Space, Commute, Location: Reevaluating Office Markets
Investors are weighing the benefits of urban vs. suburban, according to Daniela Alvarado of Cole Schotz.
As the COVID-19 pandemic continues to be a reality of office life, companies in all business sectors consider the benefits of locating office space in urban centers versus suburban areas. For some sectors, cities continue to be an attractive place to locate offices. Others value the benefits of space and shorter commuting distances by locating their offices in suburban areas. During the past year, the real estate industry continued to see great opportunities in both urban and suburban markets.
For many industries, urban centers continue to be an attractive setting for flagship offices. “Demand remains strong for office tenants to be in the heart of the action, so to speak. Markets like New York City still offer unequaled access to talent, culture, innovation, transportation and the energy of a bustling metropolis,” said Christie Bennett, managing director of JRT Realty Group Inc., a leading woman-owned commercial real estate firm.
With a slow post-2020 recovery in the market for urban office space, tenants are finding that they have better negotiating power in urban centers than ever before, and as a result, they have access to added amenities and incentives from landlords willing to make a deal.
Bennett also noted that “the city … offers new and modernized office buildings that feature abundant air and light, environmentally friendly building systems, and a focus on employee health and well-being.” Environmentally and health conscious office spaces continue to be a priority for the work force and for corporate social responsibility initiatives. For companies sensitive to these needs, like many in the technology sector, LEED-certified space is more readily available within an urban core. Because proximity to sustainable sites and transportation accounts for a certain number of LEED credits, urban office space is more easily able to achieve a LEED certification.
For these reasons, technology companies, healthcare companies and even financial sector companies especially continue to sign new leases in urban centers.
Rebound in Office
This type of interest has given real estate owners, operators, developers and investors confidence in a rebound in urban office spaces in 2022 and beyond. One recent example of such a bet on the success of urban office space is CommonWealth Partners’ acquisition of Hudson Commons on behalf of CalPERS, at 441 Ninth Ave. in Manhattan, from the Cove Property Group. Through its location, amenity and outdoor spaces and LEED Platinum certification, Hudson Commons has been able to attract household names including Peloton Interactive Inc., and Lyft Inc. as anchor tenants.
At the same time, real estate investors have shown a strong interest in suburban office buildings. Though the dual priorities of environmental consciousness and health consciousness remain at the top of mind for employers signing leases and investors acquiring properties outside the urban core, it should be noted that suburban office space addresses these priorities in a different way than urban office buildings. Communal outdoor spaces and access to walking paths and nature boost the office experience.
In addition, with companies being increasingly cognizant of the need for social distancing measures in the office, a lower cost per square foot is desirable in their spaces.
“Five to 10 miles can mean a cost per foot savings of nearly half on rent and allows for commuters to use their own cars or even bicycles and avoid urban traffic. Antiquated loft offices are being spruced up and populated by office workers keen on quality of life and better commutes,” said David Schechtman, senior executive managing director & head of investment sales at Meridian Capital.
Bullish on the suburbs
Given the same need for more space at home as in the office, during the first 18 months of the COVID-19 pandemic, many urban professionals relocated their homes further afield from urban centers. This same workforce is now resistant to the long commutes that were once part of its daily routine. In addition, given that in early 2022 the Omicron variant caused many companies to adapt to a flexible return-to-office plan, easy access to an office to foster a hybrid work-from-home model has proved to be a priority.
“Law firms that adorned their mastheads with multiple offices in suburban locations historically housed tiny portions of their staff in those satellite or even sublet office space. Today, there is explosive growth in the acceptability of staff to work outside flagship locations,” added Schechtman.
With an added demand for greater available space and shorter commuting distances, many investors are bullish about opportunities outside of the urban core. For example, on the heels of its acquisitions of office properties in Morristown and Jersey City, N.J., at the end of 2021, The Birch Group purchased 1 and 2 Jericho Plaza, in Long Island’s Jericho, N.Y., another major addition to its suburban office portfolio.
Given the trends in investors’ and tenants’ priorities, office as an asset class may look different from the office of decades ago. Nevertheless, investors and business owners alike continue to see great opportunities in both urban and suburban office markets.
Daniela Alvarado is an associate in Cole Schotz’s Real Estate Department representing clients in all aspects of complex real estate transactions.