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October 17, 2017

The headlines have painted a downtown-centric picture: big corporates moving out of the leafy suburbs into the concrete jungle, leaving behind a trail of empty suburban office buildings.

But here’s a headline you might not be expecting: “Investors set sights on suburban office.”

“There is this false notion that the suburbs aren’t desirable for investors,” said James Postweiler, JLL Managing Director. “The fact is there is strong demand that we only see getting better.”

The numbers are clear: rent growth has been strong for suburban office, especially Class A product.

JLL research shows suburban Class A and B vacancy is the same as CBD product at 10 percent. Where the two diverge is rent growth.

Since 2010, suburban Class A rent has increased 18.3 percent and has seen a large uptick in the last two years. Meanwhile, CBD Class A rents have grown 33.1 percent and hold a 63.2 percent premium to suburban buildings.

“There’s no question that CBD assets are at the top of many investors’ lists, but where the suburban product has an advantage is for investors looking to tap into a much stronger relationship between risk and return,” said Postweiler. “The credit worthiness of suburban tenants is equal to or better than the CBD, and yields favor suburban product as well.”

Postweiler notes Chicago’s suburbs as an example. The suburbs there have a ratio of Fortune 500 companies of nearly two to one.

Transit, walkability drive value

Not all suburban office product is created equal. According to JLL research, proximity to transportation and walkability are two key factors in determining rents for suburban office.

Walkable suburban submarkets have just 14.5 percent vacancy, while transit served submarkets are showing 15.3 percent vacancy.  However, Postweiler notes, these numbers do not include owner-occupied space, which would push suburban vacancy much lower.

Those that are both walkable and transit served are rare – there is only 21 million square feet available. But here’s the kicker: JLL research shows those markets that allow easy access to transit have rents that are 79.5 percent higher than those without transit accessibility.

“We’ve seen a development of clusters where Class A offices are near amenities like retail and provide easy access to transit as employers realize that urban-suburban feel can effectively attract talent,” said Sean Coghlan, JLL Director of U.S. Investor Research.

“This has been the case in cities such as Boston and Atlanta, where tenants are finding high quality office space at a discount relative to the CBD,” Coghlan noted.

Where does the road to the suburbs lead?

The national office market is well along in the cycle, with construction at near-cyclical highs. Development remains pretty evenly balanced between urban and suburban settings, meaning opportunity exists in both.

With tenants continuing their flight to quality, that new supply has created an increase in vacancy that landlords will aggressively be looking to fill.

“With where we’re at in the cycle, we anticipate investors to take a long look at suburban office when considering the longer term leasing landscape,” said Coghlan.

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James Postweiler

Managing Director, JLL Capital Markets

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