The Return of the Suburban Office

7.17.2017

How Millennials are Powering the Re-Emergence of the Suburban Office Market

By: Kristine B. Hurlbut, Senior VP of Leasing

Much has been written in the last few years about the demise of the suburban office. A significant source of the negative outlook surrounding the suburban office has been based on millennials’ penchant for living and working in densely populated urban cores far from the suburban offices that occupy nearly every town in New Jersey. However, the tide is turning and many in the real estate world are becoming more optimistic about the prospects of the suburban office market in the state.

I recently spoke on a panel at the Mid Atlantic Real Estate Journal’s New Jersey Commercial Real Estate Summit with executives from HFF, Mountain Development, Gensler and Savills Studley where we discussed our shared optimism surrounding the office market. One thing was very clear –  suburban office is making a comeback. Although it will be vitally important for owners of these buildings to position them correctly to attract quality tenants as this trend accelerates.

Why Suburban Offices?

As areas like New York, Hoboken and Jersey City become increasingly more expensive, the cost of entry for many companies into these markets has become prohibitively expensive. It is becoming increasingly difficult for business owners to justify paying rent on spaces at twice or three times the rent of offices located only miles away. Commuting methods and preferences have already seen a drastic change over the past few years with ridesharing becoming more popular and autonomous cars becoming reality, these once “inaccessible” offices that were far from mass transit hubs have become viable options as the definition of mass transit changes.

Also, as millennials begin to age out into their 30s and 40s, they are beginning to look towards the suburbs again as they look to purchase homes and start families. The pendulum of millennials’ desire for urban versus suburban spaces has begun to swing back the other way.

For owners and investors, suburban office will present a quality value-add opportunity in coming years. Much of the older, obsolete stock of office buildings will be coming down in the near future to make way for other uses including residential, retail and industrial. As these buildings come off the market and limit the existing supply of buildings, rental rates will begin to creep up for the remaining buildings, provided they are positioned properly. Suburban offices also present owners with significant opportunities and optionality in how spaces are designed and what amenities can be offered. Many urban spaces do not allow the same flexibility due to size and design constraints.

Suburban Office, Renovations

150 Morristown Road, Bernardsville, NJ

How Can Offices be Repositioned?

Although the market is trending towards suburban offices, participating in this trend will require a continued focus on imaginative and creative repositioning of existing assets as new construction is not an option in many markets. 80 percent of the office stock in New Jersey was constructed in the 1980s, making most of the offices in the state over 30 years old with a large percentage approaching 40 years old. Buildings constructed in the 1980s are largely obsolete for most users and will have difficulty attracting tenants as they age even more. Short of leaving the asset as is and hoping to attract a tenant at a lower rent or redeveloping the land around another use, owners are left with one option for these buildings – repositioning.

Most tenants I speak with place a high value on the food and beverage offerings in a building as they are considering spaces to lease. The saran wrapped sandwiches, lukewarm coffee and vending machine snacks of the past no longer cut it. Tenants want exciting and unique dining options. Whether it is bringing a local coffee roaster into a space like we did at our 100 Matawan building or offering weekly food truck visits as we do at a number of our buildings, these amenities are essential to securing and retaining tenants.

 

Suburban Office, Renovations

2 Executive Drive, Somerset, NJ

Beyond food and beverage type amenities, fitness centers, wellness rooms, outdoor and indoor gathering spaces and breakrooms, and  modern lobbies are all features that are no longer solely nice to have in a building but considered essential. Adding these types of amenities throughout our portfolio has allowed us to solve the “amenity gap” that previously made many of these spaces feel outdated and breathed new life into our buildings.

At Denholtz Associates we also place a strong emphasis on the architecture and design of our buildings. We have recently embarked on a series of lobby and interior renovations at a number of our properties where we removed dated design features and replaced them with bright and modern fixtures and elements. These renovations allowed us to take older office buildings and transform them into 21st century spaces without the significant cost of demolishing and rebuilding.

Unlike urban offices which are often much more expensive to acquire and more difficult to reposition, suburban offices present almost limitless opportunities for creative and experienced investors and operators. At Denholtz Associates, we are excited about the prospects of the market and look forward to continuing to transform office buildings into exciting and in-demand office buildings to attract and retain modern tenants.