Suburban Offices Vs. Urban Offices: A Growing Divide

As the office market continues to struggle nationally, there remains a tendency to paint the entire sector with one broad brush. According to the overly simplistic story line, the “doom loop” for offices applies to offices of all types, and in all locations.

As we have been discussing over the last few months, the reality is more nuanced. Some office buildings and some locations are clearly struggling. But that does not mean that every office building everywhere is in trouble.

One important distinction is the divide between urban offices and suburban office buildings. In our market, the Tampa Bay region, there is a large gap between the city centers and the ‘burbs. Highly amenitized downtown buildings continue to outperform, while plain-vanilla offices near interstates are struggling.

The trend holds nationally. For instance, New York City, hard hit by the pandemic, has rebounded and now boasts one of the highest occupancy rates in the country. Despite rumors that the Manhattan office market would not get off the mat, it has seen some impressive activity. One notable example, for instance, was seen during the fourth quarter of 2023 when law firm Paul, Weiss, Rifkind, Wharton & Garrison leased 766,000 square feet of office space on the Avenue of the Americas.

Manhattan’s vacancy rate was a healthy 12.8% at the end of 2023, according to Colliers. By contrast, vacancy in New York City’s northern suburbs was close to 20%.

Other suburban markets are showing signs of stress. In the Chicago suburb of Downers Grove, a 251,000-square-foot office building went into foreclosure last year and was expected to sell in 2024 at a deep discount.

In the Washington, D.C., suburb of Arlington, Va., the office vacancy rate is above 21%. In Santa Ana, California, the owner of a suburban office property near John Wayne Airport, Kearny Real Estate, wearied of 40% vacancy rates, decided to demolish the office property and build warehouses instead. 

Despite predictions that long commutes would discourage suburban office workers from returning downtown, the evidence suggests otherwise. In fact, downtowns appear more attractive workplaces—even for those not required to be there. For its City Pulse 2023: The Future of Central Business Districts report the Gensler Research Institute surveyed 26,000 urban residents.

“Much of the decline in central business districts—and city economies overall—has been attributed to the rise of hybrid work,” Gensler wrote. “However, as urban centers emerge from the pandemic’s immediate aftermath, hybrid workers have not abandoned or lost enthusiasm for their downtowns. Sixty-six percent of hybrid CBD-based workers visit their CBDs at least some remote workdays. And 58% of downtown hybrid employees work from cafes, co-working spaces, and other third places within their CBDs.”

During the pandemic, many observers predicted the death of downtown offices. But the skeptics failed to understand the importance of urban amenities. A separate Gensler report says younger workers want “a welcoming, amenity-rich environment with a hospitality vibe encouraging socializing, connecting, and community. In fact, 86% of younger workers said they’d come into the office more if their employer provided their ideal mix of experiences.” 

Suburban office buildings might be able to invest heavily in amenities to deliver the experiences today’s office workers want, but even those efforts will struggle to match the restaurants, coffeeshops and social interactions offered by vibrant city centers.

Suburban office is not dead, of course. Gensler’s City Pulse report noted a “halo effect” around downtowns also applied to suburban downtowns. Offices in suburban downtowns have seen rent premiums of 40% to 60% compared to those far removed from any semblance of a business district. So perhaps the lesson is not that all suburban office markets are on life support, but rather that office locations outside of prime locations will face headwinds—or be demolished and replaced by logistics centers.

The Florida success story

Population inflows and job growth are important drivers of office demand. As employers and employees gravitate toward amenitized buildings in bustling downtowns, Feldman Equities remains hyper-focused on our strategic sweet spot. We reposition struggling office space, and we build new space in downtown markets.

Florida’s winning combination — warm weather, reasonable regulations and a modest tax burden — is luring employers south. Financial firms from New York and Chicago and tech companies from California have been flocking to Florida.

Feldman Equities remains laser-focused on our strategic sweet spot. We reposition struggling office space, and we build new space in downtown markets. The trend is clear: Employers and workers are gravitating toward Florida’s combination of warm weather, low taxes and common-sense regulation. And once they’re here, they want to work in vibrant downtowns, with plenty of access to restaurants and entertainment.

The trend is clear: Employers and workers are migrating to Florida’s combination of sunny skies, low taxes and common-sense regulation. And once they are here, they want to work in vibrant downtowns, with convenient access to restaurants and entertainment.

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