With many areas reporting strong construction and leasing activity and other regions' increasing need for space, America's suburban office market continues to be vibrant. From the East Coast to the West Coast to the Gulf Coast, real estate entrepreneurs and developers report a continuing demand for suburban office space, with much of the speculative space now being constructed already spoken for. And, while the Central Business Districts (CBDs) of some major metropolises are reporting a real estate renaissance, those in the industry say the surprising downtown activity isn't occurring at the expense of the suburban markets.
There is continuing strong demand for well located suburban office buildings, notes Robert E. Peterson, president of CarrAmerica Realty Corp., one of the nation's largest suburban office developers based in Washington, D.C. "Our research continues to indicate that leading corporate customers have a strong preference for office locations that provide high quality of life characteristics, minimal commute time and access to an educated workforce," he says.
Development is occurring in suburban markets because many office tenants today are placing less emphasis on the high-gloss buildings of the 1980s and more emphasis on more powerful utility systems, more flexibility in mechanical systems and more adaptability for companies.
"We're still seeing the suburban markets flourish because developers are able to create the type of product that tenants want, with larger floor plates, greater ratios of parking and good access to executive housing," says Lawrence C. Glaze, president and CEO of Glaze Commercial Real Estate Advisors Inc./CRESA in Kansas City. "Those characteristics are in keeping with the suburban market and what it has to offer."
Thomas M. Yockey, senior vice president at CarrAmerica, adds that while his company is always mindful of downtown opportunities, "right now, we're focusing more on select suburban markets - high growth markets and sites that are available in very established suburban areas. I think suburban markets are still where the majority of office market growth is occurring in the U.S."
Yockey may be right on target. According to Grubb & Ellis Real Estate Services, there is some 67 million sq. ft. of speculative suburban office space currently under construction throughout the country, with nearly a third of the space concentrated in the Mountain/Southwest region. That section includes Dallas, Denver, Houston, Phoenix and San Antonio. The Pacific Northwest, which includes the San Francisco Bay Area, Seattle and Portland, reports some 8.7 million sq. ft. of spec suburban office space being built, while the Pacific Southwest, which includes Southern California, has 6.3 million sq. ft. under construction. The Midwest has 5.5 million sq. ft. of office space going up while the Southeast, including Atlanta and Miami, has 5.7 million sq. ft.
That contrasts with 8.8 million sq. ft. of spec office construction in the country's downtown areas, with a quarter of that amount being built in the Pacific Northwest. In Portland, for instance, 806,000 sq. ft. is being put up in the Central Business District, while 788,000 sq. ft. is under construction in the San Francisco CBD and 396,000 sq. ft. in downtown Sacramento. Grubb & Ellis reports no CBD spec construction in San Jose, Los Angeles, San Diego, Dallas, Denver or Houston, while midtown New York has 1.5 million sq. ft. under construction and the Washington, D.C., CBD has 2.2 million sq. ft.
"As of the fourth quarter, suburban spec construction was still on the rise," says Robert Bach, national director of market analysis for Grubb & Ellis in Northbrook, Ill. "It looks like all this construction is continuing to increase, which is surprising because everyone thought we'd see a decline in construction because financing wasn't as widely available and terms weren't as generous late in 1998. But it looks like developers are finding ways to finance suburban spec construction."
Bach added that CBD vacancy rates have dropped and are about the same as suburban rates. "We're starting to see a little spec development downtown, which is a sign that some downtowns are pretty tight," he continues. "There is less construction there, and what construction there is, is meeting with greater pre-leasing." Clark S. Gore, executive vice president of Atlanta-based Holder Properties, notes that his company has been focusing on the Alpharetta submarket outside Atlanta, and was one of the early pioneers of speculative development in the area. The company's projects include 300 Windward Plaza, a 132,000 sq. ft. project in the heart of the Windward Business District, and 225,000 sq. ft. of speculative and build-to-suit space in Great Oaks Center, located halfway between Windward and North Point Mall.
"Both of those projects are speculative projects, and both are now enjoying a tremendous amount of prospect activity," Gore adds. "The health of the Alpharetta submarket continues to indicate there is quite a bit of demand left. Alpharetta has gone from a kind of 'out in the boonies' town four years ago to an area having some of the finest residences, offices and shopping today. People have the ability to work, live and play within the Alpharetta submarkets."
Gore adds that there is some talk of companies moving to closer-in Atlanta. "Most of the people that migrated to the suburbs are not really impacted at all by the new motivations to revisit the Midtown and downtown submarkets of Atlanta," he adds. "Those people moved out for access advantages and for business lifestyle advantages that they still see in suburban markets. People looking at Midtown are more entrepreneurial - advertising firms, high tech firms, law firms, professionals if you will, excited by the urban environment."
In addition, he adds that the migration to the CBD is "somewhat of a good Samaritan movement, to reinvigorate these urban markets, to be part of a resurgence. BellSouth announced a huge commitment to the urban marketplaces. Other corporate citizens see it as good for the city."
Such suburban scenarios are being played out elsewhere. Phil Baker, president of Baker Commercial Realty, a full-service commercial firm in Las Colinas, Texas, says he is seeing an upswing in individual and corporate interest in places like downtown Dallas, led by Dual Income, No Kids (DINK) couples who like the "reverse commute" during rush hour. "The problem is that the downtowns lack some of the ancillary amenities, such as immediate adjacent parking, that are standard in suburban office locations," he says. "In downtowns, sometimes employees have to walk great distances after parking their car, and that may make the CBD not as attractive."
Suburban locations offer more amenities, Baker notes, which is why construction activity has been dynamic in locations such as Las Colinas during the last 24 to 30 months. "The developer list (at Las Colinas) is pretty substantial, including Koll, CarrAmerica, Champion Development, Granite Properties, Macfarlan, Prentiss Properties and Opus South, among others," Baker says. "Of the buildings currently under construction, 40% of them are pre-leased. The market is a lot smarter now, particularly some of the traditional sources of financing. No one wants to make a mistake of building a building ahead of its time. No one wants to be the last one to jump in."
He adds that suburban office construction has been fairly consistent - structures designed to be extremely cost efficient. In the beginning, he says, projects were sort of 'econo boxes' that were designed with frugality in mind. "Now we're seeing a little bit more stylistically designed buildings, but I don't think we're ever going to see a return to expensively designed granite clad buildings because the market does not support it," he adds. "The space that is coming on line is very cost efficient."
Companies today want function over price, says Richard Gatto, senior vice president at The Alter Group, a major real estate player based in Lincolnwood, Ill., near Chicago. "Corporate America doesn't want fancy aesthetics, but a good quality product," he adds. "The money that would have funded a showy building is now being spent on HVAC, better technology, added parking areas and other areas instead."
Because suburban projects involve a smaller dollar value than projects in the CBD, they are more quickly constructed and financed easier, he notes. "A lot of buildings are being built on the periphery of CBDs and they are smaller structures, in the 300,000 to 500,000 sq. ft. range," he continues. "From a suburban perspective, the buildings are big, but compared with a downtown structure, which is typically twice or three times as large, the suburban buildings are smaller."
Most suburban office markets remain hardy, he adds. Phoenix is but one example. The Alter Group is building a three-story 100,000 sq. ft. suburban office project in the area, off the I-17 corridor. "We've topped off the first building and leased 70% of it. We've ordered steel and pre-cast for the second building based on strong leasing, and hope to deliver the second building later this year," he says.
Suburban office markets are strong throughout the nation, including some new areas, says Richard C. Page, senior vice president/national marketing for Opus National based in Chicago. "With 24 offices, we are very active across the country," Page says. "We just opened a suburban Philadelphia office because we feel we'd like to do some projects in the area. We're a little bit ahead of the curve, but we're seeing an opportunity because the suburban office markets in that area are tightening and rates are starting to rise."
Opus has a number of suburban projects under way across the United States, Page says. "Washington, D.C.; suburban Maryland; and suburban Virginia have been strong markets," he adds. "Orlando and Tampa are strong. We have a project, Maitland Promenade, in Maitland, a suburb of Orlando, with 226,000 sq. ft. available. And we are not the only one active in the Orlando suburbs. Disney is building some offices and there are others as well."
Page adds that Atlanta is a strong market, "although it's an area we're being cautious about. Dallas continues to have strong demand in Las Colinas, but we're avoiding Richardson, which appears to be getting a little overbuilt. There is quite a bit of activity in Phoenix in Scottsdale and at Gateway at Sky Harbor Airport.
"The market continues to be strong, with a number of new people moving into town," he adds.
For Opus, Chicago's suburbs - particularly the area's east-west corridor - continue to be active. Suburban Minneapolis has been strong, he adds, and Opus has projects in suburban Kansas City, Denver and a number of other cities.
"In general, the suburban office market is strong and continues to be strong," he adds. "In the office sector, I'm not sure any market is going unnoticed today, but we are uniquely capable of seeing it all due to our national scope, and in many cases, we are the first ones in."
Other companies are also active. Houston-based Hines is building in a number of suburban locations throughout the country, including Woodfield Preserve in Schaumburg, Ill., outside Chicago, where it is constructing two six-story buildings totaling 600,000 sq. ft. Nearby in Oak Brook, Hines is building a five-story 213,000 sq. ft. Oak Brooke Pointe structure. In Phoenix, the company is building 350,000 sq. ft. for Vanguard, while in Washington, D.C., Hines is constructing a 12-story, 725,000 sq. ft. project for Gannett Corp./USA Today in McLean, Va. Other Hines locations include Carbondale, Colo.; Nashville; and Atlanta.
Atlanta continues to attract a number of new suburban projects as well as new developers. Richard Bowers & Co., for example, is building a 10-story, 221,000 sq. ft. office tower at Riverdale Road and I-85 called Waterstone Tower. It is located about a mile from Hartsfield Airport.
Bowers has also secured zoning approval for a 78-acre office development in Tyrone, Ga., that will eventually total 700,000 sq. ft. of space spread over 21 mid-rise, and one- and two- story buildings. "We are confident in the pent-up demand for south side office space," Bowers says. "According to industry statistics, 40% of the growth in metro Atlanta is south of Interstate 20, and we expect that number to continue and increase in the coming years ahead."
Companies such as CarrAmerica are selecting the best land sites in key growth markets, says Yockey. "Hot suburban markets right now are in Chicago, Austin, Denver, San Francisco, Seattle, and the suburbs of Virginia, among other areas," he adds.
For instance, Yockey says the Reston/Dulles/Tyson's Corner areas continue to be hot spots for high-tech suburban development. "We just completed a project for Nextel, a 300,000 sq. ft. headquarters in the Dulles corridor in Reston," he adds.
Construction of suburban office space has been impressive and concentrated over the past several years. Janice Stanton, director of investment research for Cushman & Wakefield in New York City, notes that of the 68 million sq. ft. of office space under construction today, over half is focused in the Top 7 markets including Dallas, with 11 million sq. ft. under construction after building 9 million sq. ft. in 1998; Northern Virginia, with 6.7 million sq. ft. being built after 1.7 million sq. ft. was completed last year; and Houston, with 5.3 million sq. ft. going up after 1.6 million sq. ft. was delivered last year.
"What we've seen going on is a tremendous building boom," she continues. "In Denver, there is 4.3 million sq. ft. being built, with 2 million sq. ft. built last year. In Boston, 3.5 million sq. ft. is under construction, with half that amount completed in 1998. Other locations include Atlanta, with 2.5 million sq. ft. under construction and 6.5 million sq. ft. feet finished last year; Chicago, with 3.7 million sq. ft. currently going up and 2.6 million sq. ft. finished last year; and Seattle-Bellevue, with 2.1 million sq. ft. under construction."
Certain suburban office markets may need the space, but as vacancy rates tighten and building continues, there could be problems down the line. "We're not sure we can continue to absorb at the pace we have," Stanton says.
At the same time, the competition for companies to lease space between the CBDs vs. the suburbs is increasing, but the two markets are completely different, she adds. "Ten years ago everyone moved to the suburbs as a cost cutting move," Stanton says. "What you're seeing now is companies coming back to CBDs because they get a more highly educated work force. Where you have a 24-hour CBD - where there is strong shopping and residential components - those are the CBDs that are doing well, including Boston, San Francisco, the Washington, D.C., areas."
The resurgence of downtown areas is not occurring to the detriment to the suburban markets, she adds. "It's not like the suburban offices are closing and moving back downtown," she adds. "It's the character of the space. The suburbs have attracted many large companies with back office operations. The creative, financial and management types have generally stayed in CBDs."
Yockey of CarrAmerica notes that downtown seems inexpensive because there has been substantial overbuilding in the past, thus driving down rents in those urban locations. "Whether to locate in the CBD or the suburbs is a lifestyle issue as well," he continues. "I think high-tech companies, firms considered on the cutting edge, need types of sites and locations the suburbs can offer for recreation, parking and other reasons."
The suburban office markets are expected to continue to be strong in the months ahead. Mark J. Small, president of MJS Resources Inc. in Dallas, notes that the crisis in Asia will pass and the global economy will settle down. In addition, places such as Dallas are still gaining jobs. He adds that construction remains robust.
Many others would agree. Glaze of Glaze Commercial in Kansas City notes that larger floor plans offered by suburban buildings are sought by users because of greater employment densities. This requires more parking to accommodate additional employees. And, in contrast to downtown buildings, there is less emphasis on lavish building finishes, but more emphasis on state-of-the-art mechanical systems, electrical capacity and advanced technological components.
With strong construction and leasing, and in spite of some companies taking a closer look at downtown locations, suburban office markets are expected to continue on their upward curve in the year ahead. With the continued strength of the U. S. economy, the suburbs are providing companies what they need - good buildings at a good price. And while some clouds may be appearing in the future, the present forecast is for "more of the same" in the suburban office sector.