One of the key questions about the effect of coronavirus on the office outlook is the potential shift towards the suburban market. Suburban office space acquisitions have been on the rise since 2017, but this trend may pick up as a result of social distancing and increased opportunity to work from home (see the July 2020 Commercial Market Insights report).
The increasing trend towards suburban office development may continue for two reasons: the price differential and the potential movement of people to the suburbs which offer more affordable housing and more space which has become a valuable commodity in the age of social distancing.
Suburban office space: half the cost of CBD office space
Nationally, the average sales price per square foot of office space in May was $238 in a suburban area, just about half the cost of office space in a central business district (CBD) of $500, for properties or transactions of $2.5 million or over in May 2020, according to Real Capital Analytics.
As the Great Recession trend shows, the demand for CBD office space has fallen more than the demand for suburban office space during an economic downturn. During the time of the Great Recession, the share of CBD office acquisitions fell from 48% in 2007 to 31% in 2009. As the economy started recovering, the office space demand increased, with the share of CBD to total sales rising to 53% in 2011. However, since 2011, demand started to shift towards suburban office space, with CBD share trending down to 36% by May 2020. The decline is in part related to the high pace of appreciation of office CBD prices compared to suburban office prices. Office CBD price per square foot appreciated as high as nearly 20% on a year-over-year basis by 2014 while suburban office space only increased by as much as 10% by the peak of the cycle in June 2015.
Several metro areas already have a more active suburban market. Except for Boston and Charlotte, more than 50% of sales of $2.5 million or properties during Jan–May 2020 were in the suburbs and the demand for properties in the suburb is pushing up prices as well. For example, in San Francisco, the price per square foot of office buildings sold in the suburb was higher than in the CBD area, at least for transactions during Jan–May 2020.