By Jim Cardellicchio
Since the start of the Great Recession in 2007, there have been several reasons for investors and lenders to question the potential returns of suburban office acquisitions.
When the recession curbed business growth and increased vacancies, many landlords responded with enhanced concession packages that diluted net effective rents. Although headcounts began to increase during the recovery, a good number of companies turned to teleworking and other strategies to accommodate employees without expanding their footprint.
A flight to urban lifestyles helped to stabilize Central Business Districts at the expense of suburban office properties, creating a migration to dense, walkable neighborhoods. This boosted demand for well-located, transit-accessible assets but made it more difficult to attract users to suburban markets.
At the same time, companies tended to sock away cash rather than spend on new equipment and hiring. The economy expanded at a slow and steady pace, but companies remained in a wait-and-see position.
A new attitude
Now we are beginning to see more sustained growth. Recent changes to U.S. tax law have spurred spending by businesses, while household wealth has risen to almost seven times disposable income. The unemployment rate hovers near record lows and wages are climbing. There is growing consensus that there will be sufficient economic activity ahead to justify spending and hiring.
For example, the Washington, D.C., area has shifted employment from the federal government to government contractors over the past decade-and-a-half. The region’s highly educated labor pool fills many technology and life sciences roles, which tend to be high-quality, high-paying office positions that exert a strong multiplier effect on the economy. With the return of more typical government spending and growth among federal agencies, demand for office and industrial properties is on the rise, in step with improving occupancy and rental rate growth.
Expectations are up nationally as well. This fall, NAIOP reported the highest rating yet on its NAIOP CRE Sentiment Index, which measures the 12-month outlook among commercial real estate developers, owners, investors and brokers.
The case for suburban assets
Ongoing economic growth has positioned suburban markets to rebound, providing value-add returns on core and core-plus investment opportunities.
Hiring is an indication of anticipated growth, and employment has never been stronger. Corporate growth is evident: According to Transwestern’s third-quarter office report, absorption nationally is 17.1 percent higher than for the same period in 2017. Meanwhile, vacancy is stable and asking rents increased by 4 percent annually.
Consumer spending, boosted by tax changes and rising wages, is fueling demand for industrial fulfillment centers near population densities, including suburban hubs. In fact, of the 47 industrial markets Transwestern tracks, 44 reported positive 12-month absorption at the end of the third quarter.
Given the improved outlook and hiring trends, investors are well-positioned to fill properties with paying tenants and generate attractive returns. As the evidence of suburban rent growth mounts, more and more of those investors will find willing lenders and equity partners ready to finance suburban deals.