by Brianna Crandall — August 21, 2017 — Suburban office locations that provide an urban-like “live-work-play” environment are well positioned to capture strong demand from office users, according to a new report from global commercial real estate (CRE) services and investment firm CBRE Group. In seeming contrast to this research, however, some major companies are leaving long-established suburban locations for the city, as cited in a July 16 report in the Washington Post as well as a new report from architecture and engineering firm HOK.
Among the most common attributes of so-called “urban-suburban” submarkets are the presence of abundant retail, office and housing options, as well as employment opportunities, based on the survey conducted this summer of CBRE Research professionals in the 25 largest suburban markets.
Established urban-suburban submarkets have the added advantage of amenities like entertainment and recreational offerings, restaurants and grocery stores and public transportation access. Established submarkets include the New Jersey Waterfront, Santa Monica and Palo Alto.
Emerging submarkets, such as the Los Angeles submarket Glendale or the Central Perimeter in Atlanta, are more likely to be in transition, with development, construction or renovation — including ongoing or planned public transit projects — shaping dynamics.
Notably, emerging submarkets are more likely than established submarkets to have mixed-use projects in the works. Mixed-use projects often serve as a catalyst for additional development in a particular area, spurring interest in the surrounding neighborhood, finds the report. Emerging submarkets are also more likely to utilize government incentives, zoning changes or other public commitments to assist development than established submarkets.
According to Scott Marshall, executive managing director, Advisory and Transaction Services|Investor Leasing, CBRE:
Steep rental rates and an increasingly limited supply of quality office space, especially in large blocks, in downtown submarkets will continue to lead more tenants to look for space in suburban markets. Moreover, as more Millennials age and begin families, many will eventually move to the suburbs. Office locations that can provide the urban characteristics this pool of workers has grown accustomed to will be in the highest demand.
The vacancy rate for emerging urban-suburban submarkets was 15.3 percent as of Q1 2017, compared with 13.8 percent for the established urban-suburban submarkets. Similarly, rents in emerging urban-suburban submarkets have yet to surpass the overall suburban average ($27.79 per sq. ft.) but were essentially equal at $27.46 per sq. ft. and significantly below rents in established urban-suburban submarkets ($31.90).
The amount of new office construction underway in urban-suburban submarkets is slightly elevated relative to their share of inventory. Emerging submarkets account for 22 percent of total square footage under construction in the top 25 suburban markets (compared to their 20 percent share of total inventory), and established submarkets account for 30 percent (compared to 26 percent of total inventory). Yet in certain metros, these shares are much higher, with urban-suburban submarkets accounting for 100 percent of the suburban office space under construction in Sacramento, Minneapolis/St. Paul, Kansas City and Austin.
Andrea Cross, Americas head of Office Research, CBRE, stated:
Established urban-suburban submarkets offer investors and occupiers a relatively low-risk alternative to downtown office space, as fundamentals in these submarkets already outperform the suburbs overall and in many metros, rival the CBD. Alternatively, emerging urban-suburban markets offer those with longer-term strategies an opportunity to secure space in up-and-coming areas while there are still options to choose from and purchase prices and rents are more affordable.
The North America Suburban Office Trends | Summer 2017 report is available from CBRE with a brief registration.
Washington Post article
Seemingly in contrast to these findings, the July 16 Washington Post article cites such major companies as McDonald’s, which is leaving its 86-acre suburban compound in Oak Brook, Illinois, after four decades to relocate to the West Loop of Chicago; and Caterpillar, which is retaining its manufacturing, engineering and research in Peoria, Illinois, where the company has been since 1925, but moving its executives to a new corporate headquarters in Chicago near McDonald’s facility.
In addition, Aetna is relocating from Hartford, Connecticut, to Manhattan; General Electric is vacating Connecticut for Boston; and Marriott International is leaving a Maryland office park for the center of Bethesda.
All these relocations will have a dramatic impact on the suburban communities they are leaving, but the main reasons for the moves center around the growing importance of technology to every aspect of business, and the factor that a majority of young professionals with expertise in e-commerce, digital engineering, software analytics, finance and marketing and finance tend to prefer urban settings.
Similarly, the new white paper from architecture, design, engineering and planning firm HOK focuses specifically on tech-driven suburban campuses in the Silicon Valley near San Francisco, California. Rethinking the Corporate Campus says that such tech giants as Salesforce, LinkedIn, Twitter and Airbnb have recently relocated to high-rise urban offices or converted industrial buildings that are located near public transit.
Reasons cited in the article include that the sprawling, insular campuses have made it more costly to attract young talent and added to traffic jams with commuters coming from the city; and that “these more accessible urban campuses support the principles of agglomeration, the theory that innovation occurs faster in dense environments in which workers, suppliers, funders and partners are co-located for collaboration.”
Similarities in the reports
All three sources listed above acknowledge that young digital-savvy professionals, who are so crucial to today’s business advancement, tend to gravitate toward urban-type settings where there is an atmosphere of collaboration along with restaurants, entertainment and other amenities as well as public transportation nearby, whether that is found in a downtown urban setting or in the trending mixed-use “urban-suburban” settings, with similar characteristics.