M&M: Demographics Revive Interest in Suburban Office Spaces

With 95 percent occupancy, HALL Office Park in Dallas represents the renewed investor interest in suburban office properties.

A growing concentration of households in suburban areas throughout the country is sparking renewed interest in office properties located outside urban centers, according to a recent report from Marcus & Millichap.

Millennials’ general preference to work in amenity-rich office buildings with walkable retail and dining options heightened demand for urban office space for much of the post-recession era, notes the report. Overall vacancy for urban office properties declined by 250 basis points during this period and clocked in around 14 percent as of the first quarter of 2017.

This activity spurred a 7 percent increase in asking rents across America’s urban office markets, but demand for these properties is beginning to slow. The suburbs, where rents for stabilized properties land for new properties are cheaper, are currently poised to benefit from rising rents in urban sectors, according to the report.

Compounding the opportunities for suburban office properties are the general demographics of those markets. According to the report, as of 2015, 64 percent of America’s households resided in the suburbs. That figure is projected to rise as high as 75 percent by 2025. Particularly in smaller areas with tighter labor markets, this proportion is an important consideration.

In addition, the report found that many young adults are influenced by long commute times, further heightening the appeal of a suburban workplace.

Source: Marcus & Millichap

Source: Marcus & Millichap

Combined, these financial and demographic trends have reinvigorated investor interest in suburban office space. In 2014, roughly a quarter of all office sales across the country involved properties located in urban cores. In 2016, that figure declined to 21.7 percent, illustrating renewed investor interest in the suburban markets, which account for nearly 70 percent of all office space in major cities, according to the report.

In addition, net absorption in suburban office properties has hovered around 60 million square feet for the past two years, compared to 40 million square feet for urban assets. In fact, annual absorption has been greater in suburban office properties every year since 2011, save 2015, when the two were more or less equal.

With most institutional investors continuing to focus on trophy properties in downtown areas, private buyers and holders of foreign capital are increasingly seeking out suburban assets, the report notes.

For their part, owners of suburban office properties, many of which were built to resemble campuses laden with open green spaces, are re-envisioning and repurposing those green spaces to offer amenities like walking and jogging trails, food truck courts and collaborative outdoor workspaces. Particularly for properties built during or after the 1990s, this can be a cost-effective way of breathing life back into the buildings, the report suggests.

— Taylor Williams

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