March 21, 2023

On Aug. 29, one of the world’s largest sovereign-wealth funds made a call that may soon open the floodgates for office building sales in the U.S.
But it comes with subtle nuance.
Singapore’s GIC Pte. Ltd. and Florida-based Workspace Property Trust, a privately held real estate firm, decided to buy 53 suburban office buildings for about $1.1 billion. The most important word in the sentence is “suburban.”
That’s a bet that reflects institutional investors believe remote work is here to stay, and now office buildings near residential neighborhoods should become more desirable.
If the top brass at GIC and Workspace are correct, that means the Covid-driven work-from-home phenomenon is here to stay. Kastle Systems, a company that keeps track of unique scans into buildings by workers, reports office occupancy levels in the 10 largest U.S. cities have neared 45 percent, the highest since March 2020 but only slightly up from earlier this year. Based on that survey alone, companies are beginning to accept the fact that they may never have all their workers come to the office five days a week.
Likely adding to the shift away from office space is the wave of layoffs spreading across the country as companies big and small start to scale down in anticipation of an extended economic slowdown. Already this year, major public companies such as Walmart (NYSE: WMT), Snapchat parent Snap Inc. (NYSE: SNAP), Carvana (NYSE: CVNA) and Rivian (Nasdaq: RIVN) have announced layoffs totaling thousands of jobs. The same goes for Shopify, (NYSE: SHOP), VF Corp. (NYSE: VFC), Best Buy (NYSE: BBY), Peloton (Nasdaq: PTON) and others. This month, Apple (Nasdaq: APPL) said it had laid off 100 contract-based recruiters as the tech giant plans to slow hiring and spending. And talk of potential layoffs is swirling at Google (Nasdaq: GOOG).
In an April 2021 column, I pontificated that suburban retail is going to go through a renaissance as remote workers will get restless staying at home all day, and start going to their neighborhood shopping strip to have a beer, play pool and go to dinner.
However, I did not mention office buildings in the suburbs getting popular.
The second quarter report from the CBRE Group (NYSE: CBRE) noted that the office vacancy rate in U.S. downtowns surpassed the suburban vacancy rate for the first time in decades. While this may be true for most of the largest cities in the country, growing metros such as Raleigh-Durham and Austin, Texas, have started seeing that trend as well.
For example, during the second quarter of 2022, downtown Raleigh had an office vacancy rate of 13.64 percent, according to Triangle Business Journal research. But suburban office buildings located in places such as Cary and off Falls of Neuse Road saw vacancy rates drop to 11.26 percent and 9.50 percent, respectively.
But the numbers don’t tell the full story. Downtown Raleigh office buildings had far more new leases signed than their counterparts in the past year, with net absorption of 254,358 square feet. Cary, by contrast, registered 140,335 square feet and Falls of Neuse has 23,400 square feet of net absorption in the past 12 months.
But there is a noticeable shift taking place as absorption rates in downtown properties across most of the larger metros are struggling to keep pace with the numbers from the recent past.
If the world’s largest real estate investor starts looking at office buildings in the suburbs, one of the largest beneficiaries of that trend would be retail. While parking will be a massive issue to solve because suburban office buildings’ parking density is far lower than the downtown parking equation, new restaurants, shops and walkable landscapes are sure to pop up in the future.
Municipalities may soon face a swath of rezoning requests in areas not inside the central business districts, especially if big money is lurking in the background.
What remains to be seen now is whether this move is just temporary for private equity and other institutional investors parking their money in a ‘”safer” real estate haven — or are employers, investors and workers collectively convinced that people will work far longer at their home than at their office?
Let’s review this one year from now.
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