Office Tenants Prefer Vibrant Centers
By: Julie D. Stern, managing editor, NAIOP
Where do today’s office tenants want to be located? New research shows that they prefer amenity-rich, mixed-use suburban vibrant centers (also known as “live, work, play” locations) to typical single-use suburban office locations, by a margin of more than four to one.
A new report prepared for and published by the NAIOP Research Foundation combines expert opinion and accurate property-level data to provide reliable information about emerging location preferences across major U.S. office markets. The study also compares the performance of office space in CBDs, suburban vibrant centers and typical single-use suburban areas.
“Preferred Office Locations,” by Emil Malizia, professor of city and regional planning at the University of North Carolina at Chapel Hill and president of Malizia & Associates LLC, demonstrates that, overall, office tenants show no strong preference for either downtowns or suburban locations. Yet it reveals a clear preference for suburban vibrant centers — defined as amenity-rich, mixed-use, live, work, play locations — over typical single-use suburban office environments. It also demonstrates that office properties in suburban vibrant centers like Belmar, Colorado; Santana Row, California; and Evanston, Illinois, are outperforming those in typical single-use suburban office areas on almost all metrics, including rent and occupancy.
The report compares central business districts (CBDs) to suburban areas in the 45 largest office markets in the U.S. It also compares 42 suburban vibrant centers to either a nearby suburban office park or corridor, or to the remainder of the office submarket surrounding the center, on a wide range of measures, including average asking rents, vacancy rates, absorption rates, and changes in rents and vacancy rates over two time periods. It asks, and answers, the following five questions:
“Do office tenants prefer CBDs to suburban areas? Sometimes they do, sometimes they don’t.” Malizia’s research indicates that CBD/suburban location preferences primarily depend on company priorities and on an area’s economic base and spatial structure.
“Do office tenants prefer suburban vibrant centers to typical single-use suburban environments? Yes, they do.”
“Are office properties in CBDs performing better than those in suburban office areas? Yes, for rent level and rent changes; no difference in vacancy rates; no, for absorption.” (There has been less absorption in CBDs than in suburban office areas.)
“Are office properties in suburban vibrant centers outperforming those in typical single-use suburban office areas? Yes, for almost all metrics.” Malizia reports that rents are higher by $3.39/square foot and vacancy rates are lower by 4.5 percent in suburban vibrant centers.
“Are suburban vibrant centers preferred to or performing better than CBDs in their market areas? Preference depends on the specific area; vibrant center performance is the same as or better than CBD performance.”
“Any company wanting to attract and retain young educated workers who prefer live, work, play locations needs to locate in a compact, mixed-use, walkable place, either downtown or in the suburbs,” Malizia concludes, a statement that clearly has enormous implications for the future of commercial real estate.
Presenting the report to the NAIOP Research Foundation Governors at Development ‘14, Malizia predicted that suburban vibrant centers will continue to experience value premiums. He added that one of the most important contrasts between suburban vibrant centers and typical suburban development is that “decentralized suburban development, when it continues in a community, clogs up schools and congests roads.” With compact development, however, “more is better; the more development you can concentrate in a vibrant center, the more likely it is to become more vibrant.”
For more information:
“Preferred Office Locations: Comparing Location Preferences and Performance of Office Space in CBDs, Suburban Vibrant Centers and Suburban Areas,” Emil Malizia, NAIOP Research Foundation, October 2014.