CoStar Insights

Office: Are the Suburbs Ready for a Comeback?

by Margaret O'Leary | Dec 12, 2016
Suburban Office

One of the most prominent, and headline­-grabbing, trends in the office sector in this cycle has been the flight of corporate tenants from the suburbs to the urban core. For example, General Electric announced plans to vacate its long­time headquarters in Fairfield, CT, in order to move to Boston’s Seaport District this year. The company cited Boston’s ability to “attract a diverse, technologically­ fluent workforce” as one of the main reasons for the move[1]. GE is not alone—the ability to attract and retain talent has frequently been cited by companies as a primary motivation for moving to city centers.

With this downtown shift, central business districts have enjoyed steady vacancy compression and outsized rent gains, with the spread between rent growth in CBD and suburban submarkets averaging approximately three percentage points from 2011 to 2016. But, as highlighted in Exhibit 1, that performance gap has begun to close. Rent growth in CBDs has been slowing throughout 2016, and we expect it to match rent growth in suburban submarkets by the end of the year. This slowdown is due in part to supply additions ramping up in downtown areas. On a percentage of inventory basis, office construction in CBDs is currently double its five ­year average, with construction not projected to peak until 2018. Conversely, in the suburbs, construction activity is at its five­ year average.

Even coastal gateway cities at the center of the downtown corporate relocation/expansion trend show a convergence of performance in CBD and suburban office submarkets. As highlighted in Exhibit 2, two­thirds of the core coastal markets have greater year-­over-­year net absorption in suburban submarkets than in the CBD. Seattle stands out as a notable exception, but it should be noted that the 1.1 million SF first phase of Amazon’s new downtown headquarters delivered in December 2015. When excluded, Seattle’s CBD still outperforms its suburbs, but with a year-­over-­year net absorption gain of approximately 3.4%. 



This is not to say that suburban office product will return to its heyday of the 1980s and 1990s. However, with the performance gap between the suburbs and CBDs closing this year, and asset prices in suburban submarkets at less than half of those of their downtown counterparts, the suburbs may be worth a second look.  

[1] 1GE Press Release:http://www.genewsroom.com/press­releases/ge­moves­headquarters­boston­282587

[2] “Suburban” designation includes both Prime Suburban and Suburban submarkets

 
 

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