Disparity Between Suburban, Urban Office Performance Grows Sharper
There is one commonality: The availability of debt financing is still "very challenging" in the office environment.
While the narrative in office continues to be negative overall, there are subplots within the overall story.
Factors driving office space demand have shifted from remote and hybrid policies that exist today and in the future to one more affected by jobs and the economy, according to a recent video report from Marcus & Millichap.
“It’s about the economy and perceptions about economic growth going forward,” said the firm’s National Director, Office and Industrial Division, Alan Pontius.
“We’ve already seen a slowdown in the pace of hiring, and that corresponds directly to office space demand.
Pontius said that in work-from-home policies right now, there’s clearly a trend towards more time in the office for the collaborative benefits that that brings as well as demographics.
“Right now, you have the suburban population being impacted heavily by the movement of millennials,” he said. “The push for larger space, the push for quality schools, the movement away from public policy in most of the big cities, the movement away from the crime trends in big cities is really having an impact on suburban growth.”
Looking at transactions, we see another significant disparity in investors’ perception, he said.
Marcus & Millichap finds that at $25 million and below in a suburban setting, transaction counts have come down by only 17% when compared to the benchmark year of 2019.
Comparing that same benchmark year, transactions $50 million and greater in the CBD (America’s cities), the reduction in transaction count is at 74%.
“That is quite a disparity and very telling in terms of investor perceptions about where the movement will be going forward,” Pontius said.
Debt financing is one caveat that remains, he said.
“The availability of debt financing is still very challenging in the office environment, irrespective of a $25 million and below suburban asset or a larger format asset in the CBD,” according to Pontius.
“It is going to take diligence on the part of any borrower and their team arranging the financing to work through the challenges and make sure the story is as compelling as possible for the individual asset in question.”