Commercial Real Estate News
U.S. Tenants Gravitating to Higher Quality Offices in Response to Hybrid Work
According to global property consultant CBRE, there is a "flight to quality" playing out across 12 major U.S. markets as office-using companies adapt their workplaces for hybrid work.
A flight to quality traditionally entails users and investors shifting to the highest quality properties in a given commercial real estate sector due to an economic or industry upheaval. In the office sector, that change has come in the past two years through widespread adoption of hybrid work.
That, in turn, has spurred office occupiers and investors to favor high quality offices as a strategy for encouraging employees to work from the office and equipping them to be their most productive when there.
CBRE reviewed more than 2,700 lease transactions across 12 large office markets since 2019, classifying buildings as either Class-A or A+ for top tier or Class B or C for lower tier. The analysis found that average effective rents for top-tier properties increased by 3.8 percent in 2021 and by 6.7 percent so far this year. Conversely, average effective rents for lower-tier properties declined by 3.4 percent last year and by 1.1 percent so far this year.
"This data represents just one of many ways of assessing the flight-to-quality phenomenon, but it does provide a simplified, clear view for consideration," said Mike Watts, President of Americas Investor Leasing. "The data underscores that companies are investing more in their offices and owners are investing more in their buildings to get into the top tier and stay in it. Owners in lower tiers may need to get more aggressive in their pricing and concessions to generate sustained leasing velocity."
CBRE's analysis focused on effective rents, which take into account concessions provided by building owners like months of free rent and higher allowances for tenants to fit out their offices. An increase in such concessions was a key factor in the declining lease rates for lower-tier properties.
Granted, most analyses of flight-to-quality trends are subjective. There are not strict, universal definitions of Class A, B and C space. Companies can and do move to better space within the same quality category, especially in the A tier. And lease rates don't always tell the full story; Location, tenant mix, access to transportation corridors and other factors can play a role.
The cities included in CBRE's analysis are Atlanta, Boston, Chicago, Dallas/Fort Worth, Denver, Houston, Los Angeles, Manhattan, Philadelphia, San Francisco, Seattle and Washington, D.C.
