Marcus & Millichap

Special Report Suburban Office Challenging CBD

Midyear 2017

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Often-Overlooked Investment Quietly Gathers Traction; Reinventing Suburban Offi ce Sparks Refreshed Perspective

CBD led office recovery. Central Business District office markets garnered attention during the recovery as a variety of large companies announced relocations to downtown areas. Notable leaders in this movement included United Airlines, which moved its headquarters to downtown Chicago, and Expedia, which relocated to the Seattle waterfront from its suburban office location. As millennials entered the workforce, access to transportation, walkability and retail topped priority lists, further benefiting CBD office demand. This noteworthy shift sparked an urbanization trend and drove increased absorption of office space. Subsequently, CBD office rents and vacancy were quicker to recover from the Great Recession than their suburban counterparts.

Evolutionary suburban office trends. The idea of working in an amenity-rich offi ce location with walkable access to shopping, restaurants and other recreational activities remains attractive to many professionals and still favors urban office space. Numerous suburban office locations have become increasingly competitive, however, by clustering in walkable villages featuring many of the amenities and services of urban environments. These locations are generally more affordable than their urban counterparts while remaining attractive to employees seeking a variety of offerings that are within walking distance. Many of these areas are located on transit lines, allowing employers to draw from a broad labor force outside the urban core.

Suburban office gathering momentum. Following the recession, many employers relocated to the urban core, capitalizing on reduced downtown office rents while reinforcing the trend toward urbanization. As the economic growth cycle gained momentum and office rents in core locations recovered, suburban office space once again became a more affordable alternative for many companies. Though lower costs catalyzed a shift in where companies located, tightening labor markets have reinforced the value of locating near the substantial suburban labor force featuring 70 percent of the millennial population. Though many millennials favor an urban live-work-play lifestyle, for many young adults, commute time is also a significant consideration.

Investors shift focus. The urban core comprises approximately 31.6 percent of the total office space in major cities, but in the wake of the recession just 17.3 percent of the 2009 office transactions were in downtown areas. As the urbanization trend gathered momentum, sales of downtown office properties increased to comprise nearly onefourth of the deals in 2014. Since then, investors have once again begun to focus on suburban options, restraining downtown activity to 21.7 percent of 2016 office sales. The flow of capital reflects the convergence of opportunity, yield and perceptions of future growth, and it appears investors’ attention is once again moving beyond the core.

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