Suburban Office Stayin’ Alive

Despite the common narrative about the downfall of the suburban office market, the sector has actually been steadily improving since after the Great Recession, according to a recent CBRE report. Improving demand and lower supply levels have kept vacancy rates low and absorption high.
Andrea Cross, CBRE
Andrea Cross, CBRE

City centers have been dominating the news in the office sector for the last several years, but suburbia has been quietly recovering in the background, according to CBRE Group Inc.’s 2017 North America suburban office trends report.

“Since the end of the Great Recession, the U.S. suburban office market has tightened at a steady clip, boosted by improving demand and low overall levels of new supply compared with previous cycles,” Andrea Cross, Americas head of office research with CBRE, said in a prepared statement. “Still, the suburbs are having a hard time shaking the perception that they’re struggling to keep up with the allure of vibrant downtowns.”

What is not happening in suburbia is perhaps more significant than what is happening in these non-city core markets. In the U.S., the suburban vacancy rate has not increased for 27 straight quarters, holding at 14.1 percent as of the close of fourth-quarter 2016. And while the vacancy rate in many areas remains a noticeable 340 basis points higher than the downtown vacancy rate, it is significantly lower than the long-run average gap of 430 bps that’s been the norm since 2000. It’s also 450 bps lower than the cyclical peak of 18.6 percent seen in the second quarter of 2010.

There has been no retreat in absorption, either. The suburban market has experienced positive absorption for, yes, 27 consecutive quarters. Fifty of the 58 markets CBRE observed for the report logged positive absorption in 2016, and 15 of those markets recorded positive absorption exceeding 1 million square feet.

“The geographic breadth of the suburban office expansion during the last year has been remarkable,” Cross told Commercial Property Executive. “Positive absorption has been occurring not just in leading suburban tech markets such as San Jose and Austin, but in many markets that have been slower to recover during this cycle. Reflecting this trend, a number of housing-bust and lagging Midwest markets, including Orlando, Tampa, Fort Lauderdale, Detroit and Milwaukee, ranked among the top markets for largest annual suburban office vacancy rate decline in 2016.” Orlando experienced the largest year-over-year decrease in vacancy rate, dropping 490 bps from 15.4 percent to 10.5 percent.

Looking ahead, the U.S. suburban market is on track to hold steady for the next 18 months or so, despite an anticipated moderation in demand. The vacancy rate is expected to hover at 14.2 percent through 2018, partly as a result of higher construction completions, especially in 2017. And, although net absorption is projected to slow, it will remain positive in the next two years, bolstered by rent growth.

So much for the downfall of the suburban office sector, which, as CBRE notes in the report, “has been a common narrative in recent years.”

Image courtesy of CBRE