Suburban Office Markets Trail Downtown Rivals

By A.D. PRUITT

The commute to recovery looks like it is going to take a longer time for suburban-office-building owners than their counterparts in downtown areas.

Fourth-quarter earnings reported by publicly traded real-estate companies over the past few weeks reinforced a trend that has been taking shape since economic recovery began: Vacancies continue to rise in some suburban buildings even as downtown properties fill up.

Mack-Cali Realty Corp., one of New Jersey's largest commercial landlords, for example, saw its occupancy fall to 89.1% at the end of 2010 from 90.1% a year earlier. The occupancy rate of Brandywine Realty Trust, an owner mainly of suburban-office buildings in regions like Philadelphia, metropolitan Washington, and central Virginia, fell to 85.8% at the end of the fourth quarter from 88.5% at the end of 2009. Both Mack-Cali and Brandywine, based in Radnor, Penn., saw slight occupancy improvements between the ends of the third quarter and the fourth quarter.

Meanwhile, the leading downtown-office-building landlords are enjoying occupancy rates well over 90%. Boston Properties Inc.'s occupancy rate in the central business district in greater Boston and Washington was 97.8% and 93.7%, respectively, at the fourth-quarter end.

S.L. Green Realty Trust has experienced both markets. The largest office-building landlord in New York City, its Manhattan occupancy was 94.6% at year end, about the same as a year earlier. Meantime, its suburban-portfolio occupancy rate fell to 87.3% in the fourth quarter from 88.7% at the end of 2009.

The relative strength of major downtown markets contrasts with trends after the last recessions. For decades, the suburbs have outpaced downtowns as companies and their employees sought lower rents, shorter commutes and car-oriented lifestyles.

But this downturn was different. Suburban-office buildings accounted for 70% of the 135 million square feet of occupied space that has gone vacant since the beginning of the recession a little over three years ago, according to Reis Inc.

Downtowns are performing better partly because the suburbs were hit harder by the housing collapse, which caused the closings of mortgage lenders, home builders and other small businesses that tend to be in the suburbs. Also, there was more construction in the suburbs than downtowns during the boom.

Demand in some cities has improved, thanks to their success in revitalizing entertainment districts and attracting new retail and residential development.

Executives at suburban real-estate investment trusts acknowledge that the recovery is slower than they would like. They note that the declines in occupancy are stabilizing and leasing volume is increasing.

Gerard Sweeney, chief executive of Brandywine, said in an email that the company's highest occupancy is Austin, Texas, where it is 94%. Its lowest is central and southern New Jersey, at about 74%, he said. "In general, I feel that Brandywine is well-positioned to handle any demographic shift," he said.

But demand will depend on job growth, and some executives don't expect much anytime soon. "I don't necessarily subscribe to the theory that there will be a rapid V-shape recovery in job growth," said Mitchell Hersh, president and CEO of Mack-Cali, in an interview. "While we continue to see the economy stabilize, it will take some time for significant office-space absorption to occur and corresponding rent increases."

Both suburban- and downtown-office landlords have been forced to cut rents during the downturn. But some of the suburban cuts have been sharper and rates have bounced back faster in some cities. For example, tenants who signed leases in SL Green's Manhattan buildings in the fourth quarter are paying rents that are 3% lower than those of the tenants vacating that space. Brandywine's and Mack-Cali's rents fell 8% and 7.7%, respectively, in that period.

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