Much has been discussed about millennials and Baby Boomers choosing to live in urban areas where they can walk or take public transportation to work, shopping and nightlife. In some suburban markets, that has impacted the demand for commercial real estate, including apartments and office space.
However, it looks like commercial real estate in the suburbs might be bouncing back.
There are a couple of draws to secondary and tertiary markets right now. First of all, investment in these areas can provide higher returns than some city centers that are saturated with transactions. The suburbs and secondary markets are also places where there is room for ground-up development, unlike some urban locales.
Additionally, as more foreign capital enters the U.S. market, many of these investors are looking at secondary commercial real estate for opportunities, according to brokerage firm Avison Young. After all, capitalization rates in big markets such as New York City and San Francisco are south of five percent.
In the Philadelphia area, a company called Workspace Property Trust has made a big bet on the suburbs. It spent $969 million on a portfolio of office and flex buildings, purchased from Liberty Property Trust. The firm now has a total of 149 suburban office properties.
In Tempe, Ariz., a firm called DMB Associates is taking a different turn. DMB plans to build an urban village in the suburbs. The thinking is that more consumers and workers would be attracted to these areas if they have 18-hour amenities. And cities in the Phoenix area, such as the suburb Gilbert, are working to attract more millennials, shoppers and diners.
In the suburbs of Jacksonville, Fla., VanTrust Real Estate plans a 160,000-square-foot office building, reportedly the largest to be built in the metro area for more than a decade. It is going to be a Class A development, as well.
There is no denying of the draw that urban environments have for several residents and companies, due to their proximity, and the new wave of migration to city centers.
The expansion by investors and developers into the suburbs makes sense, though. As long as the commercial real estate market remains hot, buyers are going to look for higher returns. Since most of the gateway and primary cities are already crowded with capital hungry to invest in buildings, it’s logical that more interest in the suburbs is likely in the future.