Suburban Office Product Is Outperforming CBDs

Suburban offices are officially outperforming urban assets for the first time, with vacancies in central business districts far outweighing suburban rates — but hope is on the horizon in the long term.

According to a new report from Colliers, the rise in CBD vacancies is “probably a temporary trend, not a structural market shift,” noting while that office markets with the strongest growth in the Southeast and Southwest tend to be suburban driven, “the amenities of CBDs and urban cores should eventually lure back occupiers.”

“Until this demand rebounds, it won’t be clear whether suburban outperformance is temporary,” the report notes. “Office conversions will also help reduce the denominator in CBDs, further suppressing vacancies in the years to come.”

Colliers notes that the majority of residential office conversions will take place in CBDs, not the suburbs, if they meet specific criteria around such metrics as floor plate size, slab to slab height, and optional location.

“Those with 30,000-square-foot-plus plates are hard to convert without massive capital expenditures,” the report states, adding that several such projects are currently underway today in cities l ike Washington, D.C., Manhattan, and Chicago. “Logistics aside, repricing needs to occur for conversions to be feasible, including recent examples of distressed assets with high vacancy. In addition, local governmental policy and cooperation will likely be needed to promote and support office conversion activity.”

Conversely, few suburban office assets are good candidates for residential conversions. There are exceptions — some assets “can make for intriguing adaptive reuse” by removing floors, or adding power for manufacturing use — “but most suburban assets, not easily converted, are demolished and rebuilt.” Life science conversions are a possibility as well but are more capital intensive.

The flight to quality assets is also a driver. Gateway CBD markets like Boston, Chicago, Los Angeles, Manhattan, San Francisco, and Washington, D.C. lack modern product, and  most of the inventory in those cities was built between 1970 and 1999. A recent report from Newmark asserts that the flight to quality “will drive tenancy for the foreseeable future, though high-quality assets in dynamic suburban markets may hold an advantage over traditionally stable downtown assets.”