How Does the Live/Work/Play Shift Impact Office Trends?

So-called “urban-suburban” submarkets that offer mixed-use developments are in the best position to capture demand from occupiers and investors looking to leave CBDs, according to the latest CBRE market report.

Scott Marshall
Scott Marshall, executive managing director, Advisory & Transaction Services|Investors Leasing, CBRE

Don’t write off those suburban office markets as unappealing to Millennial workers, occupiers or investors. A new report from CBRE notes that suburban office markets that provide an urban-like live-work-play environment—the so-called “urban-suburban submarkets”—are in a good position to be in high demand, particularly as rents climb and supplies dwindle in downtown locations.

“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,” Scott Marshall, executive managing director, Advisory & Transaction Services|Investors Leasing, CBRE, said in a prepared statement.

Cross Andrea
Cross Andrea, Americas head of office research, CBRE

The North American Suburban Office Trends Report, Summer 2017, notes established urban-suburban submarkets offer investors and occupiers a “relatively low-risk alternative” because the fundamentals in these submarkets tend to be strong and often outperform or rival those of the CBDs.

“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,” Andrea Cross, Americas head of office research, CBRE, added in a prepared statement.

Lower rents

The report notes that first quarter 2017 rents in emerging urban-suburban submarkets at $27.46 per square foot were significantly below rents in established urban-suburban markets where rents averaged $31.90 per square foot and were essentially the same as overall suburban rent averages of $27.79. Vacancy rates also favored emerging urban-suburban submarkets at 15.3 percent as of the first quarter and 13.8 percent for the established locations.

Common attributes of the urban-suburban submarkets, both established and emerging, are the presence of employment opportunities along with abundant retail, office and housing options, according to a survey of CBRE Research professionals in the nation’s 25 largest suburban markets. Established submarkets like the New Jersey Waterfront and Palo Alto and Santa Monica in California also have more entertainment, recreation, restaurants, grocery stores and public transportation. Emerging submarkets like Glendale, Calif., a Los Angeles submarket, or the Central Perimeter in Atlanta, are more likely to be in transition with mixed-use developments and public transit projects planned or under way. The report states emerging submarkets are also more likely to use government incentives, zoning changes or other public commitments to spur development.

Emerging submarkets account for 22 percent of total square footage under construction in those 25 submarkets and established submarkets had about 30 percent of the suburban office construction occurring in the first quarter. In markets like Sacramento, Calif., Minneapolis/St. Paul, Kansas City and Austin, Texas, those numbers are as high as 100 percent. CBRE states the amount of office space under construction in urban-suburban submarkets of Phoenix, Los Angeles and Orange County, Calif., is between two and four times the share of inventory. In emerging submarkets, mixed-use projects that include office space often serve as a catalyst for increased development in the area to help grow the neighborhood.

CBRE’s spring suburban office trends report looked at 58 suburban makers and found 50 markets recorded positive absorption in 2016, including 15 that had more than 1 million square feet of absorption. Suburban markets with the highest absorption included Dallas/Fort Worth, Phoenix and Los Angeles. The spring report found that submarkets with high-quality amenities and efficient buildings were likely to perform the best. A main takeaway from the spring report was while downtown markets were still outperforming suburban office markets in some metrics, the gap in vacancy was shrinking.