This article is reprinted with permission from TreppTalk.

Trepidation regarding the suburban office market has risen in recent years as a number of the country’s largest corporations have fled their suburban headquarters for urban office space. A number of firms have relocated from suburban Chicago to downtown offices, and the Connecticut suburbs have lost a number of corporations to Boston and New York City.

Millennials are thought to be the driving force behind this migration as companies continue to find top talent in larger, urban environments. Businesses want to either hire or sell to millennials, which is why more firms are beginning to relocate from secluded, traditional suburban office parks to more modern office space in cities where millennials prefer to live.

On the other hand, many in the industry argue that the suburban office market is actually showing signs of strength and growth potential. For one thing, rent for Class A suburban office space is typically half that of similar space in central business districts. National Real Estate Investor observes that some large companies—especially tech giants like Google, Facebook, and Apple—continue to lure young talent to the suburbs with creative office campuses that provide a number of amenities, along with greater housing affordability.

Trepp data indicate that suburban and urban office properties behind commercial mortgage–backed securities (CMBS) loans have comparable occupancy levels, though the gap has widened in 2017. Average occupancy has been hovering just below the 90 percent mark for both subsectors over the past three years. On average, urban offices are 89.6 percent occupied, with suburban offices lagging that number by a half percentage point in July. However, the suburban office subsector has a substantially higher percentage of loans in distress, which may reinforce the idea that tenant migration toward urban offices is becoming a nationwide trend.

In 2016, suburban office securitizations accounted for 34.1 percent of total office issuance. So far this year, suburban office allocation has represented just 26.4 percent of the sector’s issuance. New issuance for suburban offices reached $3.2 billion in the first half of the year, up 43 percent from a year earlier.

According to Trepp data, office CMBS debt carries one of the highest distressed volumes among all major property types in recent years. Within the office sector, urban office loans are outperforming, while suburban offices carry the highest percentage of distressed debt.

The suburban office subsector carries a notably high delinquency rate of 13.3 percent, while the reading for the broader office sector is currently 7.24 percent. In comparison, the delinquency rate for all U.S. CMBS loans was 5.49 percent in July. The difference between the suburban office delinquency rate and that of the broader office sector has been nearly 5 percent or higher since the start of the wall of maturities in 2015.

To see the entire research piece featuring additional data, breakdowns, and analysis, click here.

* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.