|Suburban Opportunity: Watch for a resurgence in suburban office space. “I’ve never seen a better opportunity or value for suburban office than the situation we are in,” said John Chang, National Director of Research for Marcus and Millichap. Sixty percent of Millennials are age 30 and older, and they have been starting families, driving a migration to the suburbs over the last five years. That household growth is likely to accelerate. At the same time, the logistics of commuting to cities on railroads and subways and crowding into elevators in central business districts have become more precarious. Some analysts expect employers to embrace a “hub-and-spoke model,” with urban headquarters surrounded by suburban satellites. “The vacancy spread between urban and suburban office has been narrowing for several years but is going to accelerate because of COVID-19,” Chang said. “Any occupiers who are on the fence will lean toward the suburbs as leases come up for renewal.”
Reviving Suburban Campuses: Suburban office buildings typically contain larger floorplates, which facilitate social distancing, and ample parking, an important factor as driving to work becomes the preferred commute. At the same time, the nondescript box with a massive asphalt parking field is fading away as employers incorporate more amenities to attract top talent, including outdoor space, restaurants, coffee shops, and fitness facilities.
As landlords and tenants work to find clarity on the future of office utilization, the same is true in the capital markets. Lender demand is less abundant for office than multifamily and industrial, but office is anticipated to be one of the better comeback stories in a year’s time. Currently, we see banks, credit unions and some life companies looking at office assets, with intense scrutiny of asset quality, strength and resilience of tenants, rate of collections, and borrower credit. Debt yields and debt coverage are higher, and loan-to-value ratios are lower, at 60 to 65 percent. Rates range from 3.75 to 4.50 percent. CMBS is open to deals but meeting the criteria might be compared to trying to land a 747 aircraft on the head of a pin, with debt yield premiums of 9 percent or more.
With its extensive market coverage and unparalleled network of lender relationships, Marcus and Millichap Capital Corporation is continuing to close loans across all asset classes. Connect with an MMCC advisor to help you navigate this fluid and dynamic market.