Remember the suburbs? They are coming back, experts: Shift away from urbanization is afoot

Posted 7/6/20

They say life is cyclical, and such is true in the housing business.

Ten years ago, developers were rushing to build apartment communities in the urban areas of the country, Valley of the Sun not excluded.

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Remember the suburbs? They are coming back, experts: Shift away from urbanization is afoot

Posted

They say life is cyclical, and such is true in the housing business.

Ten years ago, developers were rushing to build apartment communities in the urban areas of the country, Valley of the Sun not excluded.

From 2010 to 2015, 21% of household growth was in urban areas, while from 2000 to 2010 it only made up 8%, according to real estate brokerage Marcus & Millichap.

The cycle has been shifting back to the suburbs with a decrease to 15% of household growth in urban areas over the last five years, according to John Chang, senior vice president of research services at Marcus & Millichap.

And suburbs will capture a larger share of household growth in the coming years, he said.

“Between 2010 and 2015, we saw a big move to urbanization and then since 2015 we’ve seen a migration back out to the suburbs. Now 79% of the households are going to the suburbs. This is very reminiscent of the 1980s when the Baby Boomer generation was in a similar stage, when they were forming households and moving to the suburbs,” he said. “Even seven, eight years ago, the commentary I was hearing was that the suburbs were dead and that nobody was going back to suburban office. And we can see that even though that was a common conversation point, that over the last five years or so, we’ve seen the momentum in the suburban areas pick up and the momentum in the downtown areas flatten out.”

Experts say this is being accelerated by the pandemic and a change in lifestyle as a result of the coronavirus.

A number of factors are contributing to the shift: U.S. mobility trends indicate an aversion to public transit; real estate numbers show an increase in apartment vacancies. Millennials, the market’s biggest purchasing power, more than 70 million strong, are getting older, getting married, wanting to buy a home and start a family.

Experts say these all these things are contributing to a shift toward the suburbs.

Add to that a desire to have more space due to the COVID-19 pandemic, and the trend appears real for things to come.

Brandon Huffman, managing principal and portfolio manager of Equity Investments, Rubenstein Partners, said millennials living in the cities today overwhelmingly say they think their next household will be in the suburbs and when they state the reasons, they are: household formation, cost of living, public schools and more space.

So, it’s always been cyclical, it’s been coming back to the suburbs in a big way, and with COVID-19, a lot more people are focused on it, he said. It is a misconception to say the pandemic started this, but it is amplifying and accelerating it, he said.

“Everybody looks at the major urbanization trend that happened in the U.S. from 2010 to 2015,” Mr. Huffman said. “It was as if the millennial subset of the population that shifted to the urban core was never going to reverse course and come back. Like they were going to stay in the cities forever. Now that we have the data, we know that is not the case. They’ve been moving back and moving back in droves. And there has been an overwhelmingly large number of millennials moving from the cities to the suburbs rather than vise versa over the last four years.”

The vacancy rate spread between suburban and urban office space has diminished in the last 10 years, with a spread of 230 basis points between urban and suburban in 2011, shrinking to a spread of 30 basis points today, according to Marcus & Millichap.

The continuing shift is expected to have an effect on how suburban office space is expected to be used in the future, with more of a focus on amenities, rather than just big boxes and parking lots.

Running concurrent to the shift toward the suburb has been a shift toward the urbanization of the suburban office, with a more amenitiezed approach to attract talent.

Martha dePlazaola Abbott, co-managing director and principal at Gensler, said there has to be some sort of equitable formula for people to work outside the central business area and the urban core, and that’s really not about parking any longer. It is about creating micro-urban suburban environments, she said.

A recent survey from Gensler found that only 12% of U.S. workers want to continue working full-time from home.

Ms. dePlazaola Abbott said people really do want to go back to work, and in a post COVID-19 world, outdoor spaces will become extensions of the workplace, and it will be important to create these spaces as part of the suburban office market.

One value of the suburban office market is larger floor plates — suburban floor plates are around 50,000 square feet, while urban floor plates are around 30,000 square feet, allowing for more open space and social distancing, she said.

“With suburban office, you can get larger, more open floor plates, and have more creativity to break space up, which is good post-COVID,” she said. “You have much more flexibility in suburban office, an incredible opportunity for ultimate flexibility.”

The suburban shift could be a teachable moment for investors and the fate of office development to come.

Mr. Huffman said the future of suburban office space should shift in favor of amenities.

“What have we have learned from the urbanization experiment of 2010 to 2015? Just because there is a shift back to the suburbs doesn’t mean everybody wants to go back to a 1990s commodities office building on a sea of asphalt,” he said. “As companies shift back to suburbs, they aren’t going to shift back evenly. The benefit is not going to get distributed evenly across all of the suburban stock. I think the non-competitively advantaged commodity stuff with low ceiling height where you can’t really create that sense of place or have the right programing or amenity package, it will struggle. It just will. Those will be last to lease and won’t have a lot of leverage. Recreate semblance of that urban experience in a suburban campus — that is where you will get the best of both worlds.”

Philip Haldiman can be reached at 623-876-3697, phaldiman@newszap.com, or on Twitter @philiphaldiman.

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