The below article originally appeared in The New England Investor. Click to read the full magazine.
“Looking back just 18 months ago, you would have had to be quite convincing to get investors to even consider the suburbs. That’s really changed in past six to nine months.” So says Matt Sherry, Senior Vice President on the JLL New England Capital Markets team, who cites the recent sale of University Office Park in Waltham as a prime example of this. The property, which traded in March, had previously been on the market nine months prior with no activity. Which begs the question, what changed in such a short period of time?
“I think it’s definitely a new appreciation of the yield premium that exists out there, but I do think the lack of available product in the CBD over the past 12 months has helped to push people out there,” said Sherry. “While they may still be hesitant at first, once they get out there and see it and experience it, they are much more optimistic about the opportunity it presents.”
Added JLL Vice President Tom Ragno, who’s observing the same trend: “The urban markets have gotten so competitive that you’re seeing a lot of capital reconsider the suburbs as a viable investment alternative due to the yield available relative to downtown product.”
It also helps that today’s suburban product is much different, and arguably much better, than it once was. From improved amenities to new transit options and refreshed space itself, gone are the days of what we once knew as the more traditional suburbs.
“We’re seeing a new suburban office product that investors are willing to chase,” said Ragno. “A lot of these investors expect to see eight-foot high dropped ceilings with fluorescent lights and unhappy employees at their cubes. What they actually see when they get there is an energized innovative environment that tells an entirely new story.”
There is perhaps no better example of this than The Xchange at Bedford, a 475,000-square-foot campus that is home to iRobot’s Headquarters and recently sold for $108 million. The property saw increased tour activity and received 10 qualified offers at or above asking price, which, according to Ragno, “you never would have seen two years ago.”
“Xchange fit the bill,” said JLL Managing Director Frank Petz. “It had the combination of durable income in place long term with iRobot, rent roll upside given its below market rents, vacancy, a strong on-site tenant amenity base, and a little icing on cake with a life science component. For investors, a lot of risk was taken out of the equation and you still had upside,” he added.
“I think The Davis Companies did a heck of a job repositioning the property and amenitizing the physical space, but the raw real estate there just has a certain versatility to it,” said Sherry. “It’s office space with a little bit of an R&D and lab spin, so while it’s well-leased today, in the future you could appeal to companies with different types of requirements and space needs.”
But not every suburban property is going to boast iRobot’s headquarters among several other positive factors, so is Xchange an anomaly, rather than the new norm? “No” says Petz, who ensures this scenario is replicable so long as there’s quality product, the right location, amenitization, and some form of yield durability with upside.
“Investors are becoming much more aware of the risk-reward benefit in the suburbs,” he said. “The product is still redlined by certain people, but those numbers are diminishing and increasingly investors are coming to embrace the green pastures of the suburbs.”
To read more about this and other investor insights across the region, check out The New England Investor.