Climbing Concessions Weigh Down Rents At Top-Tier Offices
Effective rents at the country’s top-tier offices dipped 1.2% on an annual basis in 2023, weighed down by concessions that landlords offered to tempt tenants to their spaces.
The decrease is the first for Class-A and trophy assets since 2020, according to CBRE, which reported the findings Wednesday. The company studied 3,400 leases in 12 office markets across the country to formulate its conclusions. Effective rents for Class-B and C properties fell 3.9% at the same time, CBRE found. The figures include the first three quarters of 2023.
The deeper cut in rents for lower-tier buildings is evidence of the flight to quality, according to CBRE. Wednesday's report didn’t include an average price for effective rents, but the company's third-quarter office market report pegged asking rents at $35.45 per SF across all asset classes.
Across the board, top-quality properties performed better on the metrics CBRE tracked, including in base rents, which popped 2.6% for the best properties year-over-year, compared to the 1% drop clocked by their lower-quality brethren.
Still, landlords are offering $98 per SF in tenant improvement allowances and more than 10 months of free rent for top-tier properties, according to CBRE, a substantial increase from the $86 per SF in TI and roughly nine months of free rent last year.
Compared to pre-pandemic levels, though, concessions at Class-B and C properties have climbed faster, with TI allowances for those properties increasing by 52% from 2019 levels. Class-A office landlords are offering 37% more than they were in 2019, on average.
“The increase in concessions underscores just how office tenants have an advantage in lease negotiations today,” CBRE President of Americas Investor Leasing Mike Watts said in a press release. “It also illustrates an ongoing ‘flight to quality’ in which companies favor higher quality buildings that will help to entice employees to work from the office. In turn, lower-tier properties have needed to boost concessions to stay competitive in leasing.”
Rising construction costs are also contributing to tenant improvement allowances, Savills Senior Managing Director Lesa Nickelson French, based in Houston, told Bisnow earlier this month.
Flight to quality has become a common refrain among office leasing professionals since the pandemic began. New office projects in popular neighborhoods are some of the few properties in most major metro areas seeing leasing momentum, while older buildings have languished in many cases.
A JLL study over the summer indicated that buildings constructed in the 1980s and 1990s or earlier have been most impacted by the drop in leasing activity seen since hybrid work took hold in early 2020. Properties in that age group make up more than half of new vacancies since 2020, according to JLL, although they make up about 40% of the total office inventory in the country.
