What the future holds for office buildings is yet to be written. But what the here and now is telling us is that suburban office buildings – particularly those in walkable locations in close proximity to retail and housing – are faring much better than both their true urban and purely suburban counterparts.
To be absolutely clear, this is not a new trend. It is only just being widely realized and accepted today due to ongoing current events, according to Forbes.
For the past decade investors – especially large institutional investors – focused heavily on major urban markets such as New York City and San Francisco. Their focus makes sense because commercial rents tended to be higher in urban locations due to their close proximity to talent, amenities, infrastructure and more. They did not pay as much attention to the growing trend of mid-density, urban-suburban – or “surban” – locations. As the pandemic sent the American office-using workforce into their homes, we are now watching in real time as the relationship between the office and employee changes.
No longer are workers of all ages fully anchored to the biggest job centers. The most highly skilled, capable workforce in industries such as tech and finance are – in the near term – free from a single urban destination.
It’s also more possible than ever to accommodate the varying geographic desires of diverse employees, including entertainment and retail options, live events such as festivals, urban-like facilities, transportation infrastructure, and outdoor activities within urban-suburban areas.
While lockdowns in the densest cities may be temporary, many Americans are contemplating moving to less densely populated areas.
Many have and will turn the thought into action. Within New York City, for example, you’re seeing an explosion of demand to stay within the metro area but move nearby, to suburbs in Long Island, New Jersey and Connecticut. The same story is happening in San Francisco, with people moving to the East Bay and other nearby suburbs. What is particularly attractive about these locations today is that they have spent the last decade redeveloping their own suburban downtowns, which can attract younger, family-oriented millennials.
Walk around Cherry Creek in Denver, downtown Chandler in Phoenix, St. Louis Park in Minneapolis, or Carmel in Indianapolis, and one will see great examples of suburbs that have transformed with additional density and amenities. It’s this middle ground – having gained traction for at least the past half-decade – that I believe leads to a happy medium of urban-suburban locations where residents can enjoy the perks of city life outside of the city.
Sublease inventory has increased more dramatically in urban submarkets, such as central business districts, than in their suburban counterparts. This doesn’t mean that it will be smooth sailing for suburban offices in the longer term, but the discrepancy in sublease inventory at least provides for less competitive shadow inventory.
If you’re conceptually on board, then the question becomes execution and how to actively deploy capital in a strategy focused on urban-suburban properties. The first step is to identify those locations that currently exhibit – or have the potential to exhibit – the infrastructure to support a mixed-use environment. That means looking at properties that are not totally isolated from residential and retail in the neighborhood.
The old suburban corporate campuses of the 1980s are good examples of properties that may struggle to find sea legs in the new era of demand, but similar vintage properties nearer to suburban cores may thrive. One also has to look at whether the market itself is growing jobs requiring offices.
For example, Minneapolis has a number of suburban office pockets, but not all are created equal. The West End in St. Louis Park is surrounded by homes and new retail drivers – and the tenants are diversified industry-wise but use office space heavily. Meanwhile, the further west-southwest into the suburbs one goes, the more small business demand there is, and the more spread out the office parks. Not surprisingly, there is a significant variance between the performance within the various suburban submarkets. The West End is fully realized now, but the growth was clear before it happened.
Same with Carmel, Indiana, which used a city process to redevelop a swath of industrial properties into a thriving community. Find these areas, and you’re likely to come across office properties that are well suited for future growth.
Investing in urban-suburban locations is an opportunity made clearer by new trends in office space use, geographic preference and already established mixed-use areas. These pockets offer an opportunity to create an acquisition pipeline of property. While it may take time to find properties, it will be worth waiting for the right opportunities to enter these markets for the long term.
