CRE Continues to Pivot Toward the Suburbs

Big picture trend leans toward the suburbs for the next few years—and investors should take note, according to one industry watcher.

CRE momentum appears to have shifted, at least in part, to the suburbs even as the COVID-19 pandemic wanes. According to Marcus & Millichap data, in Q4 2019 the average apartment vacancy rate in a downtown area was 4.2%—but by the end of 2020, it had risen to 6.3%. That’s the most dramatic one-year vacancy rise on record, according to John Chang, the firm’s senior vice president and director of research services, and “the biggest movement was to the local suburbs,” he says.

The pandemic spurred changes in housing drivers, to be sure, but “this wasn’t just a pandemic driven event,” Chang says. “The migration to suburban living was already underway before the pandemic but the health crisis accelerated the movement.”

The core underlying driver? The aging millennial generation—all 72.2 million of them. 

“Even before the pandemic, millennials were already moving to the suburbs because many were getting married and forming families,” Chang notes. In the first year of the pandemic urban apartment vacancy increased 21 basis points to 6.3%. But at the same time, suburban vacancy rose just 20 basis points to 4.3%. Downtown office vacancy spiked 340 basis points, while suburban counterparts rose just 220 basis points.  Since then, suburban office vacancy peaked at 15.8% and has come back down to 15.6%, while urban office vacancy continues to climb and now stands at 17.8%.

“The evolving demand for office space has yet to stabilize but it does appear to favor the suburbs,” Chang says—especially as companies move closer to where their employees live. And the big question for investors will be the trends going forward, Chang says.

“If the only factor in play were the pandemic then we’d likely see a relatively quick reversion to the pre-pandemic norm,” he notes.  “The momentum is certainly going in the right direction. Apartments are pretty much already there but a big part of that may be a reflection of the broader housing shortage. Office on the other hand may take awhile. Companies are adapting to the labor force who favor hybrid work schedules and shorter commutes. That in turn could drive the suburban office alternative for several years. And that will reinforce demand for suburban housing, suburban retail, and suburban self-storage.”