The topic of suburbanization has come to the forefront as COVID-19 spreads and the subsequent shutdown endures. As the virus lingers, we have seen big-city residents seeking shelter by migrating to less dense places in the suburbs. While most of these moves are a temporary response to the pandemic, population data suggests urban centers have been losing their allure since the late 2010s. Soaring rents pushed residents out into the suburbs, seeking more space and better education for their growing families, with the Millennial generation leading this trend. The majority of Millennials are now entering their 30s and make up the largest group of home buyers. Will the COVID-19 pandemic accelerate this outmigration? And if it does, will office employers follow the population shift in order to retain and attract talent? There are arguments on both sides, but all agree that only time will tell.
New Jersey is in a unique situation. COVID-19 has been devastating major cities, including New York, as the virus spreads rapidly through dense, public transit-oriented urban centers. While New Jersey was not spared from the damaging effects of the virus, it offers more room and larger homes in automobile-oriented suburbs. The sheer amount of space makes it easier to safely practice social distancing. What was once a liability for New Jersey is now an asset in the post-COVID-19 environment.
Attracting talent has been one of the major considerations for many employers when conducting space searches. If the suburbanization trend sticks, we may see increased tenant demand in New Jersey.
COLLIERS INTERNATIONAL
Recent population data suggest New Jersey is in the early stages of suburban migration as municipalities are growing at a faster pace than the urban core. The Internal Revenue Service tracks migration data based on the year-to-year changes in addresses reported on income tax returns. In 2018 there were more that 8,800 tax returns filed in New Jersey that in 2017 had an address in New York County, which further solidifies the suburban migration trend.
COLLIERS INTERNATIONAL
This dynamic may lead to renewed interest in suburban office parks, as health has now become a major concern in a post-pandemic world. Driving to work prevents contact with others and parking, which is typically free in the suburbs, is an important commodity, as parking is tight and costly in the city.
Furthermore, suburban office buildings in New Jersey are typically four to five stories, allowing employees to skip the elevator and use stairwells to get to their offices. This is another way to help people to keep a safe distance between one another for as long as social distancing mandates are in place.
The spread in asking office lease rates between New Jersey and the three Manhattan markets has never been greater. Midtown South and Downtown asking rents are at or near all-time highs, while Midtown is up 46.9 percent from its post-Great Recession low. Conversely, New Jersey’s asking rent has stayed relatively flat since 2002, remaining within the $24-$28 per square foot range and is only up 14.6 percent from its post-Great Recession low. In the first quarter of 2010 the Manhattan premium was $33.54, $10.89, and $11.42 per square foot in Midtown, Midtown South and Downtown respectively.
COLLIERS INTERNATIONAL
Ten years later, this premium has soared to $57.50, $49.69, and $37.53 per square foot and has never been higher. Companies looking to de-densify or scale down their urban offices can save significantly on real estate costs by opening smaller satellite offices in New Jersey and other Tri-State suburbs.
COLLIERS INTERNATIONAL
There are several reasons why a suburban office strategy makes sense in our post-pandemic world – population shifts, maintaining the health of employees, and pricing among them. Manhattan will continue to remain the central headquarters of many corporations for a multitude of reasons, but suburban outpost offices may play a larger role. We are still very early on in this cycle, so this is an important dynamic to follow closely. There are also questions surrounding how long these moves will last. When looking at past cycles, these moves are typically ephemeral. For instance, after 9/11 many tenants who relocated the suburbs returned to Manhattan when things got back to normal. The impact COVID-19 will have on our market and economy is unprecedented and it is unclear how long the spread will last. The longer its time frame extends, the higher priority it becomes for people and businesses to mitigate risk and economic impact.
John Obeid is senior director, Suburban Tri-State Research at Colliers International.
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June 08, 2020 at 11:22AM
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CLOSING ENTRY: The case for the suburbs - NJBIZ
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