Hunch - Is Suburban Office An Undervalued Asset Class?

Question

I posted this in another thread too, but I wanted to get some help from the community on this one. I am starting with a hunch at the highest possible level:

- Urban office has been decimated and has a huge pile of vacancies. The pain is real and likely to linger.

- No one is building office of any sort right now, and net new supply will be low for some time.

- Prices reflect this pain in office

- Many high income earning millennials are, finally, moving to the suburbs. They do not want to work from home every day, but also do not want to make the long commute to the office.

Thus, it seems to me that there is good reason to believe that small office spaces, including for small local/regional firms, services firms, and co-working spaces near large suburbs will see a steady increase in demand with little net new supply for the next several years.

Is this hypothesis worth exploring? Can anyone help me get started or point me in the right direction to research something like this?

Henry Clark · Answer

We have 5 acres in a metro area.  Thinking about splitting the front 2 acres on high traffic count 17,000 VPD at 35 mph.  Talking with our Realtor who is the owner of the major CRE agency in the area, he recommended don't build.  Sell the property and have an Owner Occupier build.  He is not comfortable finding a tenant on a timely basis.  This is different than buying an existing location, with possibly an existing tenant, but the same demand premise.

On the Urban office tenants moving to a suburban office space.  I would look at the type of Urban Companies, which tend to be large firms.  Who would not want to buy or lease for their homebased workers.  The number gets smaller really quick of who might lease those spaces moving out from a large metro urban setting.  To get a feel, I would identify some Urban facilities that have gone vacant and question what services and would those companies support local suburban offices.

I think your premise is correct, but like anything what is the demand and the Return potential.  If you buy it right, the return will be fine.

You might get on Loopnet or Crexi and list an office "Coming Soon" and see what type of interest you get.  We did that for a Flex location, and there was significant "Click" interest on the property.  But we got to see the companies who were looking at our listing, which helped us identify the potential market better.  Businesses I would have never thought of.  Flower distribution, Power drink distribution, tortilla distribution, small tool distributor, etc.  I was thinking more auto shop, lawn care, electricians, etc.

Russell Brazil · Answer

I purchased some suburban office space during covid as office prices were decimated. It's bounced back a bit, but could still be undervalued.

Eli Kantor · Answer

Hey Scott! This reminded me of a Wall Street Journal article that came out about a month ago. I highly recommend you check it out - Downtown Offices Are Toxic. Suburban Ones Are Surviving

To summarize the article, throughout this entire CRE 'Doom Loop,' suburban office properties have consistently outperformed urban/downtown buildings. This has included less defaults, drops in valuations that aren't as steep, etc.

I 100% agree that the potential for these suburban office buildings is there, and that further growth and steadily increasing demand is highly probable!