HOUSTON-During the Great Recession and its immediate financial aftermath, the concept often mentioned when it came to office space was "flight to quality." This meant that tenants, taking advantage of lower lease rates, signed agreements for – and moved into – class A spaces.
According to Alexander (Sandy) Paul, executive vice president with Delta Associates, Transwestern's research arm, class A space secured 91% of net new demand by 2008 (an increase from 68% in 2007). In the recent "Insights + Trends + Opportunities" published by Transwestern, Paul points out that, while US office absorption was negative in 2009, the top-tier space wasn't as hard-hit as the class B and class C spaces were.
In recent years, however, absorption for class A space has plateaued, leading Paul, and others, to wonder if the flight to quality is tapering.
The answer is yes – and no. On one hand, tenants leased class A space because rents were low, but higher rents may be reversing this trend. On the other hand, class A space, which boasts better layouts and more energy efficiencies, could provide cost savings in other areas. Furthermore, Paul notes that class A space continues to remain "affordable in most markets – by historical standards – with growth rates below the long-term average."
For owners, Paul suggests that class B space be renovated into class A product that is competitive. And for tenants, "we suggest taking advantage of slowly growing class A rents to lock in deals that are favorable for the long term."
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