IN SUBURBIA: Continued Out-Migration from US cities sees Local Investment Opportunities
- Susan Lawson Thought Leadership
- Apr 28, 2024
- 7 min read
Globally, Commercial Real Estate has been subject to repeated blows both pre and post-Pandemic, including the rise of remote working and the move to online retail; labor shortages and low productivity; inflation; the Energy Crisis, supply chain issues and rising construction costs. Work from Home (WFH) in particular has led to significant out-migration from urban office sites, retail offers, and Resi, with an unexpected shift from city to suburbs.
CRE in the US – the largest CRE market in the world - has encountered its own particular set of challenges, with both pre and post Covid issues arguably exacerbated since the Federal Reserve began hiking interest rates, and with the US economy at a critical turning point and continued fears of a recession.
For non-residential Real Estate, in the US as well as elsewhere, what’s noticeable is that the 3 main sources of crisis (two trends exacerbated by the Pandemic plus the ‘wildcard’ of the Energy Crisis) correlate almost exactly to the 3 classical mainstays of Real Estate Investment: Retail, Office and Industrial. Homeworking and e-commerce have of course continued to be problematic post-Pandemic since trends have not reversed in the way that many in the industry had hoped.
In Retail, for example, not only did Covid introduce online shopping / doorstep delivery to those who had previously not embraced it, reports from the Retail industry reveal that many maintained the habit. Meanwhile the effects of inflation have produced ‘savvy’ consumers who tend to be far more judicious about which items are truly critical to their everyday lives. When it comes to WFH, the trend has clearly not reversed to anything like the degree anticipated (or at least hoped for) by many in the industry. And this is a near-global issue.
In the US specifically, Lyle Niedens, writing for Investopedia in June 2023, refers to a study by Columbia/New York University which found that the US commercial office market lost $506 billion from the start of 2020 to end 2022. The study also predicted that by 2029, the New York City office market is likely to remain 43.9% below pre-pandemic levels—even lower if WFH fails to fully reverse (and let’s face it this now seems likely). Indeed, although 30% of the population is now back in the office, the move to remote working is ongoing.
In this regard, the critical issue that was perhaps overlooked by those overly optimistic about a wholesale return to pre-pandemic working norms was that it was never only about Covid, or indeed about safety. Despite that the world has (largely) overcome the fears arising during the Covid crisis, trends (particularly in global cities such as London and New York) had already been moving towards a hybrid model of work before the crisis ever hit.
Too, what was not fully factored in were new habits and new technologies as well as the long-lasting emotional effects of prolonged crisis and the life-decisions this encouraged. To wit, Zoom et al became mainstream. WFH/Zoom proved that work could be undertaken effectively remotely – a fact many had previously denied and which is to a larger extent true after the mainstreaming of such platforms.
At an emotional level, many rethought what they wanted out of life. Perhaps most importantly, many made long-term decisions which they are not likely to reverse any time soon: in particular, the move to the suburbs; a move of this nature is not easily reversed simply because post-Pandemic safety conditions appear to have returned to normal.
Finally, it is also worth noting that Industrial – perhaps the only sector of Real Estate Investment that actually benefited from the Pandemic (e.g. in the rise of data centres due to the increase in internet usage) - has now itself succumbed to problems caused by the wholly unforeseeable Energy Crisis (which has, for example, had serious impacts on the ‘German Miracle’, as we discussed in the Winter 23/24 issue of The STOCKtake).
Given this combination of irreversible shifts and unexpected ongoing global crises, far from any longer lamenting the change, we need now to take seriously new CRE Investment opportunities.
Opportunities may lie in the Suburbs
This is not of course the first time we have suggested an ‘investment move to the suburbs’. But US data increasingly bares out this thinking. Key cities including New York, San Francisco, and Chicago (as well as LA, Philadelphia, and Pittsburgh amongst others) have witnessed significant suburban outmigration, not only due to WFH but also to inflation and affordability issues, as well as less tangible factors such as perceptions of the suburbs as ‘friendly places’. (In fact, out-migration to the suburbs is a general trend for most major US cities, especially, according to Census data, at the height of the crisis from 2020–2021.)
This is always of course framed as a negative and clearly presents a problem for city centre CRE (but that’s another subject for another Post). Yet what is negative for urban centres may be positive for the suburbs. Suburbia is seeing a renaissance, which surely also presents opportunities. Not least, already existing suburban CRE experienced lesser disruption in the first place: according to Goldman Sachs Research Analyst Caitlin Burrows, as at Spring 2023, ‘suburban offices, and medical offices in particular, have been less impacted, especially in smaller American cities.’
We see this trend equally here in the UK, where B Grade suburban / regional office has suffered far less than in major cities where the focus on Prime / A-Grade Office (and growing concern for energy efficiency) is potentially leaving B-grade assets stranded. In London, the new Elizabeth Line has also effectively expanded the functional bounds of the city such that it is not entirely a stretch to see the likes of Slough and Reading as new ‘suburbs’ of Greater London (hello, Slough!). So for those whose Real Estate portfolios were more regional / diverse in the first place, the damage is perhaps less severe than for those already concentrated in major cities.
Why not the Suburbs?
For many decades deemed unfashionable (or even quite simply ‘boring’) and relegated to specific demographics (largely, growing families and elderly generations), the extraordinary combination of recent events as well as improvement in amenities means the appeal of the suburbs has again widened. This appeal ranges from more affordable property prices to better access to space (in terms of residential amenity but also for business growth), ultimately putting less pressure on already severely stretched incomes or capital.
In addition, as pointed out by Don Catalano at Propmodo, lower rates, safety concerns, shorter commutes (where commutes are still undertaken), better parking and general quality of life factors have all contributed to the revival of the suburbs, whilst suburban amenities, including restaurants / cafés, retail and cultural attractions, present in many cases an improved offer. So whilst for many the key remains WFH and the ongoing availability of remote or flexible working, others still have migrated for purely financial and lifestyle reasons. For those under pressure from inflation, city property may simply be no longer sustainable.
Does this represent an if not virtuous then certainly productive investment circle? If one reason for the demise of popularity of the suburbs over the previous decades (which, bear in mind, were in the late 20th century seen as beacons of hope and healthy living) was the sense of poor, limited or ‘globally blanded’ amenities, then investment in suburban CRE – and a more nuanced and revitalized offer – could well also continue to attract out-migration. Certainly, this may be at the expense of urban CRE – but isn’t it worth following the migration pattern?
Key Suburban Investment Opportunities
There are a number of clear areas where suburban investment may be worth considering: suburban Office itself, of course (although given WFH, and the need in many cases to retain a Flagship presence, mere reduction in urban footprint may be easier); Suburban Retail / Leisure (notably local Malls but also in general investments that improve the offer), and also of course residential itself, although our scope here remains CRE. (In addition, Transport Hubs may also present opportunities to better serve those now embracing a flexible / hybrid working model.)
Office property in suburban areas has in fact already seen a rise. Don Catalano at Propmodo again, writing in September last year, points out that ‘While suburban office markets may always end up being smaller and less expensive than traditional CBDs, they are clearly becoming more attractive to both companies and workers and will continue to be an important market to watch going forward.’
In fact, in the US, suburban properties have accounted for two-thirds of newly constructed offices over the past twenty years. Writing in August 2023, Barbra Murray, also of Propmodo, states that: ‘In the United States, average Class A rents in the suburbs have experienced year-over-year increases since the third quarter of 2022, while CBD rental rates have recorded a year-over-year decline in rents—until now. As of the second quarter of 2023, Class A rents in the suburbs and urban centers are both in growth mode, having increased a respective 1.9 percent to an average of $34.56 per square foot and 0.4 percent to an average of $52.93 per square foot year-over-year, according to research from Colliers’. Meanwhile Tom LaSalvia, Head of Commercial Real Estate Economics at Moody's Analytics CRE, is quoted by JPMorgan as being hopeful: “Year over year, national level effective rent for neighborhood and community shopping centers is the highest it has been since before the onset of the pandemic in early 2020’…. The vacancy rate has fallen to 10.2% from its 10.6% high in early 2020.’ And according to Brin Snelling, in her Forbes blog of January this year, downtown Naperville (outside Chicago) and downtown Birmingham, Michigan, are prime exemplars. ‘Similarly, neighborhood centers like Brentwood Country Mart in LA and Lido Marina Village in Newport Beach are acting as quality alternatives to bigger malls and centers.’
In fact these trends are not entirely new: Bryan Eshelman, MD of Retail at AlixPartners, was already reported in Modern Retail back in May '22 as saying, frankly: ‘You got to be where the customers are and customers have definitely, over the past few years, been moving in general out of cities into more suburban areas’. Nonetheless, such trends persist: according to Philippa Maister, writing in June 2023, ‘Since mid-2020, suburban mall traffic has caught up with traffic to urban malls during the January-October period, while still beating city locations over the holiday season.’ The suburbs might be boring, but is the data telling us something?
In Summary: Always Being Boring?
Numerous data point to the US suburbs as a viable new Real Estate investment opportunity.
Why so?
Firstly, the availability of properties in suburban areas has given individuals, families, and companies quite simply a break from the pressure that comes with property ownership in an urban area. As such, investors now have a chance to turn away from conventional categories that are failing them and capitalize on suburban trends.
While the dynamics of WFH and of migration patterns will continue to evolve, and whilst other ‘classical’ Real Estate Investment sectors suffer, suburban CRE looks, for 2024, to remain an appealing option. Life in the suburbs has long held the reputation for being ‘too comfortable, too predictable’: in short, boring. But in the current economic climate, with the Fed forever cagey and forecasts disparate, perhaps ‘being boring’ is required.
References / Useful Further Reading