In This New Normal Smaller Buildings May Be A Safety Investment

Whenever there is economic turbulence, investors flock to safety. 

In economic recoveries of the past, that meant large assets “as location issues often led to a high correlation of size and quality,” Jim Costello, senior vice president at Real Capital Analytics, writes in a new blog post. 

That may well be the case again when the office recovery starts. Still, Costello wonders if the perceived safety issues around density during COVID-19, combined with the dispersion of the workforce as telecommuting becomes commonplace, could make smaller buildings the new safe haven for investors.

“If views of quality shift to these smaller, more dispersed assets, jumping to high dollar levels of annual office sector sales activity will not happen as easily or quickly as before, with many more deals required to hit the average levels of activity seen in the past,” Costello writes.

Sales of larger buildings have been on the decline throughout the economic expansion, according to Costello. In 2019, office assets sold in central business districts averaged 161,000 square feet while suburban assets averaged 75,000 square feet. He says those lows were similar to the levels seen in 2008.

Costello says these shifts might have something to do with investors’ changing views of quality. “Early in the cycle, investors were still cautious and only stepping into transactions involving assets where perceived risks were lower,” Costello wrote. “Size and quality often go hand in hand, as it pays to build bigger in areas where land is more valuable, and tenant demand is greater.”

But COVID-19’s impact on the economy could be changing that calculus.

Already, there are hints that office users may move toward leasing more suburban space, even if it is a smaller hub office that supports a headquarters, or spoke, location. 

“With this idea of the hub and spoke, if you’re reducing expensive real estate in the prime core business districts, the urban cores, and you’re moving out to first string suburban, you’re going to see some, some cost savings,” Joe Brady, CEO Americas for The Instant Group, a workspace innovation firm, told GlobeSt.com.

As companies look to add spokes office locations in suburbia, there are indications that employees are also leaving dense areas. 

“Rising taxes and the challenges of urban living and mass transit are prompting individuals to depart for the suburbs,” Matthew Deal, principal with Deal Sikes told GlobeSt. “The affordability of suburban life appeals to a growing number of individuals and this will impact commercial real estate markets across the country.”