Dive Brief:
- Top-tier office rents have steadily grown in recent years, compared with decreases in rents for lower-tier office buildings, according to a CBRE analysis released last week.
- Rents for Class A+ and Class A office buildings have increased by 3.1% and 5.2%, respectively, since 2023, while Class B asset rents have fallen 5.7%. Rents for Class C buildings have dropped 1.2% in that time, per the report.
- “Many tenants are willing to pay a premium for top-tier buildings, especially when the landlord offers a generous tenant-improvement allowance that facilitates a high-quality fit-out,” the report says. “Higher top-tier rents are in part the result of landlords ensuring their return on investment when offering higher build-out costs and capital expenses.”
Dive Insight:
Rent growth in top-tier office buildings is due in part to steady growth of base rents and fewer concessions in 2024, says CBRE, noting the trend is supported by high demand for limited new supply of top-quality, amenity-laden office buildings in prime locations.
Effective rents for lower-tier office buildings have steadily declined. Landlords kept base rents “relatively flat” until the second half of 2024 to meet financing requirements and maintain property values. This has contributed to lower net operating incomes as operating costs and vacant space has escalated.
To attract tenants seeking cost-effective options, landlords of lower-tier buildings are beginning to reduce base rents and capital improvements, CBRE says. Overall, landlord concession packages have been trending down after peaking in 2023, but remain about 30% higher than 2019, per the report.
Landlords that need to manage financial pressure will likely continue to reduce spending on concession packages and lower asking rents to attract tenants, CBRE says. As a result, tenants will continue to have the upper hand in lease negotiations for space in lower-quality buildings with high availability.
Owners and operators of quality buildings in the best locations will gain leverage amid the continued flight to quality and diminishing new supply, per the report.
Business-centric districts that lack prime office buildings and fewer amenities captured only 40% of the top office leases, despite containing 66% of total U.S. office inventory, CBRE says based on its analysis of the top 100 office leases last year.
