Are suburbs in trouble? These numbers tell a different story.
In recent years, many investment managers have all but pronounced suburban real estate markets dead. But don’t plan to attend any funerals just yet: Looking at national statistics, there’s plenty of evidence that suburban office and apartment markets are back on their feet.
Suburban office markets typically take the brunt of recessionary periods, when the few thriving tenants may take advantage of favorable deals by upgrading to CBD buildings. Some suburban markets are still suffering from office vacancies greater than their downtown counterparts—for example, Chicago’s suburbs were over 20 percent vacant at the end of 2014, when CBD vacancies were about 15 percent and declining.
That doesn’t mean suburbs are stagnant, however. In 2014, suburban markets accounted from 46 percent of all office leasing nationwide, according to JLL. And 51 percent of suburban tenants are increasing the size of their lease, compared to 46 percent of downtown tenants. That could be because companies that pay high CBD rents are more motivated to use their space efficiently, resulting in less space per employee than ever before. That trend is less important in suburban markets where rents are lower.
In addition, suburbs absorbed significantly more space that downtowns in eight of the past 12 quarters from 2012 through 2014, while CBD absorption was notably higher in just two quarters. Overall, suburbs have absorbed far more Class A space than cities over the past five years.
Investors have not paid much attention to suburban apartment markets either. Virtually all discussion of multi-family investment in recent years has been focused on development and redevelopment around the urban core, where tech workers and other upscale Millennials can afford to pay high rents that justify new construction. But the suburban apartment market is about eight times the size of CBD markets, and continues to enjoy strong performance. A recent article from National Real Estate Investor observed that the vacancy rate for suburban apartments is 3.9 percent and falling, compared to urban apartment vacancies at 5.8 percent and rising.
Naturally, investors have good reasons for focusing on downtown markets; for example, it may not make sense to monitor a small suburban market where few buildings change hands. But as intense competition for downtown trophy properties pushes cap rates to low levels, suburban markets may offer better yields.