Core Office In Favor Again. Is Suburban Next?

CHARLOTTESVILLE, VA—Investors' view of office assets are markedly better this year than last. SNL Financial reports that, year-to-date the SNL U.S. REIT Office index outperformed the S&P 500 by nearly 8 percentage points, providing a total return of 8.7%.

REITs, in general, have done better than the market at large this year. Improving fundamentals, such as employment, though, strongly suggest office will continue to become more attractive.

The report, authored by analyst James Mathieu, notes that Jones Lang LaSalle's Office Outlook report from the fourth quarter of 2013, found that vacancy levels over the past 12 months declined 40 basis points to 16.6%, the lowest rate in five years. Also, 76% of the markets it tracks reported higher rents in the 2013 fourth quarter compared to the third quarter, and 82% displayed year-over-year rent growth.

The gateway markets of New York, Washington DC and San Francisco are the prime beneficiary of these trends. Not only is employment significant down in these areas-San Francisco's MSA is down 23.3%; New York's is down 21.4%; and unemployment in the Washington MSA is down 13.2%-but the asking rates for office space are high and vacancies low.

The next logical question is, will this trend spread to the long-languishing suburban office market? GlobeSt.com poised this question to Mathieu who responded that it does appear some suburban markets are following this path, albeit at a distance.

JLL research, he says, notes that office vacancy levels across suburban markets have dropped 140 basis points since 2012 to 18.2%, but still lag CBD vacancy levels of 13.9% at the end of 2013.

"This drop is driven largely by markets just outside of some major CBDs, such as Cambridge in Boston, the East Bay of Northern California, the Westside of Portland, San Francisco, the Southend of Seattle and Santa Clara."

Suburban vacancy levels still remain 200-220 basis points from equilibrium levels, he continues, "but there may be increased tenant demands in certain markets, especially those with amenity-rich and transit-oriented locations."