As the pandemic rages on both companies and their employees are looking to the suburbs for salvation, the theory being that the wider spaces in these city outskirts will make social distancing that much easier. As a result, companies are dusting off playbooks to reconsider the hub-and-spoke site selection model not just for their own corporate purposes but also to accommodate their employees.
While this trend is real, it would be a mistake to think that it kicked off with Covid-19. A new report by Cushman & Wakefield makes the case that the rebirth of the suburbs was already well underway before the pandemic. Instead, the coronavirus accelerated a process that had already started.
In 2019, C&W pointed out, 69% of Class A net absorption occurred in the suburbs, up from the 10-yr average of 60%. It also noted that in the past two years there has been better leasing performance—stronger absorption, faster vacancy decline and stronger rent growth—in suburban submarkets. Also, as a share of all office occupancy, suburban submarkets increased from 63.6% in 2005 to 68.4% in 2020.
"Suburban office markets have outperformed over the past few years," it said in its report.
To be sure, rental rate growth was faster in the CBD for the first six years after the Great Financial Crisis, C&W said. But since 2016, the gap in cost between CBD and suburban office has receded from a high of 68%. Indeed, in the last four years, suburban rents have risen 330 bps more than the CBD (19.8% vs. 16.5%).
"The cost differential remains well above historical norms, which makes hub-and-spoke or co-location expansion strategies attractive for employees' commutes and companies' pocketbooks," C&W said.
Millennials Drive the Trend
One of the main drivers behind this push for the suburbs is that prime-aged workers—Millennials, in particular—have been increasingly migrating to these areas. "Now in the prime home buying age range, many more are forming families, buying homes and moving to the suburbs. And just as businesses followed the labor force talent into cities, some are likely to follow them into the suburbs—particularly given the benefits of lower commute times, not to mention, lower rents."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
