So Far Businesses Haven't Followed Residents to the Suburbs

Over the last few years, there has been a mass exodus of residents from major metros to smaller more affordable and suburban markets. The pandemic has only exacerbated the trend. While residents are making the move, so far businesses haven’t followed—at least not yet. Cushman & Wakefield’s research team took a closer look at the migration patterns of businesses, and found that they are staying in major metros.

According to research from Cushman & Wakefield, major metros have accounted for 32% of office leasing activity so far in 2020, well within the historical average of 30% to 40% of total leasing activity occurs in gateway markets, including Los Angeles, Chicago, Washington, DC, New York, San Francisco and Boston. Of course, this is a smaller sample size than typical years due to the coronavirus pandemic, but it is clear that businesses aren’t moving out of major markets at this time, even if they are stalling lease negotiations or decisions. For that reason, Cushman isn’t making any firm conclusions about business migration.

Fundamentals, though, are clearly softening with office leasing activity down for the year. Nationally, office leasing volume totaled 46 million square in the third quarter, compared to the historical average of 96 million square feet.  Large cities are clearly feeling the impact. Research from Newmark Knight Frank, for example, shows that the office leasing activity in Manhattan during the coronavirus pandemic is down nearly 70% with 8.9 million square feet in transactions.

Although leasing activity is down, the split between suburban and urban leasing hasn’t changed. Typically, central business districts account for 31-37% of total leasing, while the suburbs have accounted for 63-69%. This year, according to C&W, CBD leasing has accounted for 32.6% of total leasing and the suburbs have accounted for 67.4% of total leasing—both within the historical average.

Furthermore, in urban markets lease renewal activity is up, a sign that companies are staying put for now and renewing leases in the interim. Typically, lease renewals average about 20%, but this year, they have accounted for 33% of leasing. So far, these tenants are not renewing leases for less space, C&W says. This year, 34.5% of renewal transactions have been for less space while 41.9% were for additional space. In the remaining 23% of leases, tenants kept the same footprint.

Tenants have also been reducing their lease term and opting for shorter-term leases. This year, the average lease term is 5.75 years in CBDs and 4.51 years in the suburbs. Typically, CBD leases average 6.44 years and the suburbs average 4.90 years respectively. In addition, nearly one third of lease renewals are for very short-term leases between 3 and 12 months.