Low-Cost Office Space
Lures Firms to Cities

It is a corporate turnaround of a different kind.

As many companies continue their exodus from cities to locate headquarters and operations in cheaper-rent suburbs, a growing group are making a U-turn. Seeing an opportunity to grab prime real estate in central business districts of cities -- often on the cheap -- and to take advantage of a renaissance in many downtowns, they are moving from the suburbs to the cities.

BellSouth Corp. is consolidating 25 of its offices -- most of them in the suburbs -- into three new buildings in Atlanta for 10,000 of its 18,000 employees, says Richard Gilbert, who manages the communications company's Atlanta Metro plan. BellSouth performed demographic studies on its employees' home locations to determine the most centrally located sites, and all were within city limits.

The company, which owns the new buildings, is putting each one on or near Metropolitan Atlanta Rapid Transit Authority lines, and the company is building 3,000 free employee parking spaces next to Marta stations in four suburban locations. BellSouth also subsidizes the monthly transit passes so employees only pay $12 a month, a 75% discount.

"We're increasingly facing traffic congestion and air-quality issues, and we wanted to give our employees an extra commuting option," says Joe Chandler, a company spokesman. He declines to say how much the company is saving in real-estate expenses by making the moves but does say it's "absolutely a cost benefit."

Cost also played a role with Broadview International LLC, a mergers-and-acquisitions advising firm and private-equity investor that has had its headquarters in Fort Lee, N.J., since its founding 30 years ago. Sensing a chance to jump across the Hudson River into prime Manhattan real estate at rents down precipitously since 2001, the firm last month bolted from its 33,000-square-foot New Jersey confines to sublease slightly bigger space in midtown Manhattan.

Broadview is actually paying more for its new city space, but it is also getting better-quality digs. "It is more expensive for us to be in Manhattan, but the price gap has narrowed substantially," says Paul Deninger, Broadview's chairman and chief executive. He says the attractiveness of the city made the move a "no-brainer."

Fort Lee "became a hindrance to our business," Mr. Deninger says. "It's very easy to get in and out of Manhattan [from Fort Lee], but it's a lifetime away. When clients would come to New York it was very hard for us to get them to hop the bridge and come to Fort Lee."

Cities increasingly are giving incentives to companies to come back to their central business districts. Philadelphia and a nonprofit development organization drew American Business Financial Services Inc. downtown from suburban Bala Cynwyd with a multimillion-dollar incentive package. But the company had other reasons for moving: It has a young work force, wanted to be closer to public transportation and got the 235,000-square-foot space at a steep discount.

The business districts in numerous city markets are faring better than the suburbs. For example, the downtown Philadelphia market is at 12% vacancy, while Bala Cynwyd is at 20%, says Andrew Rudzinski, director of research and marketing in Philadelphia for Insignia/ESG, a division of Insignia Financial Group Inc.

In downtown and midtown Atlanta, net absorption of office real estate, or the amount of space taken, is up 145,000 square feet this year. The Atlanta suburban markets, which combined are about five times the size of Atlanta's central business districts, are down 1.2 million square feet this year.

BellSouth and Coca-Cola Co. are two big reasons for that trend. Coke moved its fountain-beverage division to an Atlanta suburb two years ago but recently restructured and is bringing those 650 employees back to Atlanta by the end of this year.

In St. Louis, URS Corp. recently consolidated its two suburban offices into one about a mile from downtown St. Louis, moving up to Class-A space from lower-quality offices -- and paying less. "We had more space than we needed in both of our offices, so the net effect is we're in a custom-designed environment, and we're paying less lease than we were with our other two offices," says Dan Chilton, vice president and office manager of the engineering, architecture and planning company's St. Louis branch.

The new office is about 20 miles from the old Maryland Heights office but much more convenient for clients. "We're relatively close to the airport," Mr. Chilton says. "We're less than five minutes from downtown." The move isn't without pitfalls, though: URS employees who moved into the city now must pay a 1% tax on their earnings.

In Oklahoma City, taxpayers have pumped about $400 million into redeveloping the downtown Bricktown area in the last decade, building a multipurpose arena, a baseball stadium and a canal. The Class-A downtown vacancy rate has fallen from 20% in 1998 to 12% this year, says Ford Price, managing partner of Price, Edwards & Co. But suburban Oklahoma City's Class-A vacancy rate has jumped from 6% to 35% in the same period. Now, downtown rents are higher than suburban rents.

MTV Associates, a regional investment firm that has nothing to do with music videos, took about 10,000 square feet downtown in March, moving from Norman, Okla., 20 miles south.

"We wanted to get back into the thick of things, back into a central business district that's clearly undergoing a positive transformation and revitalization," says Gary Hancock, the company's vice president. "And we wanted to be closer to a lot of people we do business with."

In Milwaukee, Roundy's Inc., a long-established wholesale and retail grocer, will move its headquarters 20 miles east from Pewaukee to a new building downtown near Lake Michigan. The company wanted to consolidate three of its metro offices into one, and its new chief executive preferred an urban location, says Samuel D. Dickman, who owns Dickman Co. and brokered the deal.

"They wanted to locate in a place that had more activity in terms of culture, different types of people, more action, and they wanted to be around other businesses," Mr. Dickman says. Milwaukee is seeing a "fairly decent" trend of companies moving back into the city, he adds.

The other major tenant in the building housing Roundy's headquarters is Artisan Partners LLC, a money-management company, says Mark Irgens, owner of Irgens Development Partners LLC, which is developing the building. Artisan is also moving in from the suburbs.

As workers moved from the city to the suburbs over the last half century, companies followed. Roundy's was founded in Milwaukee in 1872 and remained there until 1954, when it moved to the suburbs. Its new headquarters will be in the same area as its original warehouse. Now, with thousands of loft apartments and condominiums being built downtown, companies will begin to follow the labor pool, says Bill Bonifas, executive vice president of Polacheck/CB Richard Ellis in Milwaukee.

When the economy picks up and the labor market tightens, the appeal of downtown will be even greater, Mr. Bonifas says. "Roundy's is going to wake up other users," he says.

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