Business real estate in major cities has skyrocketed in pricing sending many companies out into the suburbs where the cost per square foot is drastically lower.
The number of commercial enterprises in the U.S. is growing. According to the U.S. Small Business Administration's 2019 profile, there are more than 30.7 million small businesses and startups, which led to the creation of 1.8 million new jobs. Many of these businesses are located in major urban business centers. However, a large portion of those companies can't afford rent in expensive cities, and neither can their workers.
As a result, businesses are shifting to other, previously-untapped markets, including smaller cities and their suburbs. It's an unexpected move away from setting up shop in a bustling metropolis, but one that's creating new opportunities for once-tired office parks and commercial buildings.
Getting Priced Out
Although major urban centers were once friendly to new businesses and startups—New York and Silicon Valley primarily—real estate in these areas has skyrocketed, thanks to commercial behemoths such as Alphabet, Facebook, and Apple that can afford to pay rising rents. In Manhattan, for instance, commercial real estate prices in the second quarter of 2019 averaged $75.60 per square foot—and up to $94 in premium locations.
New, leaner businesses, especially those in nascent days, are getting priced out of these markets. They simply don't generate the revenue to devote such a significant portion of their earnings to commercial real estate. This also poses a problem for workers who, even with high salaries, are paying disproportionally high rent. That influences the bottom line for companies as workers move out to more affordable locales—and also creates a shrinking talent pool within those major cities.
The Emergence of Alternative Markets
Alternatives to major-market office space have emerged in untraditional locales, including small cities and larger suburbs. This is a more affordable solution for new businesses and startups as commercial real estate prices in these areas are much lower. Beyond renting, the prices to purchase commercial office parks are also lower in these markets.
An increase in businesses that have sowed roots in non-major commercial markets reflects this trend. Areas that have seen a surge in small business and startup interest include Atlanta, Oklahoma City, North Carolina's Research Triangle, and throughout Utah, among others. Smaller cities such as Des Moines, and suburban counties such as Anne Arundel County, outside of Baltimore, are also offering business development incentive programs to spur commercial development with real estate benefits such as tax abatement.
One example of a company with a strong suburban presence is Paylocity. The business software company is headquartered in Chicago suburb Schaumburg, Illinois, and also has offices in Orlando suburb Lake Mary, as well as Boise suburb Meridan. In Meridan, Paylocity occupies 62,000 square feet of modern-feeling space in a suburban office building off of the main interstate. In contrast to New York City rent, current commercial rent prices per square foot for office parks in the Meridan area average around $15.
New interest in the suburbs is also creating opportunities for revitalization of commercial real estate that's either empty or in disuse. Uber founder and former CEO Travis Kalanick has even launched a new startup to help repurpose abandoned malls and other distressed properties into offices and other attractions.
A New Home for Modern Office Spaces
The conventional, cubicle-filled office building is out of style. Appealing, urban-feeling workspaces packed with amenities are in.
With the increasing demand for modern offices, suburban office space is getting a makeover to reflect younger workers' tastes. This entails providing contemporarily designed open office space, as well as building entire campuses, much like the ones touted by major-market players such as Facebook. This shape-shift is reflected in places including the North Carolina Research Triangle, which includes Durham, Raleigh, and Chapel Hill, where campuses have sprung up.
Modern, amenity-filled offices appeal to workers, which makes these small-market companies compete for talent.
Former abandoned and blighted commercial spaces are also experiencing a modern renaissance due to the creation of these chic offices. For instance, co-working company Industrious has begun to open modern office spaces in malls, such as a space in Scottsdale, Arizona, a suburb of Phoenix. It's an appealing alternative to both small businesses as well as larger businesses opening up satellite offices.
Reflecting the Cultural Shift
The small and mid-market business shift away from major metropolitan areas and toward smaller cities and suburbs reflects the desires of younger workers writ large, including millennials and Gen Y, who are moving to suburbs for a lower cost of living. Wall Street Journal data from 2019 showed that 27,000 millennials between the ages of 25 and 39 left major cities including San Francisco New York and Houston for other destinations including Austin, Seattle, and Columbus.
As workers leave for these destinations, companies that develop offices in smaller markets can take advantage of a growing talent pool, and make themselves more competitive to counterparts in metropolitan centers.
Although suburban office parks and other commercial real estate may seem outdated at first glance, these buildings are experiencing a second wave—especially as talent pools continue their exodus from cities. With modern makeovers and a younger feel, suburban commercial real state may have a promising future after all.