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NEW YORK CITY-Although investors have traditionally looked toward downtowns across the country for their next deal, researchers with CB Richard Ellis were surprised to see their attention has turned to the suburbs.
According to CBRE's 2006 Office Insight, a semi-annual report powered by Torto Wheaton Research, the mid-year report figures put approximately 63% of office inventory in the US in suburban markets, compared with 57% of office in downtown markets in Canada. Ward Caswell, CBRE's US director of research, explains investors in the US like the suburbs because it is easier to build; there are less land constraints; and the permitting process is easier. In addition, companies like to build closer to where there employees live, a decades-old trend. "Toronto continues to be a downtown-centric marketplace because people there prefer a downtown environment, while Americans prefer the suburbs," he tells GlobeSt.com.
Traditionally, he says, investors have been more focused on downtown markets because they have higher profiles and lower vacancy rates with higher rents. "Dollar for dollar, they generate higher yields," Caswell says. However, things may be changing. "All good deals have been done," he adds. "It's difficult to find a for-sale deal with a good cap rate."
Caswell goes on to explain that downtown markets are more susceptible to large construction projects late in the cycle. "We are not late in the cycle yet but at some point we will be," he tells GlobeSt.com "Construction downtown is typically larger projects after demand has peaked. That being said, we are not seeing an end to the upward cycle at this point."
In fact office demand is pushing vacancy rates down, regardless of a suburban or downtown location, Craig Thomas, director of research and systems for Torto Wheaton, CBRE's independent research subsidiary, says in a statement. "The national downtown vacancy rate is currently at 11.3%, well below the historical median, while suburban vacancy stands below its historical average at 14.2%," Thomas explains. "In this environment office rents are rising, a trend we expect to continue over the next two years."
As for individual markets, Caswell says Washington, DC, Phoenix, San Diego, Las Vegas and New York stand out when looking at the history of construction and the current construction volume. "Washington, DC is a very strong market and has led the nation with low vacancy," he says. One reason is that the government sector did not experience a downturn a few years ago when other sectors did. "It is just now starting to see a decline, but its okay because other markets, like manufacturing, are doing well."Washington, DC is well-diversified market with multiple economies," Caswell explains. "Atlanta also has multiple economies so if one sees a downturn, others pick up. The better markets for investors are those with diverse economies." He adds that in this global marketplace, "if a market is myopically focused on serving one industry then it is vulnerable to competition."
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