Summer Street Advisors


       


Tuesday
Nov152016

Reports of the Death of Suburban Office Are Greatly Exaggerated

In recent years, I’ve talked to investors and advisors who suggested that suburban office markets might never recover from the recession, and that owners might consider adaptive reuse options for well-located buildings that would otherwise sit empty. Well, we can call off the deathwatch for now—suburban office is back on its feet.

Those who wondered about the strength of suburban office markets had good arguments on their side. Downtown markets historically have recovered from down cycles faster than suburban markets have, and the comeback of office space demand has been particularly slow in this cycle. For the past decade, companies have been steadily reducing their square footage per employee, based on the idea that higher density promotes collaboration and productivity (as well as saving on occupancy costs).

In addition, companies waging the “war for talent” by aggressively pursuing knowledge workers have relocated or expanded operations to work-live-play neighborhoods that are neither CBD nor suburban locations. If these emerging areas are first in line for net absorption, and downtowns are next, then it’s natural to suppose that suburban markets could be in trouble. But that’s not the case.

Suburban markets have outperformed downtowns for four straight quarters, according to a report from CBRE. Vacancy rates are still higher in the suburbs, at 14.3 percent, than in downtowns, at 10.7 percent. But in the third quarter, the national suburban vacancy rate fell by 10 basis points, while CBDs saw an increase of 20 basis points. Furthermore, the most expensive markets, such as San Francisco and Boston, have seen net absorption slow down.

CoStar notes that more than half of all office submarkets—both urban and suburban—enjoy occupancy rates higher than the peak in 2006-2007. Further tightening is expected in the next two years, since new development has been fairly limited and about 50 percent preleased. There’s already a shortage of high quality space in many markets, which creates additional opportunity for Class A suburban buildings.

And one other factor suggests that office markets will continue to firm up: More companies are rethinking the open-space plans that save so much space. Studies and surveys consistently find lower productivity when there is too much noise and distraction, and many tech workers dislike the constant distractions of loud, busy workplaces. If the pendulum swings back to more individual offices, it will mean more space per worker—and that’s good for both urban and suburban office markets.