BOSTON — Suburban office submarkets across most of the major metropolitan areas have, in the most recent quarter, absorbed space at a faster pace than the corresponding urban-core submarkets, reversing a pattern that had held for more than a decade and that nearly every long-range commercial real-estate forecast had assumed would continue.
The reversal is most visible in the metros where the urban-core stress has been most acute — San Francisco, downtown Los Angeles, and parts of midtown Manhattan. In each of these metros, suburban submarkets that had been written off as structurally weak through most of the past decade are now showing absorption rates that exceed the corresponding urban-core figures by meaningful margins.
What is driving the shift
The shift reflects two patterns that have, on the underlying tenant-data, become visible over the past several quarters. The first is that companies adopting hybrid-work strategies have, in many cases, found that suburban locations work better for the in-office days that remain than the urban-core locations they previously occupied.
The second is that the suburban office stock has, on average, been the part of the office market with the most underutilised potential. Many suburban buildings have, for years, traded at price points well below replacement cost. Tenants moving in are getting space at rents that are competitive with their old urban locations after factoring in commute and amenity changes.
Which submarkets are leading
The leading suburban submarkets, on the absorption data, share several characteristics. They have rail or strong bus connectivity to the urban core; they have walkable amenities that have, over the past several years, been the subject of meaningful local investment; and they have an existing critical mass of office occupiers that creates the kind of tenant ecosystem that supports continued absorption.
Submarkets without these characteristics have not benefited from the trend. The shift is not a broad suburban renaissance; it is a reasonably specific repositioning of selected submarkets that have the right combination of qualities.
The investor implications
The investor implications are still being worked through. Suburban office assets had been, for most of the past decade, the part of the office market that institutional investors were most reluctant to commit fresh capital to. The new absorption pattern is sufficient to begin to change that calculation but is not yet sufficient to fully unwind the long-running underweight.
The transaction data shows the pattern beginning to shift. Suburban office trades have, in the past two quarters, accounted for a larger share of total office-trade volume than at any point since 2018. The trade-volume increase is concentrated in the submarkets the absorption data identifies as leading.
What this does not mean
The shift does not, on any reasonable reading, mean that the urban core has lost its place in the office economics of the affected metros. Urban cores continue to absorb space at meaningful rates; they are simply not absorbing it at the relative pace that the past decade had conditioned observers to expect.
The longer-term equilibrium between urban-core and suburban office demand is the question that the next several years will sharpen. The current quarter's pattern is a piece of evidence; whether it is a stable feature of the new equilibrium or a transitional moment remains to be seen.
