Downtown high rises will decline in value by 10 to 15% as companies drive increased demand for office space in more dispersed secondary markets, according to a new report by Graceada Partners. That is the latest prediction for the office market, which has been in a state of flux as the work from home trend and the migration of people out of gateway cities combine to upend fundamentals.
For instance, national office vacancy climbed to 17.7% in the fourth quarter of 2020, with cities like New York City and San Francisco posting the largest declines. But as flexible working arrangements grow in popularity, the resulting “outpost economy” —a term coined by Graceada to describe current trends—will revamp the commercial real estate office market in both primary and secondary cities, with regional economies like Sacramento, Austin, and Charlotte experiencing continued population growth and corporate investment.
The findings underscore growing interest in secondary cities among both professionals and US companies and echo findings released earlier this week by CBRE, which identified eleven secondary counties poised to thrive over the next decade as the CRE landscape continues to shift.
Among the Graceada Partners report’s standout conclusions:
The value of downtown high rises will decline by 10 to 15%
COVID-19 was a real game changer for the conventional high rise, long viewed as a sign of prestige and status in corporate America: in the wake of the pandemic, companies will likely move away from high-rise office buildings in favor of smaller footprints as newly-dispersed employees create outposts. Smaller secondary cities will provide more affordable alternatives for companies rethinking their location strategies, and a primary market contraction will reduce—at least in the short term—both rents and value of high rise space. However, this will likely be short-lived: “ultimately,” the report says, “the business ecosystem that makes primary markets compelling will lead to a recovery of values.”
Office demand will not decrease—in some markets, it will go up
Office demand will be higher in secondary markets—particularly those with easy access for workers – and slightly lower or stagnate in primary or more urban markets. Commercial real estate investment will increase in those hotter secondary markets, and it’s likely that more companies will either relocate entirely or set up satellite outpost offices. And here’s a sliver of COVID-19 good news for CRE pros in those areas: a permanent work-from-home environment will likely be less compelling in secondary markets where commutes are shorter, development is less dense and real estate costs are lower.
A renaissance in traditionally working-class cities is a real possibility
The outpost economy could be a much-needed shot in the arm to previously declining secondary markets. Cities like St. Louis and Buffalo could be well-positioned to be long-term outposts for companies who want to diversify their talent pool—but markets who’ve suffered population loss or economic decline over the last half-century will require some kind of cultural or lifestyle renaissance to draw younger professionals within city limits.