Burbank to Brookline Soar in Shift to U.S. Suburbs: Real Estate

Jan. 7 (Bloomberg) -- Clarion Partners LLC, a real estate owner overseeing almost $30 billion, made millions buying Manhattan office buildings and towers in Seattle and Houston after the U.S. property crash began six years ago. It’s now moving to the outskirts of big cities.

“Investors see high quality just outside major metros,” said Tim Wang, head of research at Clarion, which acquired buildings in Arlington, Virginia, and Brookline, Massachusetts, last year. “As the recovery broadens in 2014, you’ll see more capital flowing into secondary markets and select suburbs.”

Commercial properties from Brookline to Woodlands, Texas, and Burbank, California -- areas just beyond major markets -- are selling at premiums to real estate in cities such as Boston and Los Angeles. Sales in top suburbs surged to more than $25 billion last year, and the spread in capitalization rates, a measure of yield used by real estate investors, was the widest in 13 years relative to all U.S. transactions, according to Real Capital Analytics Inc.

“These are places where companies are hiring and the new economy is forming, centers of gravity that feed on themselves,” said Dan Fasulo, managing director of the property-research company, which compiled pricing data on more than 105 suburban ZIP codes for Bloomberg News.

Office-building prices in top suburbs rose 4.7 percent last year to $311 a square foot, just 7 percent below the 2007 peak and showing a rebound “in the fourth or fifth inning,” Fasulo said, referring to the midpoint of a baseball game. High-end retail values reached $489 a square foot, a record level that’s still a discount to new construction, said Bill Whalen of New York-based Cantor Commercial Real Estate.

Debt Available

“Fear seems to have gone away from the market,” said Whalen, head of the commercial mortgage-backed securities lender’s San Francisco office. “There’s plenty of debt and equity capital.”

Cap rates for transactions in top suburbs were 5.8 percent last year, compared with a U.S. average of 6.9 percent. The difference of 110 basis points was the biggest since 2000, and probably will grow as the economy improves, Fasulo estimates. A cap rate is calculated by dividing a property’s net operating income by its purchase price, so it moves down as values rise.

Deal volume jumped from $17.7 billion in 2011, when the cap-rate spread was 73 basis points, according to New York-based Real Capital. In the years after the financial crisis, primary U.S. markets were seen as less risky bets than suburbs and drew the bulk of investment until downtown yields became so unattractive that buyers began seeking opportunities further afield, Wang said.

Investor Migration

Sales figures were compiled from deals since 2000 that were priced higher than $10 million and $250 a square foot and located outside of core U.S. markets New York, Boston, Washington, Chicago, Los Angeles and San Francisco, along with Miami, Houston, Las Vegas, Phoenix, San Diego, Seattle and Austin, Texas -- cities “where the new economy is moving,” Fasulo said.

Investor migration from cities makes sense after a 32 percent jump in downtown office prices since 2010 pushed up costs for tenants as well as buyers, Fasulo said. Occupancy in U.S. suburbs overall gained 1 percent last year to outpace a 0.1 percent increase in central business districts, according to a separate study from Los Angeles-based brokerage CBRE Group Inc.

'Beaten Down’

Suburban offices were “beaten down” in the multiyear focus on downtown assets and should gain favor in 2014 as the Federal Reserve raises interest rates and scales back its bond- buying program, known as tapering, New York-based analysts at BMO Capital Markets led by Richard Anderson wrote in a Jan. 2 note. Higher loan costs will erode returns and lead more buyers to seek opportunities away from cities, Wang said in the interview.