In this article, you’ll discover:

• The shift from urban to suburban offices and its effect on rent growth.
• Factors driving the move from cities and their impact on office demand.
• How premium Class A properties are affecting rent averages in both markets.

Navigating post-pandemic office demand has been a tale of two markets: urban rent growth has largely stalled, while suburbs are emerging as the new epicenter of opportunity.

But there’s still a lot of uncertainty regarding whether this trend is a passing fad, or it reveals that seismic and irreversible shifts that have taken place in demand.

So, let’s explore why it’s happening, just how big is the divide in demand, and where is it most notable.

The Flight From the Metros

It’s no secret that in the wake of the pandemic, employees and businesses reevaluated their stake in metropolitan real estate, and many wanted out, not without good reason.

As hybrid work devalued the corner office, businesses no longer extracted the same value from their city offices. 

First, consumer bases have majorly shifted to suburban areas. Therefore, a similar corporate relocation does not risk losing business. Second, the inflated costs of cities are no longer sustainable for companies, families, and individuals, especially given the freedom of remote work. 

And as more companies took advantage of an evolving and more flexible workforce, it launched a major flight from metropolitan regions. Because closing metro offices and reinvesting in suburban locations allows corporations to tap into more affordable, premium amenities since the power of the dollar simply goes further.

These regions have been greatly alluring to businesses of the following points:

• Lower rents 
• Shorter commutes 
• Revitalized talent bases 
• Improved quality of life

Lower rents, boosted quality of life, and improved safety can prove to be a wiser investment than paying for unused square footage in an expensive CBD.

Because of this, rent growth has largely been stalled in urban centers as corporations migrated to more cost-effective suburban areas. So renewed suburban interest at this point has come at the expense of metropolitan market where office lease transaction volume has been downhill since the pandemic.

Urban areas also have potential distress to deal with on the horizon with CMBS loans coming due. Metros have largely struggled with a slower return-to-office rates than their suburban counterparts. And if they can’t bring their buildings back to higher occupancies, they are seriously poised for long-term trouble.

By contrast, the new interest for suburban properties is supported by rapid developments. Over the last two decades, two-thirds of offices built in the United States have been suburban properties.

So not only are they being phased in more to popularity, but they are supported by a robust construction pipeline. This indicates that a fundamental shift may have taken place in the landscape of commercial offices which will persist in coming years.

Mapping Rent Growth is Not a Perfect Science

When assessing rent growth trends in urban versus suburban office markets, it’s important to acknowledge that the distinction between urban and suburban is not always crystal clear.

In some cities like Los Angeles, the definition of the central business district (CBD) has expanded to encompass multiple areas, including Downtown and Century City, while a multitude of cities and regions fall under the umbrella of its suburbs.

Similarly, in New York City, Manhattan is undoubtedly the primary CBD, but the other boroughs, along with sections of Connecticut and New Jersey, often fall within the suburban category.

This complexity in defining urban and suburban spaces underscores the intricate nature of tracking and analyzing rent growth trends.

In regions where the boundary between the bustling city center and the suburbs is distinct, the gap in Class A rental rates can vary significantly, ranging from a modest difference to a substantial contrast.

Premium Properties are Driving up Average Rents

It’s also important to note in the scope of this discussion that premium properties are receiving more interest from tenants across the board. In the Flight to Quality, the Class A (and even above and beyond) offices are in higher demand than the devalued alternatives in both metros and suburbia.

So, when just analyzing the performance of Class A or AA properties in metropolitan regions, it gives a false picture of the reality of the market. There’s been rampant issues with low utilization rates and occupancies. However, this is concealed by the ever-growing rent rates of Class A properties, especially in places like Manhattan.

And because of this phenomenon, this quarter marks the first post-pandemic period in which both suburban and metropolitan markets experienced rent growth.

Where is the Most Suburban Growth?

Suburban rent growth among Class A properties has witnessed notable year-over-year increases while up until this point metro growth has declined.

This growth in metropolitan rental rates can be largely attributed to the Flight to Quality which has exerted upward pressure on rents, particularly within the top-tier property segment. As a result, the rental rates for Class A properties are evening out the overall averages

And in the scope of national averages, the disparity in Class A office rents in the suburbs and city centers doesn’t exceed the $20 range.

But the delineation between suburban and urban office performance is not uniform across the board. Certain cities have a far more significant divide, indicating where demand lies in that particular region.

Take for instance Boston and Miami which both average around $78 psf for Class A office space in their CBDs. Once you leave the city limits for each city, there is a stark difference in the suburban market environment. Boston’s Class A suburban office space averages around $31 psf. By contrast, Miami’s suburban rent is $50 psf.

And if we look at another Southern city, Austin, we also observe a smaller gap between CBD and suburban asking rates. With the highest suburban rent rate out of the three cities, Austin’s average class A space in the suburbs goes for $54 psf. Its CBD rents are not more expensive by much, marking a $17 average distance at $71 psf. So, areas that have seen bustling activity in recent years have also had success spill into their suburbs more.

The delineation between metropolitan and suburban markets pointed out their ability to retain prospects rather than draw in. And this is a major point to digest. Because it indicated that suburban markets are more poised for long-term success and portfolio efficiency while also promoting higher levels of contentedness.

Takeaways for Tenants

The evolving office landscape post-pandemic offers valuable lessons for tenants, and it mostly has to do with your strategic location decisions.

The divide between urban and suburban office markets is far from uniform, with some cities showcasing significant rent gaps between their central business districts and suburbs, while others have a more modest difference.

On the other hand, premium Class A properties are in high demand across urban and suburban settings, masking underlying issues of low utilization rates.

Lastly, companies are showing a preference for retaining their suburban offices, signaling potential long-term success and portfolio efficiency in these markets. And in order to maximize your CRE opportunities while aligning yourself with strategic trends, tenants need to stay aware of the market’s dynamics. Because it’s a tenant-favored market wherever you go, and if your current broker isn’t keeping you up to date, we will.

Subscribe to our blog to receive the latest CRE trends and headlines delivered to your inbox!