Commercial Real Estate News
Office Tenants' Flight to Quality Buildings Increases in 2024
Based on recent analysis of office markets in 57 U.S. cities by CBRE, a top-tier echelon of office buildings that is thriving while much of the sector struggles to adapt from high interest rates, inflation and reduced demand due to hybrid work.
CBRE researchers and brokers collaborated to identify each market's highest quality buildings, designated as prime office buildings. The resulting roster of 830 properties comprises just 8% of the U.S. office market by square footage and just 2% by building count. It's a more exclusive designation than the oft-used Class A, which spans 61% of the U.S. office market.
CBRE found that these prime properties are outperforming the broader office market in most cities, underscoring the ongoing "flight to quality" in which companies are favoring new, high-quality buildings in an effort to support and increase office attendance. Average vacancy in the prime buildings in this year's first quarter (14.8%) was 4.5 percentage points lower than the rest of the market, a gap that has widened from 1.9 percentage points in the middle of 2018.
Prime buildings attracted an average rent premium of 84% more than the rest of the market in the first quarter, up from 60% in mid-2018. Additionally, prime buildings cumulatively registered 48 million sq. ft. of positive net absorption - meaning more space newly occupied than vacated - from 2020 to 2024. That's in comparison to the rest of the office market logging negative net absorption - more space vacated than newly occupied - of 170 million sq. ft. in that span.
"The widening gap between prime office space and commodity office space reflects commercial and societal shifts of recent years. This new analysis is one of the clearest indicators yet of the size of that widening gap," said Mike Watts, CBRE President of Americas Investor Leasing. "Companies seeking to recruit and retain talent are targeting the best quality office space - prime space - to make in-person work as effective and enjoyable as possible for employees and clients."
CBRE's analysis included multiple factors. CBRE researchers and brokers in each market identified the top 2% to 5% of the market's office buildings by examining their age, quality of design, location, views, green certifications, ceiling heights and differentiation from surrounding buildings. Also receiving extensive consideration were amenities such as concierge service, on-site management, outdoor terraces, fitness centers, car parking, access to public transportation, daycare and electric-vehicle charging stations, among others.
The prime designation -- like Class A, B and C -- includes some subjectivity and local relativity. Prime buildings are the best in their own metro area, not necessarily nationally. For example, Manhattan has fewer prime buildings - by Manhattan standards - than Dallas/Fort Worth and Washington, D.C. However, many nonprime buildings in Manhattan would grade out as prime in other markets. Similarly, some prime buildings in Dallas, for example, wouldn't be considered prime in Manhattan.
Looking ahead, prime office space will become more scarce as developers curtail office construction of all types due to high vacancies and the challenging markets for financing. CBRE Econometric Advisors forecasts completion of 14.8 million sq. ft. of prime office buildings in the U.S. this year, declining to 4.2 million sq. ft. of completions in 2025 and 2.6 million sq. ft. in 2026.
"This slowdown in construction of prime office buildings will cause vacancy for that subsector to decline if demand remains relatively constant," said Jessica Morin, CBRE Director of U.S. Office Research. "And that may benefit the next tier of office properties just below prime, as companies who can't find prime space to lease in a given market opt instead for nearby buildings that are almost prime."
