Don't discount the suburban markets. While the CBD office market is attracting the most attention from investors—and the highest pricing—Andrew White, managing director of the Western Region at Gladstone Commercial, says that investors may be able to find better opportunities and yields in suburban markets. He defines 'suburban' as areas at least 10 miles outside of the CBD, and in Los Angeles that includes markets like El Segundo, which has seen growth as a result of overflow from the surrounding CBD markets. The trend, however, isn't exclusive to Los Angeles. He is seeing suburban markets across the West Coast presenting good office investment opportunities. To find out more about this trend, we sat down with White for an exclusive interview.

GlobeSt.com: Why does suburban office present a good investment opportunity versus CBD office?

Andrew White: I like to quote Warren Buffet “Be fearful when others are buying and buy when others are fearful.” For years CBD office has been the office investment of choice. Cap rates for Class A, stabilized office property with credit tenants in coastal CBD's have been as low as 4% with prices well over $1,000 per square foot while well located buildings of similar quality and tenancy within 10 miles of the CBD could be purchased for a 7.5% cap and $200 per square foot+/-. The suburban office investment metrics represent a much better risk adjusted return in my opinion. Of course the premium placed on the CBD's has been driven primarily by the “Millennials.” This is the age group between 18 and 34 years old that now make up the majority of the work force. Companies have been working hard to attract the best Millennial talent and that means providing a 24/7 live, work, play environment where this age group can live in the CBD, walk to work, be surrounded by an abundance of restaurants, night clubs and entertainment and work in collaborative open offices that offer flexibility to suit their lifestyle. This is great when you are young and single but it becomes problematic when you get older, get married and have children. Suddenly living in a $3,000/month 800 square foot high rise luxury apartment with a baby running around the balcony 15 stories up does not seem so good so I think the suburbs will become attractive again.

GlobeSt.com: What is investor demand like, and how competitive are these opportunities?

White: Competition for Class A, stabilized office property with credit tenants in coastal CBD's has been intense which is why these properties have been selling for record low cap rates and record high price per square foot numbers. Prices for these CBD properties have exceeded the 2007 peak and in almost all cases have set new record highs never seen in the history of the Commercial Real Estate Industry. Competition for good well-leased, well-located suburban office has been moderate until the past 12 months when it has become very competitive as investors begin to realize the demand for suburban office is growing.

GlobeSt.com: Creative office is driving tenant activity in the city. What is the main driver of suburban office tenant activity?

White: Creative Office is the driver for all office activity in the CBD and in the suburbs. The days of isolated private offices or high cube walls are over. Today's workers want to be part of something bigger than themselves and that means an open and collaborative workplace where you can feel connected to your co-workers and easily share ideas. Creative office also mean bringing the outside in and the inside out. This means using glass roll up garage doors for walls that can roll up and open into an outdoor work area to take advantage of sunlight and fresh air. Many studies have proven that this stimulates creative thought and collaboration and removes enacted limitations to generate new ideas for the company and create cutting edge products and services. It also creates a sense of wellness for the employees where they can feel at home in the office. Since CBD's are land constrained I believe it is easier to build a creative indoor/outdoor office in the suburbs.

GlobeSt.com: Similarly, we have also seen a lot of redevelopment office activity with creative office being the prevailing trend. Has this trend also hit suburban office? What are the design trends here?

White: Creative office redevelopment has definitely hit suburban office and I think the opportunity to offer indoor/outdoor space in a suburban location is more prevalent in a suburban office than in the CBD where you are very land constrained. As I mentioned above I have seen walls that are made of several roll up glass garage doors that can open up entire walls and sections of the building to an outdoor space designed with seating areas, Wi-Fi, electric plugs and tables so employees can work outside in the sunlight and fresh air if they want to. Other design trends include the elimination of perimeter offices that will block the natural light from coming into the entire space. Instead, offices and conference rooms have been moved to the interior of the office so all the windows are open to the entire space. Bike racks, fitness centers, lockers and showers are now common amenities in all modern creative office space. The ability to go for a bike ride or run when you are on a break is also easier in a suburban setting, and that bodes well for suburban office

GlobeSt.com: What geographic characteristics do you look for in suburban office?

White: When we buy suburban office property it has to be structurally functional and less than 20 years old +/- but the most important thing we look for geographically is a “Mini-CBD” or “Urban Burb.” This means you have to have easy access to amenities, housing and transportation. More specifically nice restaurants, multifamily, townhomes, single family executive housing, hotels, freeways and light rail that can take you into the CBD or further out to lower density executive housing. In Los Angeles for example Playa Vista, which is known as “Silicon Beach,” is one of the most expensive and desirable areas because it is near the beach with all new retail amenities and housing options, letting you live the beach lifestyle and be 10 minutes from work. It has it all and more and it is not in the Los Angeles CBD. The success of Playa Vista has been moving south and east to suburban cities like El Segundo and Culver City where office prices have dramatically increased in the past 24 months. I cover the entire Western U.S. and I am seeing this trend in Denver, Salt Lake City, Seattle and San Francisco with a significant move to the East Bay.

GlobeSt.com: What is your forecast for suburban office activity this year and beyond?

White: I think well located suburban office that meets the requirements noted above represents the best risk adjusted returns available today and for the foreseeable future. The nationwide urban CBD renaissance that has reverberated during the latest expansion cycle may very well just be a 7-year trend that is coming to an end. According to a recent CBRE research report suburban growth in jobs and household formation surpassed urban densification in the latest census population estimates. Though it has been widely reported that Millennials are city-flocking suburbia shunners, that assumption is not true. In fact, U.S. census data shows only 30% of Millennials lived within urban areas as of last August, and the remaining 70% were in no rush to move downtown. A market's appeal for Millennials has little do with whether it is suburban or urban, and everything to do with its offerings, such as its access to public transportation, walkability, housing options, access to good jobs and available amenities. Housing in the longer term is a big driver that will be an increasing factor going forward as the Millennials form families. Where there is lots of mixed-use, office, multifamily and retail, that's where we are going to see strong absorption in the coming years and well located suburban office provides that as well as lower rents for employers.

GlobeSt.com: Why does suburban office present a good investment opportunity versus CBD office?

GlobeSt.com: What is investor demand like, and how competitive are these opportunities?

GlobeSt.com: Creative office is driving tenant activity in the city. What is the main driver of suburban office tenant activity?

GlobeSt.com: What geographic characteristics do you look for in suburban office?

GlobeSt.com: What is your forecast for suburban office activity this year and beyond?

Instant Insights /

Office Investors Head to the Suburbs for Better Yields

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