Suburban Office Assets Might Be a Good Bet
We came across an interesting story on the National Real Estate Investor site which summarized a recent report on suburban office buildings. This is an asset class that we really like: class B suburban buildings in great locations, which typically rent for much less than the newer, downtown office buildings. They also tend to provide a more convenient commute, ample parking, and easy access to regional transportation.
From the article:
As this real estate cycle matures, suburban office markets are showing greater promise. They offer more favorable pricing than many urban markets, while at the same time experiencing continued job growth, limited new supply, positive net absorption and in-migration of young workers as they begin raising families, according to the Urban Land Institute’s (ULI) Emerging Trends in Real Estate report.
During a presentation of the report at the ULI fall conference, Andrew Warren, director of real estate research with consulting firm PwC, which provided research support for the report, noted that the oldest group of millennials, who are now in their early- to mid-30s, are moving to suburban communities. ...
Suburban office assets increasingly offer a better value for investors than urban office product. As of May 2018, suburban office values outperformed CBDs on a three-year basis, according to Real Capital Analytics’ Commercial Property Price Indices (CPPI). RCA’s CPPI registered that CBD office pricing has gone down 2.0 percent since it peaked in November 2017 and 0.3 percent year-over-year, while suburban office pricing rose 6.2 percent since last November and 8.5 percent year-over-year.
Suburban office assets can be acquired for below replacement cost and often generate yields that are 150 to 200 basis points above those found in CBDs, Postweiler says. Other incentives for investing in suburban office assets include rising rents, high demand and positive absorption.
Institutional investors are dipping their toes into suburban office markets on a selective basis, but competition for assets remains limited, as the majority of investors is still made up of family offices, small funds and value funds, he notes. And while rents are at historic peaks in some suburban markets, there’s still lots of room for growth before they reach the tipping point.