Posts Tagged ‘relocation’

Large Firms Driving the Downtown Boom

Wednesday, August 1st, 2012

Here’s a little news to buck up the real estate mavens weathered by the daily diet of recessionary news: Google has signed the largest lease in downtown Chicago in 7 years.

It is a familiar story – a marquee firm relocating downtown because of the hip, cosmopolitan appeal and amenities of a CBD — but it does contradict the usual pattern of a recession. Nationally we’re seeing large firms (more than 500 employees) moving downtown to compete for young workers with the effect that the CBD is doing way better than the burbs. According to National RE Investor (NREI) Magazine, since the advent of the labor market recovery in the first quarter of 2010, large companies have created 1.06 million jobs while small companies have created 823,000 jobs. Talk to an economist or your cycle-tested real estate broker and they will tell you that it’s not how things usually work.

In every recession we’ve tracked, the small to medium-sized businesses (SMBs) have led hiring during the first stages of a recovery only to be surpassed by large firms ramping up during the latter stages of a comeback.  According to NREI, during the economic recovery in 1992 and 1993, hiring by small companies outpaced hiring by large companies—roughly 1.95 million jobs versus 1.52 million jobs. Over the next seven years before the economy entered another recession, the trends reversed. From 1994 through 2000, large firms created 11.23 million jobs while small firms created 7.36 million jobs.

The same thing happened in the economic recovery of the early 2000s: During 2003 and 2004 as the labor market began to recover, hiring by small firms of 1.44 million jobs outpaced hiring by large firms of 592,000 jobs. During this period suburban vacancy fell by 35 basis points while CBD vacancy rose by 130 basis points. But then it reversed. Once again, large companies generated more jobs than small companies —  3.09 million jobs versus 1.89 million jobs.

So, why is it different this time? The answer is credit. Small firms can’t tap the capital markets the way they used to because banks are still cautious. As a result, they need to keep their real estate costs low which means remaining in suburban space. Concurrently, large firms have gone through a huge cost-cutting period which has warranted the restacking, redesign and relocation of their workspaces to utilize space more productively with fewer but more highly skilled workers. And invariably, it means being downtown. Looking at the 10 largest leases of the last 12 years, we see the types of firms that rely on younger, highly educated workers who want to be downtown  — law firms, large financial consulting firms and tech giants.