8% Of U.S. Office Buildings Are Taking Basically All The Tenant Activity

Only 8% of office buildings are thriving, while most of the market has been struggling since the onset of the pandemic.

A CBRE analysis of 57 U.S. office markets found that only a sliver of office properties are successful in attracting tenants today, a sharp acceleration of the flight-to-quality trend. 

This upper echelon is designated as prime office buildings by CBRE, a more exclusive category than Class-A buildings, which account for 61% of the market. Of 830 buildings, 8% by square feet and 2% by building count fit into the prime category.

Prime buildings are determined by a multitude of criteria and are the best of the best in their area, rather than nationally. They are the top 2% to 5% of a market's offices when factoring in age, location, design quality, ceiling heights, green certifications, views, amenities and differentiation from other buildings. 

Prime offices went for an average rent premium of 84% more than their competition in the first quarter, CBRE said. That premium was 60% in 2018. These properties also clocked in a positive net absorption of 48M SF from 2020 until now, while the remaining 92% of office buildings are reporting negative net absorption of 170M SF.

Average vacancy in prime buildings was 4.5% lower than the rest of the market, at 14.8%. This gap has widened since 2018, when it was 1.9%.

Companies want amenity-rich, quality-designed spaces offered in prime office buildings rather than commodity office space, Mike Watts, CBRE's president of Americas investor leasing, said in a press release. 

Amenities are part of the algorithm of what makes a building “prime” and are major rent drivers, JLL found. Buildings with snazzy features like a roof or sky terrace can get rent premiums of 5.2% over Class-A buildings in the same submarket. Courtyards with outdoor seating and LEED-certified buildings offer up to 3.5% and 2.8% premiums, respectively. 

Flight to quality has been a buzzword for years, but the data shows it has taken a firmer hold and that “quality” means something very, very new these days.

Office buildings less than 10 years old are posting positive net absorption, while the older properties are rapidly losing tenants. Buildings built before 2014 have collectively lost 420M SF of occupancy, CoStar reported. In the last real estate cycle, the difference was not so stark, and buildings of almost any age continued to see demand.

CBRE predicts prime office space will continue to fly off the shelf and will bring availability down in that trophy category, especially as developers halt office construction due to high vacancy rates and a tough lending market. Just shy of 15M SF is set to be delivered this year, but that's expected to drop dramatically to 4.2M SF in 2025 and 2.6M SF in 2026. 

That will start to trickle leasing activity down to the Class-A tier below prime, CBRE Director of U.S. Office Research Jessica Morin said.