Marc DeLuca is CEO of KBS, one of the largest investors of premier commercial real estate in the nation.
In 2023, when uncertainty is coloring business decisions, many are seeking fresh spheres of opportunity. There is ample evidence this opportunity may lie just beyond the heart of our cities.
Geographic U.S. areas where investment companies like mine invest are categorized in office real estate as either urban or suburban. Urban or central business district (CBD) office markets are population and business dense, typically characterized by tall buildings and active public transportation systems, while suburban office markets tend to be more spread out, quieter and cater to car commuters.
But for the past 10-plus years, I’ve seen a different type of market emerge that combines the best of these two categories. One might call these suburban/urban nodes because they bridge the gap between CBDs and the suburbs—and they are offering businesses and their Millennial employees a fresher option.
How did these nodes emerge?
The evolution of urban nodes speaks to societal trends in the Covid era. In studying the post-pandemic recovery of U.S. markets, I have observed wide regional differences. For example, many office-using companies relocated to areas such as Austin, Nashville and Salt Lake City, which offered walkable environments that are less population dense than traditional primary urban markets such as New York, Chicago and San Francisco.
Along the same lines, I am seeing many submarkets just outside of CBDs that are less impacted by homelessness and other downtown issues grow in prominence. These “first-ring” urban nodes are noted for their transportation options: light rail stations and intersecting freeways that enable easy ingress and egress to the cities they surround. These markets offer much of the same experience as the heart of the city, but are generally less expensive and more accessible. My company has chosen to invest in many properties located in these nodes because our research shows they are positioned to meet our tenants’ needs.
As Covid becomes endemic to society, I expect people will continue to seek walkable live/work/play environments close to CBDs while providing a quieter lifestyle, more green space and less congestion than nearby cities.
How can urban nodes help the economy?
As areas in these urban nodes become activated, they attract residents, tourism and office users. This can drive economies by adding jobs, helping businesses thrive and bolstering city and state tax revenues. Plus, history has shown that investment begets investment—as people place capital in a region, other investors are attracted to that area.
In addition, I believe employers are drawn to these first-ring suburbs because their teams want proximity to CBDs and residential areas, plus occupancy costs are often more affordable than the urban core. These nodes can also offer public transportation, parking, and dining, shopping and entertainment options that attract employees from all demographic groups.
Further, I see many urban node markets offer office building owners and developers the opportunity to appeal to younger workers magnetized by the energy and vibrance of urban environments, as well as maturing Millennial workers interested in raising their children in less dense areas. These areas cater to the next generation of workers, and I expect they will be in demand over the next few decades.
For these reasons, you can expect to find office buildings in these submarkets with high-end amenities such as on-site fitness centers, gourmet and healthy food options and convenience services, similar to urban office properties. In fact, I find that regardless of where these buildings are located, top-quality amenities are equally important. Investors should consider customizing properties with amenities that make sense in their particular node—such as bike storage areas and shower facilities in markets with heavy bike traffic. Demand for market-specific features like these is rising in emerging urban nodes, driving these areas to thrive.
How should investors pivot their strategies?
As investors accustomed to investing in cities consider placing capital in urban nodes, they may choose to adjust their strategies given the new demographics these submarkets are attracting. Similarly, those who already own properties in urban nodes could benefit from finetuning their approach.
Here are a few key takeaways for new investors in urban nodes that are beneficial to keep in mind.
1. Think about transportation. Investing in properties close to transportation is a smart move because these buildings tend to attract young commuters who either live in the city or spend time after work there. On-site parking is also critical in buildings outside of central business districts as people are more likely to drive in those areas.
2. Incorporate the right amenities. Regardless of where a property is located, amenities are vital. These features are the selling points that distinguish one building from another in the same market. Incorporate amenities that align well with the property and appeal to younger employees and residents, such as bike storage, fresh gourmet food and drink options, state-of-the-art fitness centers and WiFi-enabled outdoor areas.
3. Factor in sustainability. ESG is a major element of Millennial and Gen Z belief systems. As buildings that are operated with environmental, social and governance sustainability in mind are more likely to attract these cohorts, investors should be advised to factor this into their decision-making.
4. Look for the latest technology. Our younger generations are the most technologically savvy groups ever to enter society. They expect fast connectivity and updated software and devices in their work and daily lives. Concentrating on smart buildings with top-tier internet service can make a tremendous difference for those who invest in urban nodes.
How will urban nodes impact cities?
Interestingly, attraction to city centers vs. urban nodes appears to be a yes/and rather than an either/or proposition.
Cities surrounded by emerging markets are more likely to be buoyed by the activity in these nodes—especially as landlords of primary CBD markets redevelop or foreclose on their assets due to rising interest rates—offering city governments additional resources and runway to improve and revitalize traditional downtowns. Also, urban nodes can provide non-traditional office markets an opportunity to compete for relocating companies that would traditionally be interested in other major markets.
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