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Urban vs. Suburban: Which Location Will Allow Your Company to Grow?

Each has its appeal, but the answer is unique to all sizes and all types of high-tech firms.

Q4 2014
It’s not difficult to understand why technology companies capture our attention. They offer innovative work environments, high-paying jobs, and a small degree of celebrity that comes with developing the world’s next big things.

The focus of that innovation and mystique has always been on California’s Silicon Valley, a suburban-style community with urban values. Millennials (those born after the early 1980s) and baby-boomers (those born between 1946 and 1964) work hand-in-hand for our technological future. It is a true melting pot of culture where families can settle down or baby-boomers can enjoy all of the luxuries of upscale living.

There is no other location in the world like Silicon Valley. Once tech companies start looking beyond the familiar confines of northern California, real estate portfolio and location questions become key in determining a firm’s growth potential. Where is the next generation of talent, and how can my company create a workplace strategy that will attract millennials and yet be comfortable for baby-boomers? Will it make more sense for my company to be in an urban or suburban environment? What sort of space do we need for future growth?

The answers to these questions are different for every firm. The key to urban vs. suburban or balancing millennial interests and boomer practicality is deciding which location and workplace strategy will accommodate growth. In 2012, Motorola Mobility — a subsidiary of Google at the time — announced that it would be moving its headquarters from Libertyville, Illinois, to Chicago for employee attraction and retention. Employment applications increased by 28 percent following the announcement. Unsurprisingly, when Lenovo purchased Motorola Mobility in January, it decided to keep and expand its new Chicago location. Urban strategy worked for Motorola, but there are examples on both sides of the fence. It is important for tech firms to look at all the variables when making a strategic decision on workplace and location strategy.
Baby-boomers tend to occupy top positions within most tech firms and will continue to do so for the next five to 10 years. In fact, across all industries, 36 percent of CEOs are over 55.
Appealing to Millennials
Approximately 25 percent of the overall workforce is under 30 years old, and this is projected to rise to 50 percent by 2020. This millennial prominence is undoubtedly even greater among tech firms. While the Mark Zuckerbergs of the industry capture our attention, there are plenty of baby-boomers in the mix, too. They tend to occupy top positions within most tech firms and will continue to do so for the next five to 10 years. In fact, across all industries, 36 percent of CEOs are over 55.

Generation X (those born between 1965 and 1981), on the other hand, will be around longer. Many over-30s remember and often prefer the old days when workers had more personal space, perhaps even a private office. In addition to personal preferences, it is not uncommon for aging workers to have vision, hearing, or other physical limitations that must be addressed in office ergonomics. While millennials may dictate the standard for tech workplace design soon, the gap between workers’ ages is currently at a historic high, and facilities need maximum flexibility to include something for everyone.

Community Is More Important Than Urban or Suburban
Many tech pundits say that to recruit and retain the most desired workers, firms have to operate in the urban epicenter of edgy cities such as San Francisco, New York, Seattle, or Boston. Well…maybe. There is a tradeoff between price and location. These office spaces are among the priciest in the United States, and it’s not a given that everyone wants to work downtown. Millennials will average 30 years of age by 2020, and in a recent survey, they preferred the suburbs by 2 to 1 as a long-term place to live.

In a pattern seen in previous generations, many young professionals enjoy the rush of city life in their 20s, but opt for suburban attractions such as affordable housing and good schools as they age and start families. Like their employers, they are also being priced out of the downtown market with exorbitant rents for tiny living quarters.
As established tech hubs become saturated with competition, more and more tech companies are expanding into new markets simply to capture new talent.
More important than city or suburb, however, is a sense of community, where tech workers can find an identity, rich culture, dining, shopping, and entertainment prospects — and thousands of highly educated young professionals just like them. Suburban cities can convey a sense of cool like Palo Alto; Cambridge as an alternative to downtown Boston; or Boulder to Denver.

In their pursuit of growth, many tech-industry leaders such as Google, Facebook, and Amazon cover all employee preferences by dividing their flagship facilities into urban core and desirable suburban locations. As established tech hubs become saturated with competition, more and more tech companies are expanding into new markets simply to capture new talent.

The Cost and Benefit of Suburban Living
Urban markets, like San Francisco and New York, are attracting droves of tech innovators that would not consider relocating to a neighboring suburb, fearing they would lose their edge and potentially their best and brightest employees. Is that concern legitimate? Not in all cases. As economic recovery and expansion spreads across the U.S., high-tech companies in growth mode are exploring new ways to innovate and compete in a market that’s become more discerning in the services and products it chooses to consume. Understanding how a company’s location plays a role in its expansion has become paramount to its success and ability to maintain its market share. But the question of whether one should locate in an urban location over a suburban one isn’t simple.

Tech companies locating outside an urban core must compensate for the city’s convenience of having all of the personal necessities workers need close at hand. Professionals who are expected to work long hours want to spend minimal time running errands. Exemplified by Google’s corporate headquarters in Mountain View, California, many suburban tech campuses have a wide variety of on-site services including elaborate cafeterias, exercise facilities, laundry and dry cleaning, hairdressers, gas and auto servicing centers, and even physicians. The farther a facility is from a central business district, the more the company will have to spend to develop these facilities. But this cost is often a pittance compared to the cost savings of suburban real estate over a Class A building in downtown.
Understanding how a company’s location plays a role in its expansion has become paramount to its success and ability to maintain its market share. But the question of whether one should locate in an urban location over a suburban one isn’t simple.
Nevertheless, downtown Palo Alto has experienced such high demand in recent years that the office market is just 3.6 percent vacant with an average asking rate over $86 per square foot, beating New York City’s Plaza District at $85 per square foot. It also has a very high cost of living. Beyond the Valley though, some suburban markets like Dallas and Austin are experiencing economic recovery and expansion far ahead of others owing to their unique attributes and amenities. The appeal of opening an additional location or starting a new business altogether is obvious.

Dallas has long been an attractive city for both residents and businesses, claiming no personal income or business taxes, while continually adding jobs and providing a low cost of living. Additionally, its sheer size allows it to maintain many of the lifestyle amenities important to urban dwellers. Austin, Texas, offers access to talent through the University of Texas, walkable amenities both downtown and in South Austin, and a highly favorable business environment for start-ups. Average rental rates for apartments are 38 percent lower than New York City and 66 percent lower than San Francisco.

Many recession-ravaged suburbs are still recovering from lost industries and company shutdowns, which have left a legacy of unemployment and economic despair, but in many ways these now offer highly attractive environments for growth and favorable real estate conditions. Detroit has started welcoming companies focused on automotive technologies, while Phoenix has become an affordable option for companies to capitalize on lower wages, while employees enjoy a lower cost of living.

Is There a Right Decision?
The question of whether or not a company should locate in a suburban or an urban center depends entirely on the needs of the company. Google, which consumes nearly the entire city of Mountain View, continues to thrive in Silicon Valley with the ownership and leasehold of nearly 10 million square feet. While it maintains a location in every urban market across the country, the opportunity to create a mega campus, building by building, was made possible by suburban sprawl in an area that offers favorable living conditions for Google’s employees.

These stories demonstrate that it’s not necessarily a question of suburban vs. urban, but what’s best for the growth and success of the company. The answer is unique to all sizes and all types of high-tech firms. In JLL’s High-Tech Office Outlook, we’ve examined the real estate environment, the market characteristics, and the reasons that each of 34 markets appeal to high-tech companies. They aren’t all Silicon Valley, but they all offer unique qualities that have enabled the high-tech industry to grow. Understanding what location means to your company and its ability to source talent and grow revenue will remain a top driver in company success.
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