A lot of ink has been spilled about Americans fleeing dense, urban areas for places with more space and, hopefully, lower housing costs over the last few years. The migration trend has led to major growth in regions like the Sunbelt and markets in the Southwest. As more people moved to outer suburban areas, residential rents began rising and have now begun to surpass rent growth in urban areas—in some cases by a lot. But what about suburban offices? If more people are living outside city centers, does that mean more demand and rising rents for offices outside of CBDs? To find out, we compared residential rent growth trends over the last few years in the suburbs and urban core and office rent growth between the city and suburban areas.
|Metro area||Residential rent growth, urban core||Residential rent growth, suburbs|
In the residential market, a gap in rent prices has emerged between the urban core and suburban area, driven by a rapid rise in rents in the suburbs since 2020. Over the course of the pandemic, rent growth in the suburbs has outpaced rent growth in city cores by nearly 8 percentage points, according to Apartment List. Rents have risen in cities, too, but it has been slower. Between March 2020 and July 2022, rental prices in the suburbs rose 27 percent, while rents in core cities rose 20 percent. But this year, annual rent growth that hit double-digits in 2021 and 2022 has slowed down. For the first time since the pandemic began, annual rent growth was negative in August. On average, apartments are 1.2 percent less expensive than they were at the same time last year. However, despite the overall decrease in prices, the gap between urban and suburban rents grew larger over the last several months, as rent decreases were slower in the suburbs than in urban cores.
The market with the largest gap in rent growth between the city and the suburbs is Portland, Oregon. Since early 2020, the city has experienced 1.7 percent rent growth, while the suburbs have seen 22.8 percent rent growth, a gap of 21.1 percent. Another Pacific Northwest city, Seattle, has the second-highest gap in rent growth, with 2 percent in the urban core and 19 percent in the suburbs. The midwestern city of Chicago has seen huge rent growth in the city core and the suburbs, but the suburbs outpaced the urban core by nearly 15 percent. Meanwhile, in two cities that are part of the Sunbelt region, Houston and Miami, the gap was smaller between rent growth in the city center and the suburbs, at 6.5 percent and 3.2 percent, respectively.
|Metro area||Office rent growth, urban core||Office rent growth, suburbs|
On the office side, we looked at the same six cities to measure whether office rent growth was higher in the suburbs than in the city core, as has been the case in the residential market. Looking at data from Cushman & Wakefield over the past 12 months, office rents increased more or decreased less in the suburbs than the urban core in four out of six markets. Just like residential rents, Portland’s office rents in the suburbs grew much faster than in the urban core, with suburban rents jumping 16 percent year-over-year while urban core rents rose 3.7 percent. In Seattle, office rent growth decreased by 5.9 percent in the city core, while office rents in the suburbs decreased by 1 percent. Houston’s office rents grew more in the urban core than the suburbs over the past year, but not by much: 0.8 percent to 0.4 percent, respectively. In Miami, a city that has exploded with growth over the past few years, office rent growth in the urban core jumped 12.4 percent but only 1.5 percent in the suburbs.
Office rents following the trend of residential rents in the suburbs could be caused by a number of factors, and those could vary widely by city. One important fact to note is that two-thirds of offices built over the last two decades in the U.S. have been in suburban areas, according to CommercialCafe. In Portland, where the suburbs outpacing the city in both apartment and office rents are the most striking, the city’s rapidly deteriorating office market might be a driving force behind the figures. A recent report found that nearly a third of Portland’s downtown office space is vacant, and many have loans that are set to mature. Additionally, the city’s downtown area has issues with homelessness and retail blight. Portland is also a city that has struggled to bring workers back to the office, which could explain why housing in suburban areas is in high demand. In Miami, where office rents in the suburbs did not match residential rent growth in the suburbs, it could be due to the strength of Miami’s CBD. Several major companies have relocated or opened offices in the city, and demand for space is soaring. As of the second quarter of this year, Miami’s office vacancy rate was 15.4 percent, below the national office vacancy rate of 19.2 percent, according to Cushman & Wakefield.
In some of the country’s biggest cities, there is a strong correlation between office rent growth and residential rent growth in the city and the suburbs. The markets where the correlation is strongest have similar factors: expensive housing costs, high office vacancy rates, and companies struggling to bring workers back. In other cities, the correlation isn’t as prevalent or doesn’t exist at all. The size of a city’s downtown office market, how a city is spaced out geographically, the suburban office market size, the location of major employers, and what kind of housing stock is available are all factors that can affect whether these two measures align or contrast. While suburban office markets may always end up being smaller and less expensive than traditional CBDs, they are clearly becoming more attractive to both companies and workers and will continue to be an important market to watch going forward.