald's Drive in Oak Brook, Illinois,

Corporations' flight from the suburbs to cities can play out like a bad breakup: One party has moved on and found someone new, while the other puts on a brave face and pretends it doesn't matter. Each may even be seen hastily courting others to show their previous partner that they're okay. But there's no way to avoid it. A once-promising relationship has ended.

It's a situation many American suburbs find themselves in today. After decades of matching up with the country's largest corporations and providing the prime highway-adjacent real estate they needed for massive office parks, suburbs are being abandoned for office space in urban centers and the pursuit of something younger and more exciting: millennial workers.

"It's all about one thing: talent," says Tom Murphy, a senior resident fellow at the Urban Land Institute. "For the first time in history we're seeing jobs move to where people are, rather than vice versa. For companies, it's all about being where talent wants to be."

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These kind of breakups aren't new, but they appear to have accelerated along with the return to the cities and the clustering of business opportunities in major urban areas. It hurts when a company trades one city for another: Aetna, an insurance giant, announced last month it's leaving Hartford, Connecticut, literally known as the Insurance Capital of the World, for New York City. It's even more impactful for smaller suburbs with less diversified economies.

Take the case of McDonald's and Oak Brook, Illinois, which was home to the multinational powerhouse until it announced it was moving its headquarters to Chicago's West Loop, a former warehouse district turned flashy restaurant row in the midst of a Google-fueled development bonanza.

The Golden Arches arrived in Oak Brook in 1971, when its entire population was just 8,000 (today, McDonalds alone employs 3,000 workers in the western suburb). When it announced it was leaving last year, the Oak Brook village president heard the news from the media first. "McDonald's and the Village have had a strong partnership for decades," he said. Nostalgia is an understandable reaction.

Will the love for downtown office space last forever?

As more and more corporations chase talent downtown, including Motorola and GE, are they being savvy or simply fickle? Over the last half-century, employment has shifted from city to suburb and back again. According to Core Values: Why American Companies are Moving Downtown, a 2015 report by Smart Growth America, in 1996 less than 16 percent of jobs in metropolitan areas were located within three miles of the traditional city center, down from 63 percent in 1960. Despite the hype of urban living, will millennials eventually return to the suburbs when they start families, search for good schools, and track down affordable homes, with corporations to follow?

Some developers and planners believe that, while cities are and will continue to be a big draw, millennials won't ignore the suburbs: They'll simply demand more walkable, transit-friendly, city-like suburbs. John Burns Real Estate Consulting coined the term "surban" in reference to a new breed of dense, walkable developments replicating "the great American neighborhood" concept.

John Arenas, who owns Serendipity Labs, a company that runs coworking spaces and has seen a lot of growth in high-end suburbs, believes corporations, which typically move slower than developers and consumers, may be rushing in too fast.

"They'll see they're working against the tide very soon when millennials eventually head to the suburbs," he says. "We see a lot of what we call 'millennials in mourning.' They're married with their first child, and the last place they think about is the urban environment. A lot of people are soon going to be at the point where finding a good place for their kid to go to school is going to be a lot more important than the coolest restaurant to hang out. Unfortunately for some companies, they may be moving into the cities just before the tide goes the other way."

Corporations following the crowd

One of the most interesting aspects (and potentially troubling takeaways for suburban mayors) of the Core Values report is that all manner of companies are making the move downtown: tech giants, startups, Fortune 500 firms, small businesses. Of the nearly 500 companies included in the report, 245 had relocated from a suburban location. The shift has been fast, pitting suburbs—and even tech hubs—against other top-tier urban areas.

"You're seeing it across the board," says Murphy. "It's not just the high-tech guys with wild offices moving, but also the more traditional companies, like Caterpillar. There's a remarkable trend happening."

And everyone seems to have the same reasons. As reported in the Core Values report, Victor Hugo Rodriguez, a spokesperson for State Farm insurance, which recently opened a new $700 million office campus in the Phoenix area, said: "We are intentionally designing workplaces of the future, live/work/play environments that have an accessible orientation for employees and the neighboring community."

A spokesman for Rolls-Royce, which recently spent $600 million on its Indianapolis facility, said its old headquarters was a recruitment liability. The engine maker's new employees and engineers "aren't looking for suburbia. They're looking for the downtown living environment."

For the employees these companies are so eagerly courting, the lifestyle differences are stark. Core Values found that the average Walk Score of companies' previous suburban locations were 51 out of 100, while the new urban locations averaged 88. Transit scores took a similarly big leap, from 52 to 79.

How can suburbs compete?

If you can't beat them, says Murphy, join them. Suburban office campuses suffer because there's no "there there," he says. The real success comes from suburbs that can reconfigure themselves, which begins with more density and relevant retail.

The so-called "surban" development trend will see malls and shopping centers reconfigured and replaced with convenient, car-free shopping in revitalized, walkable "Main Street"-style commercial districts. That's why Plano, Texas, which has focused on more urban-lite development in recent years, convinced Toyota to move its North American headquarters, and similar developments in the fast-growing Sun Belt have also lured employers.

"There hasn't been an enclosed suburban mall built in 20 years, and 25 percent of the remaining malls will close in the next five years," says Murphy. "Retail is getting reconfigured by the marketplace. It's about taking advantage of these big, 100-acre spaces, going past the mall concept, and creating lifestyle places."

Since reinventing retail and creating a dense downtown can't be done overnight, it may seem like the deck is stacked; with jobs leaving and poverty rates increasing, suburbs are increasingly facing the issue of job flight that in the past challenged cities.

But there are solutions. In a report called Creative Financing for Smaller Communities, one case study suggests how suburbs can buck the trends. Orland Park, a village of roughly 60,000 located outside Chicago, about 30 minutes south of Oak Brook, invested $35 million in new infrastructure and took the risky step of providing a loan to a development company looking to finance new mixed-use developments.

By supporting a multiyear development plan centered around a commuter rail stop, local leaders pushed a more traditional, village-scale layout with small, compact blocks of mixed-use development in what's called the Main Street triangle.

Since 2010, the village has seen more than $200 million worth of transit-oriented development transform its downtown, adding new retail and restaurants and eventually providing enough of a magnet to land even bigger projects. Orland Park successfully lobbied to become the home of a new University of Chicago medical center, the loan has been paid off, and one of the apartment developments within the new downtown core was 97 percent occupied within a year of opening.

Workplace trends offer an opportunity

Suburbs also need to respond and react to bigger changes in the workforce. According to Arenas, the biggest shift in workspaces is consumerization. As the traditional contract between workers and employers loosens with the rise of temp jobs, telecommuting, the gig economy, and shifting technology, workers in high demand are becoming consumers of the workplace.

They have more of a say in where and when they want to work, and as corporate functions diversify across numerous offices, it becomes easier to accommodate a more spread-out corporate structure. Asking workers to head to old suburban office campuses isn't attractive anymore (a 2015 report by real estate advisory firm Newmark Knight Frank found that 14 to 22 percent of the suburban office inventory is "in some stage of obsolescence"). It's not that people don't want to be in the 'burbs, they just don't want to be in inflexible space.

"We look at the longer story," says Arenas. "We believe it's about offering individuals and companies choice, and preserving that as they evolve."

Arenas believes the future is offering more flexibility and closer access to lifestyle amenities. Serendipity's plan is to set up suburban coworking locations that function as hubs for larger corporate workforces. For instance, New York-based companies can send their suburbia-based employees to work in hubs in satellite offices in Westchester, Bergen, and Deerfield counties (in New York, New Jersey, and Connecticut, respectively) to connect without the commute.

These larger trends—the more flexible, responsive, and remote workplace, as well as the desire for density and walkability—will force suburbs to respond and build more sensibly, sustainably, and city-like, and reinvent office parks, as many developers and cities are currently attempting. When and if the wave of downtown millennials turns around, will companies ever start to trickle back?

Demographics suggest we'll find out in the next decade: In 2015, millennials purchased 35 percent of homes, and their prime homebuying years are coming soon; the generation's median age is 25, while the average age of a first-time homebuyer is 31. Recent reports showing strong growth in the far-out exurbs of major urban areas is, in part, attributed to millennials looking for affordable houses where they can find them.

"The big question mark is when this generation gets to marrying and kids, where do they go?" says Murphy. "Do they stay in walkable Brooklyn, or move? That's a big unknown, and there's a debate raging among urbanists about the future."

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