Propmodo Daily

By Franco Faraudo · Mar. 19, 2024

Greetings!

Remember when everyone thought urban offices were going away? The prediction was that suburban offices, which are often much closer to where workers live, would be favored in a hybrid work environment. New evidence is coming out contradicting that theory, as suburban offices are starting to have higher vacancy rates and lower occupancy than those in downtown areas. In today's email, we take a look at what is happening with suburban offices and offer some analysis about why this trend toward favoring downtown locations over the suburbs seems to be emerging.

Plus, this week Propmodo Technology is focusing on valuation and underwriting technology with our sponsor Valcre, an innovative appraisal platform for the commercial real estate industry. We’re exploring the potential of automated valuation models, how cutting-edge data and tech are helping identify and mitigate risk, and how the industry can prepare for the coming wave of commercial property revaluation.

Now, let's dig in!

All Hub, No Spokes: The Death of the Suburban Office

As the pandemic waned and in-person work resumed, there was widespread speculation about which office strategies would gain traction. Reports surfaced that cities with longer average commute times were seeing lower office attendance rates. Here's an excerpt from the Wall Street Journal in May 2022: "The New York metropolitan area had the longest average commute time before the pandemic at 37.7 minutes, according to the Census Bureau. It also has one of the country's lowest office-occupancy rates."

New York has since rebounded and now boasts one of the highest occupancy rates in the country. In contrast, other suburban markets are starting to show signs of new preferences for experiential offices. A recent CoStar report has revealed that suburban offices are now lagging behind urban ones in terms of both occupancy and vacancy rates. There has been an uptick in suburban office foreclosures, including a large office building in suburban Chicago that was foreclosed on by its lender, JPMorgan Chase. In Santa Ana, California, an owner of a suburban office property has even negotiated lease terminations with tenants in order to demolish the building and redevelop the site into a logistics center.

Despite predictions that suburban office workers would avoid returning downtown due to commutes, the evidence suggests otherwise. In fact, downtowns appear more attractive workplaces—even for those not required to be there. Gensler's 2023 City Pulse report offers this insightful observation: "Much of the decline in central business districts—and city economies overall—has been attributed to the rise of hybrid work. However, as urban centers emerge from the pandemic's immediate aftermath, hybrid workers have not abandoned or lost enthusiasm for their downtowns. Sixty-six percent of hybrid CBD-based workers visit their CBDs at least some remote workdays. And 58% of downtown hybrid employees work from cafes, co-working spaces, and other third places within their CBDs."

One factor the predicted "death of CBD offices" failed to grasp was the importance of amenities to younger generations. Another Gensler report on their office preferences stated: "[Younger generations] want a welcoming, amenity-rich environment with a hospitality vibe encouraging socializing, connecting, and community. In fact, 86% of younger workers said they'd come into the office more if their employer provided their ideal mix of experiences."

Suburban offices can invest heavily in amenities to deliver the experiences today's office workers want, but even that might not compete with the amenities a vibrant city center offers. There's good news for the suburbs, though—the City Pulse report showed the "halo effect" around downtowns also applied to suburban downtowns. Offices in suburban downtowns have seen rent premiums of 40-60% compared to those far removed from any semblance of a business district. So perhaps the main takeaway isn't that suburban offices are dead, but rather that offices lacking proximity to enjoyable amenities will likely struggle—or be replaced by an Amazon warehouse.

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Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.

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