Thanks to a strong economy and a surplus of amenities, the nation's suburban office markets are enjoying phenomenal success.
Suburban office markets are doing quite well, thanks to a strong economy and the need for companies to locate in proximity to the best available labor markets. While downtown rental and occupancy rates are impressive, most industry sources say that the suburbs will not lose tenants to urban market renovations and construction.
In fact, the higher downtown rents and declining vacancies work to the advantage of suburban developers who can offer lower leasing costs, free parking and more amenities that appeal to the true powerin today's hot economy: present and future employees.
Crunching the numbers Although there is a growing movement in many areas to "repopulate" the nation's downtowns, most sources agree that the suburban and CBD markets are not in direct competition with each other. Granted, downtown office markets are on the upswing. Their access to public transportation and an eclectic assortment of renovated housing, restaurants and entertainment appeals to the employees of young dot.com companies as well as to law firms, banks and corporate headquarters.
Class-A rents in the nation's CBDs have jumped by 16.4% to about $42 per square foot full-service gross, and Class-B rents have experienced a 21.5% gain as telecom and Internet companies absorb B and C spaces, reports Northbrook, Ill.-based Grubb & Ellis. Meanwhile, suburban Class-A rents have increased only half as much, or 8.3%, to about $27 per sq. ft., and Class-B rents have increased by 6.5%. Also, CBD vacancy rates have dropped more than suburban rates.
But in markets such as Atlanta, the success of downtowns can actually create opportunities for the suburbs. According to Duncan Gibbs, first vice president of CB Richard Ellis' Corporate Services Group in Atlanta, high-tech companies have virtually gobbled up all the Downtown and Midtown office space, pushing the demand for intown space to record levels and fueling more demand into the suburbs.
In Chicago, the numbers might play themselves out like this: After constructing a 17-story building in downtown Chicago, rents would be about $20 net. Add on taxes and operating expenses and it will cost tenants approximately $35 per square foot on an overall occupancy basis, not including parking costs, says Richard M. Gatto, executive vice president of The Alter Group, Skokie, Ill. Contrast that with The Corridor, The Alter Group's new seven-story suburban building with underground parking in Downers Grove, Ill. At about $24.50 gross, Gatto is quick to point out savings of almost $10 per square foot.
Along with financial savings, the suburban office market - especially suburban office campuses - offers tenants more growth flexibility and a number of amenities that also appeal to manufacturing centers and labor-intensive technical businesses such as call centers.
Suburban offices aid in recruiting Suburban office settings have become valuable recruitment tools. In the past, buildings were designed to appeal to the corporate executive or facilities director, but today the "employee is a corporation's most important asset," says Brandon Birtcher, co-chairman and chief development officer for the Laguna Niguel, Calif.-based Birtcher Real Estate Group.
With their open settings, green areas, closeness to housing developments and schools, lower commute times and increasing amenities, suburban campus sites appeal to tenants from a wide variety of industries, including electronics, software, e-commerce and bio-medical, which is now responsible for an increasing percentage of absorption.
Birtcher says projects such as his company's 2.2 million sq. ft. AmberGlen project in Portland, Ore., address the needs of working mothers by providing maternity-friendly bathrooms equipped with outlets for breast pumps and a separate rest area. Daycare centers, footlockers and showers also are incorporated into large projects, and elevators are mirrored on three sides with polished doors to assuage late-working employees' fears of who may already be in an elevator.
Suburban campuses also offer access to more natural environments. Some of Birtcher's Southernprojects feature citrus trees as well as volleyball and basketball courts in the common areas, and gazebo areas with conduits for laptops.
Single-digit vacancies and strong demand are the rule in the San Francisco Bay area, where the environment is taken seriously. The planned 900,000 sq. ft. America Center in San Jose, Calif., is one such environmentally oriented project says Allen Palmer, senior vice president of Foster City, Calif.-based Legacy Partners. Formerly a landfill with wetlands, Legacy, working with the city and landowner, plans to take this 60-acre site and develop roughly 30 acres while maintaining the remainder of the land as space dedicated and open to the public, with a walking and jogging path, and habitat for burrowing owls. Although still in the design phase, the project is already oversubscribed, says Palmer.
In Tampa, Indianapolis-based Duke-Weeks Realty Corp. is developing a 450,000 sq. ft. campus for Chase Manhattan at Highland Oaks, where each of the three 125,000 sq. ft. buildings is set in a natural setting of 75- to 100-year-old oak trees and walking trails, says Forrest Robinson, executive vice president at Duke-Weeks. The development also includes two 125,000 sq. ft. spec buildings.
On-site food service, banking and printing services also are available on large suburban campus developments, such as the 1.7 million sq. ft. Summit Office Campus in Aliso Viejo, Calif., says Russ Parker, principal of Aliso Viejo-based Parker Properties. Suburban office campuses need on-site amenities to reduce the impact of traffic on the local environment because single- to three-story campus buildings generally employ parking ratios of four to five per 1,000 sq. ft.
Some of the strongest markets for these types of campuses include the Sunset Corridor in west Portland, Ore., and the Vancouver/Seattle market. In Southern California, it's southern Orange County, the Santa Clarita Valley and the Kearny Mesa area of San Diego. Rents for these products range from $12 to $14.50 per square foot triple net in the Northwest, while in Southern California they might be as low as $17.50 and as high as $29 triple net, according to Birtcher. Indicative of the success of these projects is their vacancy rates: 5% or less from the Northwest to the Southwest.
"Globally speaking, employers seem to have a greater appreciation for selecting real estate in such a way as to ask, `Will this real estate help me attract and retain key employees?'" says Birtcher.
Robust markets nationwide Job growth, employee availability and strong local economies appear to be the driving force behind the high absorption and increasing rental rates in suburban markets across the country. According to Gatto, the Alter Group is doing business in 16 different markets, and leasing activity in the first seven months equals the total for all of last year.
"The demand is equal to or very close to last year's demand, absorption is running very high and rental rate growth is higher than last year," says Jeffrey M. Schotz, senior vice president/managing director of Melville, N.Y-based Reckson Associates Realty Corp. "So, overall, one could safely say that the suburban real estate markets are as strong this year as last year."
Mountain region flies high According to Palmer, in most Denver suburbs demand exceeds supply, vacancies have declined and rental rates have risen. CBD office building designers are competing with suburban projects by copying the larger floor plans and adding higher, exposed ceilings; additional vertical chases for running cable and wiring; and emergency generator pads.
Legacy Partners has taken this approach with The Trillium, a 240,000 sq. ft. building in downtown Denver designed with elements of a suburban office. "The Denver suburban markets are so very strong and healthy, this [project] doesn't adversely affect them," says Palmer. In the submarket of Broomfield, Colo., Legacy's three-building spec development, Mountain View Corporate Center, was 100% preleased by tenants such as Arthur Andersen and Ford Motor Credit.
Southwest sizzles Larry P. Heard, president of the Southwest region of Chicago-based Transwestern, reports that suburban markets throughout the Southwest are doing quite well, benefiting from strong job growth and population migration in Denver, Dallas, Houston and Austin, Texas. According to Heard, overall vacancy in Dallas is 10.5% and in Houston 11.7%. Vacancy rates in the 10% to 12% range seem to be the norm, while average suburban rents in Dallas are $20 to $21 per square foot gross and $18 to $19 gross in Houston. Average rents for new suburban buildings are $3 to $4 higher, Heard says.
Michael O'Hanlon, managing director in the Dallas office of New York-based Insignia/ESG, says that Dallas is experiencing record absorption. Companies increasingly want to be in a campus setting with parking ratios of five spaces per 1,000 sq. ft., and that can only be achieved in the new suburban areas.
Dallas is enjoying record job growth, which is expected to continue through at least 2001. San Jose, Calif.-based Cisco Systems plans to add 1,000 new workers yearly in the area through 2004. O'Hanlon sees the Telecom Corridor as the strongest market in the Metroplex with approximately 1.3 million sq. ft. leased in the past year, followed by the North Tollway submarket with 1.5 million sq. ft. of net absorption, and the Las Colinas submarket with 650,000 sq. ft. absorbed.
In Austin, Texas, Transwestern has developed two office parks for Bloomington, Ill.-based State Farm Insurance Cos. - Monterey Oaks, a five-building, single-story garden-office complex, and Amber Oaks, which consists of one- and two-story buildings.
In Denver, Transwestern developed Lincoln Executive Center, which also includes one- and two-story buildings. All three of these products exceeded the company's expectations, says Heard. "It usually takes 18 to 24 months to lease up to a stabilized occupancy, but because of strong markets and job growth we did this in six to 12 months," he says.
Heartland sees healthy absorption Grubb & Ellis reports that the Midwest is upbeat with the vacancy rate in Chicago's Class-A and B office stock at 7.3%, while vacancy rates in Minneapolis-St. Paul are 8.6%. Cleveland posted net absorption of nearly 400,000 sq. ft. in the first half of 2000 and an overall vacancy rate of 12.6%.
According to Rich Horn, president of the Duke-Weeks Midwest office, some of the strongest suburban markets in the Midwest include Columbus, Ohio; St. Louis; Indianapolis; Minneapolis; and Chicago's western suburbs. For Duke-Weeks, signs of healthy suburban demand were apparent in their three-phase Central Park of Lisle project in Lisle, Ill. The first phase of the 600,000 sq. ft. development was fully leased, and the second is 90% leased. The third phase, when completed, will add another 300,000 sq. ft.
The perception remains that the suburbs are zooming, says Burt Follman, chairman and CEO of St. Louis-based Follman Properties- ONCOR International. Although the suburbs are faring better than the St. Louis CBD, the pace has slowed, he says. As of July 1, the overall suburban vacancy rate was 8.86%, while historic downtown St. Louis posted a 7.8% vacancy. That will change over the next six to nine months, Follman says. "We will see another 400,000 sq. ft. dropped into the downtown CBD, which will take some time to absorb," he says. Nevertheless, downtown St. Louis is seeing new condos and lofts establishing a presence, he says, which should aid absorption.
Meanwhile, companies, especially the dot.coms, are finding the young work force they seek in the suburbs, says Follman. His firm recently relocated spin-off Energizer Battery from Ralston Purina Co.'s Checkerboard Square in a long-term lease for 167,000 sq. ft. in Maryville Office Park.
"A lot of sparks are flying here," says Follman of the St. Louis suburban office market. "It's not as robust as a year ago, but there are still a lot of dynamic things happening. The St. Louis market is a burgeoning national presence."
The Twin Cities' suburbs accounted for much of the office absorption in Minneapolis-St. Paul, according to Darryle Henry, senior vice president of Duke-Weeks' Minneapolis Office Group. Out of an overall office space absorption figure of 900,000 sq. ft., the suburbs accounted for 750,000 sq. ft. "There are whispers, though, that the CBD has had a phenomenal absorption rate this summer," says Henry.
The continued growth of companies already in the Twin Cities, such as Target, American Express and Best Buy, is driving the demand for suburban space, says Henry. For example, Duke-Weeks recently leased 125,000 sq. ft. to Net Perceptions Inc., a Minneapolis-born high-tech company.
Henry cites today's tight labor market as a major reason companies want to locate in the suburbs. "Companies are looking for ways to keep employees, so they look for attractive office settings with amenities such as restaurants and fitness centers," he says. The suburban vacancy rate is between 9% and 10%, he adds.
In Detroit, two Farmington Hills, Mich.-based real estate firms, Paragon Corporate Realty Services and Friedman Real Estate Group Inc., in their mid-year reports acknowledge the current 10%-plus vacancy rate for suburban Class-A office space, but point to tenant relocation as the culprit and continued healthy demand as the solution.
"The formerly pent-up demand has been met, and there are more choices now for tenants," says Matthew Fenster, executive director of Paragon Corporate Realty Services.
"There is also more of a balance between supply and demand - it's now pretty even," notes Fenster. Office vacancy rates are 7.66% in the suburban market and 9.8% overall including downtown Detroit.
Cost is the biggest factor driving businesses to locate in Detroit's suburbs vs. downtown, he says, citing the city income tax and parking fees that companies often reimburse their employees for can add $9 to $11 per sq. ft. to a tenant's rental rates. Detroit's limited mass transit system also serves to tilt the scales in favor of a suburban location, says Fenster.
D.C., Northeast doing fine The Washington, D.C., area has added more than 100,000 new jobs during the past year, according to Los Angeles-based CB Richard Ellis. Overall, office markets in Boston and New York have less than 8% vacancy rates, reports Grubb & Ellis. In New Jersey - as in other locations - focus is on price, employee availability and growth flexibility, which often is a barrier to renting downtown. While the Northern and Central New Jersey office markets are experiencing low availability, the New Jersey suburban market has been vibrant, says Joel Bergstein, principal of Rutherford, N.J.-based Lincoln Equities Group.
According to Bergstein, vacancy rates in the Meadowlands are below 10%, and Class-A vacancy rates in Middlesex are close to 11%. Absorption rates are solid, and Lincoln is preparing to develop Highland Cross, a 900,000 sq. ft. complex in Rutherford, N.J. Bergstein reports a greatof interest from high-tech, full-building and multi-floor tenants because these efficient facilities meet the power, fiber and cooling needs of high-tech tenants.
Lower rents also appeal to potential tenants. In contrast to the $70 per square foot rates in Downtown Manhattan and Midtown, rates are in the high-$20's in Morris County, N.J., the low-$20s in the Middlesex market and are $29 per square foot in the Meadowlands market, says Bergstein.
Jersey City, reports Grubb & Ellis, is absorbing Manhattan's overflow of financial services firms. According to Schotz, tenants in telecommunications, pharmaceuticals, e-commerce and financial services are attracted to the strong submarkets in Jersey City's Hudson Waterfront market and Essex County. In Princeton, N.J., Reckson is starting University Square, a 316,000 sq. ft., five-story Class-A office building, and in the Short Hills submarket, Reckson is developing 51 JFK Parkway, three office buildings totaling 500,000 sq. ft.
Southern markets hospitable Suburban markets in Atlanta are doing well compared with last year, says Chuck Moody, director of national business development for Tampa-based Opus South Corp. In suburban Atlanta, vacancies range from 8.5% to 10%, and rents are anywhere from $20 per square foot to $27 per square foot, depending on the submarket.
And CB Richard Ellis reports that one of the fastest-growing markets in the nation is Northern Virginia, where the vacancy rate is 3.3%. "The absorption we're seeing is nothing short of phenomenal," says CB Richard Ellis' Gibbs.
Technology companies and service-oriented companies such as insurance and financial services continue to drive suburban markets, says Moody. The strongest suburban markets in Atlanta include North Fulton, the north central market, and Gwinnett County's Interstate 85 corridor. In the North Fulton submarket, Opus South has broken ground on the first building at Opus Woods, a 168,000 sq. ft. spec building, and recently completed Royal Center 4. The 300,000 sq. ft., six-story building with 50,000 sq. ft. floor plates was 85% preleased.
South Atlanta is an emerging market, and already has experienced gains in the industrial arena. Moody predicts it will only be a matter of time before office development hits Atlanta's south side.
Southern California sunny as ever Southern California's suburban office markets thrive for many of the same reasons as other parts of the country - low unemployment and a racing economy.
Orange County, Calif.'s office and flex markets surged in the second quarter. Preleasing is strong, lease rates are increasing and the unemployment rate is 2.3%, reports Grubb & Ellis. Office vacancy hit 8.2%, and flex/tech vacancy has dropped as well.
"For Orange County, the Inland Empire and Los Angeles, the suburban office market is extremely strong. We're rather bullish on the market," says Nader Shah, vice president of development for Newport Beach, Calif.-based Koll Development Co.
Koll has begun construction on the second phase of Koll Center Irvine North Phase II, an eight-story, 172,000 sq. ft. office building. "Given the level of activity that we're seeing here, I suspect that we're going to have a substantial amount of preleasing done before the project is completed," says Shah. While this style of taller building isn't typical of an office campus, Shah says that in "this environment, people are just looking for solid, value for their money and a nice development they can call home for a while."
Koll's Pasadena project, the 176,000 sq. ft. 1055 Colorado, is in the beginning stages of construction, and is already 50% preleased.
Orange County also has been good to Dougall Agan, vice president of locally based Foothill Ranch Co. The company is adding another 350,000 sq. ft to its Foothill Ranch office campus. "[Foothill Ranch] had up to a 100% lease-up before the construction was completed, which is pretty remarkable," says Agan.
The Los Angeles area, while still rebounding from the late 1980s, is experiencing rent growth, a fairly consistent supply and increasing demand, says Paul Marshall, senior vice president of Phoenix-based Opus West Corp. Suburban markets, such as north and west Los Angeles and Ventura, Calif., are going strong. The Westside, Opus West's El Segundo low-rise office facility, has done well, as has the company's south Orange County projects, such as the 128,000 sq. ft. Foothills Corporate Plaza and the Jamboree Business Center, a build-to-suit for Fireman's Fund Insurance, says Marshall.
Florida: regional reflection Florida's suburban office markets reflect the success of the economy in the Southeast.
"Our population is 1.5 million, and our unemployment is 3% or below," says Mike Phipps, first vice president of asset services in the Orlando office of CB Richard Ellis. "Last year we created 36,000 new jobs, and we're projecting to create 41,000 jobs this year. Absorption has been 1.7 million sq. ft. in 1998, 1.6 million sq. ft. last year and we're already over 1 million sq. ft. for the first half of 2000."
On the supply side, Orlando has had an incredible run of development, reports Phipps, noting that from 1996 through the first half of 2000, the suburban market has added 6.3 million sq. ft. of new product. Another 2 million sq. ft. under construction is to be completed by early 2001. The Westwood Corporate Center, a five-story, 120,000 sq. ft. Class-A building in the southwest market, opened with nearly 80% occupancy.
While the numbers for Broward County, Fla., and Tampa are not as strong as some other suburban markets, CB Richard Ellis sources in both locations are optimistic.
Jeff Holding, managing director in Fort Lauderdale, reports more speculative development in the suburbs than in the recent past, especially in Cypress Creek, the largest suburban submarket in Broward Country.
In Tampa, absorption downtown is outpacing the suburbs, while vacancy rates for suburban markets are up from last year, says Anne-Marie Ayers, a senior associate in the Tampa office of CB Richard Ellis. Yet, there is currently 1.2 million sq. ft. of build-to-suit activity, and 475,000 sq. ft. of multi-tenant buildings under construction in the Tampa market.
"I think the sky's the limit as far as the I-75 corridor and infill sites in West Shores," says Ayers. The only thing that could impact Tampa's growth is the city's low unemployment rate, which makes it harder for growing companies to find employees, she says.
Miami's suburban markets, laden with tech companies and Latin American company headquarters, are enjoying a construction boom, says Mike Klotz, first vice president in CB Richard Ellis' Miami office.
"In the suburbs, we must have close to 1 million sq. ft. total in projects under construction," says Klotz. "We're seeing downtown-like buildings being built in the suburbs with equally high rents but no cost for parking." He adds that there may be some softening in 2001-2002 because of the continual mergers occurring among the Latin American corporations that comprise much of Miami's marketplace.
Future looks solid in suburbia A few sources believe the suburbs could become victims of their own success, but most industry observers think that suburban office markets face a solid future.
The ability of the suburban office campus to create a sense of place means it's here to stay, according to Parker, principal of Parker Properties. Transwestern's Heard and Duke-Weeks' Robinson also believe that the future for the suburban market will be positive, especially as populations increase and people want to stay closer to home and avoid long commutes.
Opus' Moody and Legacy Partners' Palmer predict that suburban buildings will continue to be designed for flexibility and that mixed-use developments with office and residential components will be evident in both urban and suburban projects.
Although optimistic, Gibbs in Atlanta sees the popularity of suburban properties driving up the cost of land and, in the process, increasing the density of office development in the Atlanta suburbs. He says increased density may result in taller and more expensive suburban office buildings.
When economies slow and recessions occur, government and citizen groups concerned about sprawl and pollution begin pressing for more restrictions, says Parker. New Jersey's state government already encourages CBD development in order to curb suburban sprawl, says Schotz. But he believes suburban office markets have a strong future as long as the nation's labor markets and transportation infrastructure keep pace.