What About The Suburbs
We have previously explained the accordion effect in the office markets, where tenants relocate from one market to another; very often from the CBD to the suburbs or from the suburbs to the CBD
The usual culprit is cost. When the costs get too high in one market, companies move to lower cost market (decentralisation). The opposite occurs when incentives are high in a market, it attracts tenants from other markets (centralisation).
This has been happening across the country over the last couple of years as the pre-covid-and-covid cycle starts to become the post-covid cycle.
Not long ago, the Sydney CBD enticed tenants with generous incentives. As incentives decreased, so did the enthusiasm for that space. Now it is North Sydney’s turn, and soon after that it will be another market. It’s like clockwork.
However, there is a big difference between this office shift and previous office shifts. In the last major shift, offices were designed for 1 person (headcount) per 10-12 m2 of office space and working from home was not a thing. Office design was predicated on 100% utilisation. This time, we are experiencing completely different utilisation rates. Some are now as low as 20-40%. We also have the ability to work from anywhere. It’s a double whammy.
What’s this got to do with the suburbs?
The biggest impact of this shift is in the suburban office markets. They are more exposed to the decentralisation and centralisation periods than the bigger markets because many suburban owners are not as able to compete on incentives. Hence the influx and exodus of tenants is more regular. What is the post-covid cycle going to bring? Only time will tell.
I am off to Nashville for the annual TCN Worldwide conference and look forward to hearing firsthand how the countless US suburban office markets are adapting to the new shift. After all, Americans invented suburban office parks. They also are more innovative in dealing with legacy real estate because the markets correct themselves (real ups and downs) more often and faster. This brings fresh ideas and true innovation.
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