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Suburban Office Heats Up as CBD Demand Spills Over into Outlying Markets

CBDs Still Dominate U.S. Office Market, but Well-Located Suburban Submarkets Seeing More Leasing Activity, Absorption Gains, and Even Some Rent Growth
April 28, 2016
In  one of the largest leases of the first quarter, The Ethos Group leased 100,000 square feet of ARK Group's Music Factory project under development in Las Colinas within the Dallas suburb of Irving, TX..
In one of the largest leases of the first quarter, The Ethos Group leased 100,000 square feet of ARK Group's Music Factory project under development in Las Colinas within the Dallas suburb of Irving, TX..
Tenant interest in suburban office space is finally ramping up, with many suburban office markets starting to see gains in net absorption, occupancy and rental rates after watching their urban counterparts enjoy steady gains over the past several years.

While it may be premature to pronounce a full comeback, suburban markets showed the largest increases in year-over-year demand on both a square-foot and percentage growth basis, according to analysis of first-quarter 2016 office market perfromance.

The average suburban asking rent gained 4.6% in the first quarter, compared with a 3.4% year-over-year increase in CBD markets, a further sign of the recovery in the nation’s suburbs, according to Robert Bach, director of research for Newmark Grubb Knight Frank, citing the firm’s first-quarter U.S. office review.

While the suburban vacancy rate of 14.7% remains well above the 11.9% CBD rate, suburban markets have tightened slightly faster than downtown core areas over the last year, with the average vacancy rate falling by 70 basis points in the suburbs compared with an average 50-bps decline in CBD markets, according to NGKF and CoStar data.

Tech-focused suburban markets San Jose and Austin racked up the largest increases over the last 12 months. San Jose absorbed a staggering 5.6 million square feet in the 12 months ending in the first quarter, a 6.5% change in demand. Austin’s suburbs logged 3.4 million square feet of net absorption, growth of over 5%, compared with the 500,000 square feet and 3.5% demand growth in the Austin CBD.



Net absorption in Phoenix’s suburban markets grew by 3.5% to 4.4 million square over the last 12 months, and even suburban Houston, driven largely by the move of ExxonMobil into its Springwoods Village campus, saw a 2.5% increase to 5.2 million square feet, since the period ending in first-quarter 2015.

"Some of the suburbs are really catching on fire. The numbers are strong across the board," said CoStar Director of Office Research Walter Page. "The absorption numbers are strong for the CBDs, but not nearly as strong as for the suburban markets."

The Denver and Nashville suburbs also posted larger absorption numbers compared with their urban core counterparts, while suburban Phoenix and Raleigh, NC also saw strong gains.

A survey of first-quarter CoStar lease comparable data showed a number of large leases of 100,000 square feet or larger in strong suburban markets. For example, private automotive franchisor The Ethos Group leased 100,000 square feet of ARK Group's Music Factory project under development in Las Colinas within the Dallas suburb of Irving, TX.

The Las Colinas project also meets the need for newer product in the 'burbs. Many companies have fled these properties for higher-quality office quarters closer to the CBD over the last 10 years.

Location certainly matters, but so too does the product, said Aaron Jodka, CoStar manager, U.S. Market Research. Older 1980s-vintage office properties, many of which are in the suburbs, have had the weakest recovery during this cycle, and tenants have shied away from that product in favor of newer assets, Jodka said.

"Much of the suburban story of late on the supply side has been build-to-suit, and those seeking campus locales are opting for that type of development in the suburbs," Jodka added.

Suburban submarkets such as Sunnyvale in Silicon Valley and Route 28 South in Northern Virginia led first-quarter U.S. absorption totals in an otherwise muted first quarter for occupancy growth, according to JLL’s first-quarter office outlook. Rents in several suburban submarkets such as Redwood City, CA on the San Francisco Peninsula and Gramercy Park in New York City as demand spills into the Class B office sector, JLL said.

Even Chicago's beleaguered suburban office market received some welcome good news in the quarter as several companies renewed their leases in the first quarter, including AIM Specialty Health's lease at 540 Lake Cook Road for 94,000 square feet and Houghton Mifflin Hartcourt, which re-upped at 909 Davis Street in Evanston for almost 60,000 square feet.

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