Where the green grass grows

Suburban office markets nationwide are continuing to thrive in a strong economy. While there is an equilibrium between supply and demand in most areas, capital sources are keeping a firm hand on the financial pulse of new development. According to industry sources, downtown office markets are on the upswing, and the suburbs see no threat of losing tenants to urban areas despite extensive nationwide CBD renovation efforts.

The primary reason that both are doing well is that the two markets are on separate tracks with different users. Although there are exceptions, such as the mini, high-tech centers being developed in some CBDs, downtowns, for the most part, have a business makeup of financial services, law firms and accounting. The big labor-intensive companies and technology firms prefer the suburbs.

Employees: the bottom line Perhaps the most significant attraction of the suburbs today revolves around the employment equation. Employers are locked in a high stakes, no-holds barred battle for employees in a tight labor market. Many employers figure their best chance of getting the talent they need is by having a suburban location where they can offer attractive, open settings, a variety of amenities and a work location close to home. Sources concede there is a segment - Gen-Xers - who prefer to live and work downtown due to entertainment and lifestyle considerations.

But the high volume of development taking place in the suburbs is proof positive of suburban attractiveness.

Richard Schaller, executive vice president and COO of Chicago-based CMD Realty, says 90% of development today is taking place in the suburbs because that is where employers want to be. Among some of CMD Realty's suburban properties catering to those employers are Stanford Place 3, a 364,560 sq. ft. office building in Denver and 2100 RiverEdge Parkway, a 268,454 sq. ft. office building in Atlanta's northwest submarket.

Phil Hawkins, COO of Washington, D.C.-based CarrAmerica Realty Corp., says he sees very few markets where suburbs are competing with downtowns. "Both markets are thriving because of the economy, and neither is succeeding at the expense of the other."

CarrAmerica is developing Parkway North Center, a 1.3 million sq. ft., five-building office campus in Deerfield, Ill., with enough land to support an additional 375,000 sq. ft.

Rick Rome, principal of Washington, D.C.-based Rome Group Inc. and president and chairman of industry group Corporate Real Estate Services Advisors, concurs the two segments appeal to different types of users. He says CBDs are not developing at a level that will impede suburban office development, noting, "A lot of companies are seeking CBDs but not as an exclusive location."

Rome and others point out, though, that suburban developers are making their product more competitive by building efficient and technologically advanced facilities, which is easier to do in the suburbs where land is more plentiful. Developers are taking advantage of this space by putting in larger floor sizes and providing more open space for large users. They are also focusing more on amenities including daycare and free parking.

Janice Stanton, managing director of Cushman & Wakefield in New York, says a problem for suburban developers is staying competitive with newer properties. Richard Gatto, executive vice president of Alter Group in Lincolnwood, Ill., believes that the suburbs may have a problem in the future attracting Gen-Xers who prefer the urban lifestyle.

The Alter Group is developing Corridors III, a 217,500 sq. ft., seven-story corporate office building at The Corridors in Downers Grove, Ill., and recently completed the development of Desert Canyon 200, a three-story, 100,000 sq. ft. spec office building at Desert Canyon Corporate Campus in northwest Phoenix.

Mark Rauenhorst, president and COO of Minneapolis-based Opus Corp., puts cost as the No. 1 consideration, with proximity to employees second.

Among Opus' suburban office developments are Crescent Ridge I and II in Minnetonka, Minn., a complex with 564,801 sq. ft. ; Doral Concourse One in Miami, with 239,373 sq. ft.; and Opus Center, San Jose, Calif., with 332,500 sq. ft.

Another strong year Most sources agree that suburban office markets this year are flourishing as they did in 1999. Among the strong suburban markets cited are Atlanta, Dallas, northern and Southern California, northern Virginia and Chicago, as well as the Northeast. Stanton says the nationwide suburban vacancy rate is 11.3% while the CBD vacancies are at 8.8%, the lowest rate in over 20 years. Anything below 12% to 13% is in equilibrium, she says.

"There has been a dramatic explosion in our markets, particularly in the growth of high-tech companies," says Hawkins.

"We are overwhelmed at the volume of activity," Gatto adds. "There has been as much developed in first-quarter 2000 as in all of last year. It's like a switch has been turned on since the first of the year."

Hawkins and Gatto may be right on target. Northbrook, Ill.-based Grubb & Ellis reports that 71.1 million sq. ft. of spec space is under construction in the nation's top 30 suburban markets with 34% of it concentrated in the Northeast region, which includes Boston, Philadelphia, Washington, D.C., and New Jersey. The next highest percentage of new construction, 19%, is taking place in the Mountain/Southeast region which includes Dallas, Denver, Houston, Phoenix, San Antonio and Tucson, Ariz. The Midwest region including Chicago, Detroit, Cleveland, Minneapolis and Cincinnati accounts for 13% of the new construction followed by the Southeast region at 12%. The Southeast includes Atlanta, Tampa Bay, Orlando and South Florida. Tied at 11% each are the Pacific Northwest and Pacific Southwest regions including all of California and Seattle.

In contrast, Grubb & Ellis reports that only 20.4 million sq. ft. of new construction is under way in the CBDs. "Downtown properties are more difficult to build, land is harder to secure, capital requirements are higher and it's also more difficult to get building permits," says Robert Bach, national director of market analysis for Grubb & Ellis, Northbrook, Ill.

"There has been a surge of new construction in the suburbs which caused the pace to slow in fourth-quarter 1999 as lenders pulled back," Bach says. "Pre-leasing has also declined because of the amount of new space coming on line and less demand. Lenders and developers are behaving rationally, so overbuilding does not appear to be a problem either in the suburbs or CBDs."

Stanton says suburban office markets are doing well but notes that income growth is being capped by the new construction. Charles Hazen, president of Hines Corporate Properties, an affiliate of Houston-based Hines Development, sides with Bach in observing that suburban markets are slowing because of declining job growth, which decreases the demand for space. Others says suburban markets are strong because they offer the ability to expand and provide more flexibility for large users.

Prime suburban: Atlanta, Dallas Two of the nation's premier suburban office markets are Atlanta and Dallas. In Atlanta, Clark Gore, executive vice president of Holder Properties, says 1999 was a "pleasant surprise" as the Atlanta metro area absorbed a total of 4.4 million sq. ft. of office space, 85% of it in the suburbs. Gore looks for continued strong performance in 2000.

In terms of absorption in the past few years, North Fulton County in Atlanta is clearly one of the leading suburban submarkets. The area's Class-A market absorbed 1.2 million sq. ft. of space in 1999, and there is now more than 1 million sq. ft. under construction.

Gore says this availability of product puts North Fulton in a unique position of being able to meet the needs of corporate relocations and major expansions of existing Atlanta-based companies.

Among Holder Properties' recent developments is a 167,000 sq. ft. technical operations center for E*Trade Group Inc., an online brokerage firm. The unique structure, located in Windward Business Park in the North Fulton market, has more than seven miles of cable within its 14-inch-thick walls and is built to withstand 200 mph winds and has multiple utility backups.Richard Bowers, SIOR, president of Atlanta-based Richard Bowers Co., also notes that there is continued demand in the suburbs. According to Bowers, the city's top markets include those surrounding Interstate 75 North, I-85 North and Ga. 400 North (North Fulton). His figures show 1999 North Fulton absorption at 1.3 million sq. ft. and deliveries at more than 2 million sq. ft. In 2000, 12 buildings of more than 50,000 sq. ft. are under construction totaling 1.7 million sq. ft.

Mark Small, president of MJS Realty Inc. in Dallas, describes that city's suburban office market as vibrant. "The driver has been the major expansion of high-tech companies here and their demands for employees to staff new and expanded facilities," he comments. There was some concern in 1999 about overbuilding, but absorption exceeded everyone's expectations with more than 8 million sq. ft. absorbed compared with the 4.5 million sq. ft. expected, he says.

Last year in Dallas, there were 90,000 new jobs created, many of which were fueled by the expansion of high-tech companies. According to Small, this expansion reflects the strength of the market. The inventory of suburban Class-A space has reached a point where developers are considering bringing new product on line for 2001. In contrast, there is no new product scheduled for the CBD.

One of MJS Realty's major developments is the Centura mixed-use complex under construction in Far North Dallas. The project has four office towers totaling 1.8 million sq. ft., a 300-room hotel, a 175-unit apartment building and 100,000 sq. ft. of retail.

Steven Mays, senior vice president of Baker Commercial Realty Inc. in Dallas, says public companies are trying to contain employee costs by limiting suburban parking ratios to four spaces per 1,000 sq. ft., increasing the size of floorplates and building in strategic locations near transportation arteries.

Baker is active in Dallas' Los Colinas submarket where Opus South, Archon, Granite Properties, Prentiss and Transwestern are among the major spec players. Mays says pre-leasing in Los Colinas is scarce because tenants are willing to withhold their decisions until the properties are topped out. With existing Class-A rentals high - in the $26 to $28 per sq. ft. range - windows of opportunity were created for build-to-suit developers such as Koll, Champion Partners and Archon, he explains.

"We're getting away from high-finish, Class-A space and going more toward value-oriented buildings with alternatives such as modified tilt wall construction, large floorplates and high-density parking solutions for tenants," he concludes.

David Weinreb, chairman and CEO of Dallas-based TPMC Realty Corp., says that the Las Colinas, Far North Dallas and Telecom Corridor submarkets absorbed almost 5 million sq. ft. in 1999, of which 55% was Class-A space and 45% Class-B space.

Weinreb's firm is expanding its position in Fall Creek, a 20-acre development located in the Telecom Corridor. TPMC's Fall Creek Phase Two plan calls for several high-profile office buildings including what could be the tallest office tower in Richardson.

Midwest remains stable In the heartland, Midwest suburban office markets are noted for their stability and resistance to peaks and valleys that accompany other markets around the country.

George Kohl, vice president-leasing for the central region of Chicago-based Equity Office Properties Trust, which manages 3.6 million sq. ft. of it in the Chicago Metropolitan area, says another 1 million sq. ft. will be added when its $4.6 billion acquisition of Cornerstone Properties Inc., New York, is completed. The Cornerstone portfolio consists of of 86 Class-A office buildings totaling more than 18 million sq. ft. in some of the country's most competitive real estate markets and $884 billion worth of projects currently in development.

In addition to Chicago, Kohl's markets are Cleveland; Columbus, Ohio; and Indianapolis. He says they are generally in balance with supply slightly ahead of demand. Around the Midwest, suburban office vacancy rates are in the 10.5% to 13% range compared with a 9% to 11% range for the CBDs. According to Kohl, Midwest developers are putting up smaller buildings, resulting in higher suburban vacancy rates.

"Supply is ahead of absorption because of the quicker time cycle required to get one up," he explains. "The typical suburban office building is three to six stories and 200,000 sq. ft. vs. a CBD building, which may be 18 to 50 stories and 500,000 to 1.5 million sq. ft."

He cites Chicago's north suburban and east/west corridors as hot areas for office growth. Historically, the north suburbs have been home to a high percentage of corporate decision makers, and the area enjoys good transportation. The east/west corridor has great population growth and a ready employment pool.

In the Twin Cities area, the star suburban performer is the southwest Minneapolis submarket where 1.2 million sq. ft. of multitenant space comes on line throughout the next year. According to the United Properties Twin Cities Commercial Real Estate Outlook January 2000, in 1999, Minneapolis posted its highest absorption rate, 379,780 sq. ft., since 1993, its lowest vacancy rate, 7%, since 1997 and continued high-net rental rates.

Orange County booms Another booming office market is Orange County, Calif., where the economy is "red hot" and absorption is strong, says Bill Halford, president of Irvine Office Co., Newport Beach, Calif. Halford says the county absorbed 500,000 sq. ft. of net space in 1999, all of it in fourth quarter.

In the South County area, 900,000 sq. ft. of absorption occurred during 1999, leaving the remainder of the county with a 400,000 sq. ft. negative absorption. Spec office development was marginally successful in 1999, because more tenants opted for flex product - office and R&D. For 2000, Halford looks for continued migration to South County, a slowing of spec office development and more development of flex space.

Mixed opinions on 2000 outlook There are mixed opinions on the suburban office market outlook for 2000. Hines' Hazen looks for slowdowns in absorption and new construction, and vacancies rising due to slower job growth.

Hawkins anticipates strong demand and a disciplined new supply of space in the suburbs. Rauenhorst says growth in supply will match growth in demand, producing a good market for developers.

Schaller looks for a strong market similar to 1999 with not much rent growth. Capital markets will keep supply in check, creating a healthy market, he says. Rome sees a very positive outlook with continued demand fueled by new high-tech companies and service firms serving them.

Stanton expects a small rise in suburban vacancy rates and rent increases of 3% to 5%. However, she expects CBDs to outperform suburbs in 2000 because they present a healthier supply/demand picture and tighter markets.

Bach, though, sums it up by saying, "There has been a resurgence of CBDs, but most business growth is still occurring in the suburbs."

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