Office Investors Strategically Shift to Suburban Product

Office investment is picking up in suburban markets. According to a recent office sentiment report from Real Capital Markets, office investors are becoming more bullish on select suburban office markets with strong job growth. In fact, 37% respondents in the survey said that value-add deals in suburban markets were the best opportunities in office investment today.

“In large part, well-located suburban office buildings have increased in their attractiveness to investors because of the perception that we are late in this investment cycle coupled with investors’ focus on growth, value and yield,” Tina Lichens, COO at Real Capital Markets, tells GlobeSt.com. “These strategies are more difficult to achieve with many stabilized assets such as well-located downtown properties and trophy assets.”

The top markets for suburban office investment include Charlotte, Chicago, Kansas City, Minneapolis, Phoenix and St. Louis, according to the report. These office markets all feature highly trained labor force with population and job growth, and as a result, produce stabilized returns for investors. “The most popular of the suburban office markets typically offer common characteristics, including market stability, easy accessibility and proximity to strong housing areas and school systems,” says Lichens. “Markets with good fundamentals, including population and job growth, as well as a highly trained labor force are making the grade with investors.”

Suburban markets are also growing in popularity as pricing escalates in urban core markets. In fact, respondents said that stabilized well-located downtown buildings and trophy properties were the least attractive office investment opportunities in the current market. Stabilized suburban office deals were also seen as less attractive than value-add deals in suburban markets. “Currently across the country, investors are increasingly more focused on suburban properties because of the arbitrage that exists between suburban and downtown pricing,” says Lichens. “That, combined with efforts to increase value through renovation, repositioning and more active management programs create tremendous investment opportunities for suburban properties.”

This trend is likely connected to the maturity of the current business cycle and the result of investors chasing yield to new markets.