Dive Brief:
- Office properties in suburban submarkets performed better than national averages in rent growth and vacancy rates, according to a recent analysis by Moody’s Analytics CRE.
- These properties, in strategic suburban areas with less competition and more favorable business environments, stand in contrast to urban area office properties that may be facing an imbalance of supply and demand, Ricardo Rosas, associate data scientist at Moody’s, wrote in an April 9 blog post.
- Top-performing properties typically exhibit lower consumer amenity volume scores, indicating that they have less access to local amenities such as restaurants, retail outlets and parks, Rosas wrote. In addition, these properties have lower economic prosperity scores, which Moody’s notes “challenges the widely held belief that high-performing properties must be situated in the most thriving and growing parts of each metropolitan area.”
Dive Insight:
Moody’s analysts examined rent data, vacancy rates and a range of location and property characteristics to uncover patterns and trends that contribute to superior rent performance. The methodology provides “a nuanced understanding of what makes certain office properties outshine their peers,” Rosas wrote in the post.
Factors included a rent change z-score, calculated by deducting the property rent change from the average rent change of its metro area and dividing that result by the standard deviation of the rent change of properties within the same metro area, the post said. The z-score indicates how much a given property deviated from the mean performance, it said.
The analysis also calculated a commercial location score to indicate a location’s relative quality based on attributes like accessibility, amenities and environmental factors. Examining these physical and location characteristics of the top performers, Rosas said in the post, can shed light on patterns and trends “that may elucidate their exceptional rent performance.”
In addition to showing better rent growth, top-performing properties in the office sector scored higher on spatial demand, a measure of demand for properties based on vacancy rates in nearby areas. Higher spatial demand scores suggest that top-performing properties are in areas, where high demand for office space drives up rents, Moody’s says.
Looking at over 7,000 properties across multiple U.S. metropolitan regions, the analysis found that the 10 top-performing properties maintained an average vacancy rate of 15.4% compared with a national fourth quarter 2023 vacancy rate of 19.6%, Rosas wrote.
The analysis confirmed the general desirability of suburban areas through a case study of Houston, which Moody’s says is consistent with the nationwide trend. While top-performing properties showed commercial location score patterns similar to those observed nationally, top performers in Houston tend to be smaller and are likely classified as Class B or Class C properties, Moody’s says. This observation underscores the success of properties in suburban areas, where such characteristics are more common, it says.
“At a national level, no single attribute uniformly outperforms others, suggesting that different metro areas prioritize various characteristics,” Rosas wrote in the blog post. “However, in addition to the factors previously discussed, the commuting dynamics in suburban areas could significantly influence the performance of suburban office properties. … This insight is particularly relevant in the context of suburban real estate markets, where the ease of commuting can be a substantial draw for both employees and employers,” the analysis states.
Furthermore, acquiring quality properties at lower costs appears to play a pivotal role in performance, Moody’s says. Although top properties in Houston exhibited significant rent growth, the area’s suburban properties recorded an average rent of $22.14 per square foot, compared with the $25.51 per square foot seen in average rent across all nationwide suburban properties. Rosas notes that these outperforming properties tended to be older, with an average construction year of 1983, compared with all suburban properties, which had an average construction year of 1986. “Notably, they were more frequently renovated, with an average renovation date of July 2004, compared to October 2002 for all suburban properties,” Rosas says.
The analysis also points to the possibility of successful office properties catering to non-finance or non-tech firms in metro areas like Houston to maintain demand for older and more affordable office spaces. Small law offices, medical practices, back offices for manufacturing and logistics companies, plumbing and electrical services, and other service-oriented tenants typically require a physical office, Rosas notes, and they benefit from affordable yet quality office space often found in suburban markets.
