The Pandemic Spurs Investor and Tenant Interest in Non-Core Markets

The pandemic is shaking up commercial real estate unlike any economic cycle we have ever experienced before, and the final shakeout is far from over. While the debate rages on about the nature of future office work – the work-from-home vs. get-back-in-the office model – the other emerging trend, the combination of an urban exodus with a surge in the suburbs, is clearly on, according to Jay Olshonsky, CCIM, FRICS, SIOR, President & CEO of NAI Global.

Olshonsky cited a portion of a recent presentation by CoStar Managing Director Robert Calhoun, CFA, at NAI Global’s (virtual) annual convention, in which Calhoun stated that data supports the notion that people are leaving cities in favor of the suburbs or secondary/tertiary locations, based on apartment rents. Rents are falling in urban areas and CBDs while rents are rising in the ‘burbs. CoStar owns apartments.com and based on the volatility in daily asking rents Calhoun is seeing, especially at the highest end of the market, he thinks the economy is heading for a K-shaped recovery.

That doesn’t mean cities are dying or dead, says Olshonsky.

“Let me just say up front that while New York City is temporarily closed, as are other major cities to varying degrees, we do not see the end of major metro markets as central business hubs in the U.S. Cities will bounce back and eventually return to some version of business as usual,” said Olshonsky.

“In the interim, however, our offices in smaller cities and suburbs are reporting enhanced activity from out-of-state investors and companies that are either looking to relocate or at the very least, downsizing their urban footprints for satellite offices nearby. To be fair, some of this activity was already in motion before the health crisis, yet we firmly believe some of the market movement we are seeing is accelerated by the pandemic,” he added.

For example, the biggest office lease in Phoenix in the 4^th quarter last year – pre-pandemic, was DoorDash, a San Francisco-based logistics and on-demand food delivery service company that committed to 345,000 square feet at Lincoln Property Company’s The Grand at Papago Park Center. While corporate relocations to Arizona, Texas and Florida aren’t that new, reports about investor and tenant interest from outside markets at NAI Global’s offices in Knoxville, TN, Boise, ID and San Antonio, TX and others, is an emerging trend.

On the service side of the CRE equation, NAI Global is expanding in regional markets, in part, because of the pandemic’s disruption. In August and again in September, the firm opened offices in Syracuse and Long Island, respectively, and in both cases the principals of those offices cited the desire and need to expand their business development efforts by linking up with a larger brokerage, property management and related services company – especially since the onset of the pandemic.

“Opening an NAI Global office enhances our capacity to connect sellers and buyers/landlords and tenants,” said Tom Lischak, CCIM, broker/owner with NAI Bridgeway Commercial in Syracuse.

“Increased connectivity is essential as the commercial real estate industry addresses the COVID-19 crisis. In a metropolitan area like Syracuse, relatively lower density gives us the distinct advantage of more space to spread out. As a result of COVID-19 we may see more local companies moving to the suburbs or out-of-town companies opening satellite offices in Central New York,” Lischak added.

Similarly, NAI Long Island Principal Leo Farrell said his firm has shifted to the NAI Global platform, which is more broadly connected nationally and worldwide, yet still highly effective on the local level. This combination enables NAI Long Island to be more competitive and enhances their ability to compete for new business as well as talented salespeople and brokers, Farrell said.

“In order to effectively compete and win assignments and recruit talented professionals, becoming part of a strong commercial real estate platform such as NAI Global is essential. In addition, we were drawn to NAI due to the high quality of the other offices that happen to primarily concentrate on similar lines of business to our firm,” Farrell added.