Will the Market for Suburban Office Buildings Bounce Back?

The CRE market continues to see brighter days. The volume of overall commercial real estate investment rose 14% last year as compared to 2012, but activity in the office building sector increased even more – by 17% — to more than $104 billion, according to the CoStar Group. Although this didn’t reach 2007’s peak office investment levels, it still demonstrates the return of strong investor interest in office property.

However, this wasn’t the case across all of the top 54 U.S. office markets. New York saw a relatively lower inventory turnover, just 5%, as compared to the average across the top 54 markets, which was 6.33%. That said, New York and Boston experienced some of the strongest demand from investors. The lower inventory turnover in 2013 in those markets is attributable to a shortage of available assets and strong price increases in recent years rather than a lack of interest. Therefore, investor interest has expanded to include other markets because of broader economic growth and higher investor confidence in the office market’s recovery.

Northeast PCG is currently marketing office properties in the secondary submarkets of New York, such as Norwalk, CT, and submarkets of Boston, such as Plymouth, Auburn, and Canton, MA. Sales in these secondary markets will rise as the recovery spreads to more markets and investors move out on the risk spectrum in search of higher yields.

However, despite some hype and a few regional exceptions, the construction of office towers has not made a significant resurgence in the current recovery, according to Joel Kotkin, writing in Forbes. He notes that after a century in which office space expanded nationally with every uptick in the economy, we may have reached something close to “peak office” in most markets.

The amount of new office space in development is extraordinarily low by historical standards, outside of a handful of markets, he noted. Through the third quarter of 2013, new office space under construction in suburban areas was roughly double the amount being built in central business districts, according to CoStar. In addition, only 7.1 million square feet of office space was absorbed downtown in the first nine months of 2013, compared to 51.5 million in suburban areas. Overall, 100 million square feet less space is being used today than in 2007, and at current absorption rates, it could take six or seven years just to get back to where we were before the recession.

It’s the Economy
The key question is why so little office space is being built. As long as economic growth is modest, you can expect to only see a modest change in the suburban skyline. With job growth across the region mediocre at best, and much of it in the low-wage and part-time category, there simply aren’t enough companies and employees to push occupancy levels and rents higher. That said, there are still opportunities to be found in the office market. These include both existing properties and new medical office buildings, whose construction has increased dramatically due to the Affordable Care Act, which has subsidized millions of more people on the insurance rolls.

With offices in Connecticut, New York, Massachusetts and Rhode Island, our investment sales teams are well positioned to support commercial real estate investors looking at office buildings across the region. If you’re a property owner or an investor in the mid-market segment and want to discuss this blog or your investment goals and how we can help you achieve them, please give us a call.