This summer, the script subtly changed. The banner story has been that downtowns were in and that companies need to relocate there to remain hip and relevant and to attract young workers.
Smart, urbane 20- and early-30 years-olds, the story went, don’t want long commutes to bland office parks. (Who does?) They want to work conveniently close to home. They want all the work-life amenities. And this sparked a move by forward-looking companies to more dynamic digs, such as Coca-Cola Canada’s ballyhooed relocation to Toronto’s downtown King Street East and Telus’s new offices in various city centres.
But as the phenomenon matures, as companies continue to re-evaluate work spaces in a post-2009 era of cautious regrowth, market watchers are seeing a more nuanced story. The suburbs aren’t as out as once believed.
Research from real-estate services company CBRE highlighted those subtleties in data from the second quarter this year.
CBRE emphasized that in suburban Canada, there was 276,028 square feet of net absorption (that is, roughly speaking, the rate of office space being sold) in the second quarter. This compared with 258,391 square feet net absorption in Canadian downtowns. This was happening even as office towers were adding more, new downtown office space nationally.
“While most industry watchers are preoccupied with the wave of new construction in downtown office markets across the country, demand for suburban office space continues to surprise,” CBRE reported, summarizing its first half of 2015 findings.
“I’ll be candid,” Ross Moore, CBRE’s director of research in Canada, said at the time. “I think we’re scratching our heads a little bit as well, because all you hear and see is that it’s all about the downtowns, and the millennials want to be downtown. And if you just read the headlines, you’d think that the suburbs were soon to be a wasteland, and it’s not the case.”
It’s not a straightforward trend, though. Recent third-quarter data told a different story.
Third-quarter absorption was negative 839,228 square feet in the suburbs, a significant contraction nationally, and negative 935,510 year to date. The decline was heavy in the West and even heavier in the East.
Downtowns weren’t stellar, though, with only 86,821 positive net absorption in the third quarter and 734,949 negative contraction year to date. Here the story changed again, with all the negative absorption in the quarter and the year to date happening in the West, while downtowns in the East showed healthy, positive results.
But what we’re seeing aren’t simple comparisons between the suburbs versus downtowns, Eastern Canada versus the West. Behind the numbers are very different kinds of companies making different kinds of office choices, Mr. Moore said.
“There is a set of suburban tenants that have always been suburban tenants, and they will mostly likely always be suburban tenants,” he said, noting pharmaceutical companies and electronics manufacturers, for instance. While many software tech companies want to locate downtown, particularly the myriad startups, the electronic hardware office will often remain suburban.
Canadian head offices of typically suburban U.S. companies also tend to stay outside the city centre, such as Procter & Gamble and Kraft Canada, with offices in Toronto’s North York area, Coca-Cola being an exception.
Companies that locate their head offices in the suburbs tend to locate branch plants in the 'burbs, too. (J.P. Moczulski for The Globe and Mail)
“A disproportionate number of suburban tenants are U.S.-based tenants. And why that’s significant is because U.S. tenants since the global financial crisis [in 2009] have been in cost-containment mode, and they have had very sluggish growth at home in the U.S.,” he said. “As the U.S. economy improves and things get better at home, I think it’s reasonable to expect a little bit more growth and a little bit more appetite for expansion in new premises.”
Yet, U.S. companies are seeing the same urgency to upgrade their offices, in part to attract young workers.
“Success is still driven by location, and millennials are clearly influencing the future definition of a great location. Millennials definitely prefer urban locations, but not everyone can work in downtown San Francisco,” said Len O’Donnell, president and chief executive officer of property investor USAA Real Estate Co., headquartered in San Antonio, Tex.
He makes the distinction not only between downtown and suburban, but in different types of cities serving different purposes, such San Francisco and New York being highly visible, gateway cities, with Houston and Atlanta serving as smaller primary markets, while Austin, Tex., and Nashville are important secondary markets. Office property in smaller cities needs to upgrade to remain competitive with those in more enticing markets, while also playing up their unique attractiveness and benefits. As with many outmoded retail properties, there is a saying that retail is not overbuilt, but underdemolished. That could apply to some outdated suburban offices, too.
“Therefore, it is incumbent on investors and developers to focus on assets that can replicate the benefits of a true urban location, as much as possible. This formula typically includes on-site amenities, transit access, numerous restaurants, preferably within walking distance. And if there are attractive residential options nearby, that’s even better,” Mr. O’Donnell said.
Toronto suburbs have been particularly hit hard by new demands in higher quality office space. This has created a strong flight to quality both downtown and in the suburbs, with suburban offices also having to remain attractive to companies compared to the downtown.
“In part, it’s location. In part, it’s going to be average floor plate size,” said Stuart Barron, national director of research for Canadian markets at the real-estate service provider Cushman & Wakefield. “The modern buildings are going to be tremendously efficient. Their air handling is going to have greater capacity. They are going to be able to densify more effectively. And that of course is critical because since the financial crisis, there’s been a tremendous desire to put more people into less space.”
Yet, there’s still that something extra that downtown properties hold for certain companies.
“Technology is certainly hot in the downtown market … and part of it is definitely tapping into the youth and the energy and the vitality. There is a faster pace in the downtown market, and I think that that’s very consistent with the kind of growth and the exuberance that the technology companies are trying to tap into,” Mr. Barron said.