Demand for office space all but dried up in 2020 due to COVID-19, as companies adopted flexible work-from-home policies en masse. And while hard data about the future of the sector remains elusive – as most tenants have chosen to delay making decisions about office re-entry until at least the middle of this year – it’s clear that many companies intend to make distributed work a more permanent reality, whether through hub-and-spoke or hybrid models.
In a new report, JLL predicts that corporate urban-to-suburban moves will remain limited in 2021, and that leading occupiers will likely find they don’t need to choose a purely urban or suburban strategy as they analyze talent demand and space needs. The real winners over the next 36 months will be Sun Belt and Mountain West submarkets, which JLL estimates will outperform gateway cities in office absorption and rent growth as companies relocate offices and adopt more distributed work models.
San Francisco, New York, and Seattle suffered most last year, registering -7.8%, -4.5%, and -3.1% drops, respectively, in occupancy. Meanwhile, Sun Belt markets like Atlanta (-0.6%), Raleigh-Durham (- 0.7%), and Phoenix (-0.7%) remained more stable.
Cities with high growth and low tax environments benefited the most last year, with the most popular migration routes being San Francisco to Austin (16.7 per 10,000 residents), New York to Austin (11.6), San Francisco to Seattle (10.9), New York to Denver (9.1), Chicago to Nashville (8.7) and New York to Miami (8.7).
Companies like Oracle, HP Enterprise, and Palantir Technologies have all moved their headquarters out of the Bay Area, citing availability and cost of talent, more favorable tax rates, and a pro-business environment as reasons behind their moves. And the effects of these corporate relocation strategies are trickling down: as well-heeled ex-pats from gateway cities flood secondary markets like Austin and Nashville, they’re driving up home prices and creating stiff competition for locals.
Long-term, it’s likely that gateway cities like New York, Chicago, San Francisco and Washington D.C., will rebound as vaccines are rolled out throughout the US and the retail, F&B, and entertainment and cultural sectors within those regions rebuild. Those cities have historically been innovation hubs bolstered by connected global transportation and function as safe havens for international capital, whereas secondary markets may be constrained in infrastructure and liquidity. In other words: the gateway city will bounce back; it’s just a question of when.
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