By Mark Whiting, CEO of Drawbridge Realty
One thing that is clear for the real estate market as we progress into the latter stages of the COVID-19 pandemic is that more and more companies recognize that having an office is not an either/or option. While there have been a few high-profile companies declaring they will move to a fully-remote work environment, the vast majority of companies are pursuing partially remote or hybrid office strategies. Some are requiring all employees to return to the office, though some return dates have been extended.
Even the federal government is considering a hybrid workplace strategy, incorporating work from office, work from anywhere and work from home options that can be tailored to departments, operations and other office-bound parts of the federal workforce. Many more enterprises that haven’t already declared a move to a hybrid strategy are likely to follow suit.
The hybrid workplace strategy is nothing if not a leveler, bringing renewed focus to suburban office markets. Suburban office has been a frequently overlooked segment of the commercial real estate investment market through the years. That’s certainly been the case in the last ten years, when so many investors were wooed by the dynamic growth among tech companies into dense, high-rise office properties in major Central Business Districts (CBD).
That strategy worked for many investors but it took their eye off suburban markets. In a COVID era when companies are searching for alternative workplace solutions, the suburban market’s ability to provide flexibility in workplace strategies means they have an important role to fill for a wide variety of enterprises looking to the future.
Amenities, amenities, amenities
The appeal for enterprises as well as their employees is clear. Suburban office markets offer a variety of office product but are differentiated from urban core markets by the predominance of low-rise, low-density space. These buildings offer shorter elevator rides, easier building access, greater parking ratios, room for enterprises to spread employees out and, typically, easy access to public transportation.
Suburban offices, especially campus-style buildings, also offer greater access to outdoor space, many even incorporating landscaping, outdoor lounges, firepits and wooded trails into their tenant amenity offerings. Outdoor areas, especially in western and Sunbelt markets, are increasingly being used by enterprises for team huddles and formal company meetings as well as lunches, networking events and general employee R&R.
Employees are attracted to suburban offices because the buildings are often closer to their homes and generally offer less-crowded and difficult commutes. With the demographic trends shading toward the suburbs as more Millennial workers move into family formation mode, that’s an appeal that will only grow in the coming years. Companies are increasingly viewing suburban locations as part of a ‘hub and spoke’ real estate strategy with employees able to work in suburban satellite locations for most of the work week and traveling into the main office one or two days a week.
These satellite locations also have another benefit. Employees who don’t want to – or can’t – work from home, have somewhere to go that doesn’t involve commuting to the main office every day.
Beyond the pandemic
There is also a business continuity benefit from suburban office space. Back in 1989, when the Loma Prieta earthquake damaged the Bay Bridge and closed it for a month, San Francisco-based companies with locations in the East Bay were at least able to maintain some operations while their downtown San Francisco locations were out of commission and difficult for employees to access.
This business continuity aspect could be even more important in the future. Events such as localized disasters (wildfires, flooding, poor air quality) and unexpected or even planned power outages may affect employees working from home who may be able to resume work at suburban satellites (with redundant power) rather than having to trek into the main hub.
Suburban office markets have been consistent performers for many investors over the years and the outlook, post-COVID is bright. But investors considering suburban markets should also be careful. Just like urban core markets, not all suburban markets are equal and investors should be strategic when assessing suburban office assets.
For example, suburban office markets with easy access to key urban core markets are more likely to fit into a tenant’s hub and spoke strategy. So, assets in close-in suburban markets around San Francisco, Los Angeles, and San Diego, are more likely to appeal to a broader base of tenants than further flung California markets.
Suburban office buildings also need to be adaptable to provide tenants with maximum workspace flexibility. Buildings without the ability for occupants to easily open up floors are less attractive to most tenants. Similarly, properties without the ability for tenants to expand (or contract) as business factors dictate, carry less appeal.
And, most importantly, suburban office properties likely to provide the best risk/return scenario for investors are those with superior access to amenities. Unlike central business district buildings, which have quick and ready access to restaurants, cafes, retail, leisure facilities and transportation, some suburban assets can occupy ‘amenity deserts.’ Individual assets can mitigate this somewhat by providing food and other amenities on site, such as food trucks and ‘pop-up’ retail stores, but investors should carefully analyze local market amenities and issues before taking the plunge.