Where urban real estate rents are on the rise

Berlin’s Prenzlauer Berg neighborhood has long been known as a hip destination with cafes, restaurants, boutiques, and art galleries.

But in recent years, companies looking to be part of the scene increasingly moved in. Many set up shop in the burgeoning number of co-working spaces catering to demand for flexible-work environments.

Gradually, the demand has helped transform its real estate market. Prenzlauer Berg has seen a 50% increase in prime office rents in the past five years, according to JLL data. This in turn has helped usher in innovative projects like mixed-use development Dstrct.Berlin.

Investors have taken note, and not just in the German capital. Around the world, urban neighborhoods just outside city centers are drawing investment as companies and developers look for what’s new and affordable.

Chicago’s former meatpacking district, Fulton Market, has witnessed a 43% rise in rent since 2019, JLL data shows. In Seoul's Gangnam neighborhood, rents are up 24% over the past five years. The South End in Charlotte, North Carolina, has seen 33% growth. And transit-focused developments in even smaller markets, like the North Loop in Minneapolis, have seen increases in excess of 13% during the same period.

Once outliers, these thriving areas are rivaling cities’ primary central business districts, according to JLL’s The Future of the Central Business District report.

"These neighborhoods are home to rapidly evolving creative, tech and R&D clusters and are shifting investor focus from more established submarkets towards the intense development of creative office, living, boutique hotel, lab and curated retail product,” says Phil Ryan, JLL City Futures, Global Insight Director.

The report shows that rental growth of more than 20% over the past five years is not uncommon in these submarkets.

“High watermark sales in urban fringe neighborhoods show we have already reached the point where a non-traditional place can and will achieve similar pricing to a downtown core market in many geographies,” Ryan says.

While some investors might question whether they are too late in the game to capitalize on some of these neighborhoods, Ryan says the question we all should be asking is, “Where next?”

Building a neighborhood

Where development in urban fringe neighborhoods happens follows a pattern, Ryan says. He calls it the spillover effect.

“As one place becomes built out, demand spills over into adjacent neighborhoods,” he says. “Destinations for this migration also need to have key attributes that make them desirable.”

Figuring out how to replicate other prosperous urban fringe neighborhoods in a new space is both easy and hard, Ryan says.

“When we talk about emerging kinds of institutional locations, the successful ones are organic in nature. They are in places that naturally fit this sweet spot between location and the existing built environment,” he says.

This is where placemaking comes into the conversation.

Placemaking is vital to making these neighborhoods successful, especially when bridging them with the central business district. Ryan points to Europe – think Berlin’s MediaSpree or Prenzlauer Berg – as a case point for implementing livability and public realm improvements, such as reducing care traffic, increasing sidewalk retail, architectural distinction, and build quality.

Melbourne, he says, has been a successful model for booming fringe neighborhoods like Richmond, Cremorne and Collingwood, which have all emerged as competitive tech hubs.

“When you look at those Melbourne neighborhoods, they all have the narrow blocks, the post-industrial architecture, are relatively proximate to where people live and close to established residential areas,” Ryan says. “It’s breaking up blocks, making it easier to move around, increasing tree cover, creating destination retail, and scaling it upward.”

Because this type of development happens in different phases: you start and mature over time, and then a new development comes in, and the scale changes. When asking where next, Ryan says you might want to look back at these emerged urban fringe neighborhoods upwards of a decade ago. In Chicago, neighborhoods such as the Far West Side show many of the same signs of being primed for growth that Fulton Market did during the beginning of the previous real estate cycle.

When it comes to long-term strategy, Ryan says it’s essential to understand land use balance, what amenities are available, what sort of access the area has to the core, and whether there is an ability to build at scale. These factors are critical in influencing the direction that spillover growth will take.

When investing in these urban fringe neighborhoods, one of the most prominent challenges investors will face is their small footprint and a significant saturation point. An important question, Ryan says, is whether there is liquidity to keep going. And often, the carrying capacity and saturation point aren’t apparent early on.

Because institutional-grade development is expensive, the ability to scale the neighborhood will be crucial to determining long-term success, he says.

For example, one of the reasons Fulton Market in Chicago is gaining traction is its ability to grow vertically, like with the 45-story tower at 570 Fulton.

“As values go up, these neighborhoods become more attractive at a larger scale for redevelopment,” Ryan says. “That only happens when you hit a certain threshold, and the pricing works out. And then it precipitates a better return.”

Because of market volatility and how the risk of a single tenant pulling out of an anchor lease could disrupt an entire development, Ryan says investing in these markets have its fair share of risk. Similar risk occurs with sizing demand for higher-end and boutique hospitality and retail, where developers and tenants have to weigh the trade-offs of taking advantage of first-mover options against uncertain demand forecasts.

Still, Ryan remains bullish on the trend, saying, “Long term, this is where we are headed. There are enough investors confident in building out off-core urban neighborhoods. The lessons learned from the success of these locations in attracting residents, businesses and visitors will also inform the regeneration of traditional central business districts as they adjust to new ways of working, traveling and doing business.”

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