Analysts Agree: Flight to Quality Driving Office Sector

Office occupiers and investors are increasingly shifting to the highest quality properties as the sector grapples with how best to adapt to hybrid work. 

A CBRE analysis of 12 major US metros observes an ongoing “flight to quality” as occupiers work to lure employees back to physical offices. The firm reviewed more than 2,700 lease transactions across 12 large office markets since 2019 and found that average effective rents for top-tier properties increased by 3.8% in 2021 and by 6.7% so far this year. On the other hand, average effective rents for lower-tier properties slumped by 3.4% last year and by 1.1% so far this year.

The cities included in the analysis were Atlanta, Boston, Chicago, Dallas/Fort Worth, Denver, Houston, Los Angeles, Manhattan, Philadelphia, San Francisco, Seattle and Washington, D.C.

“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 at CBRE. “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.”

In addition, free rent has increased over the past three years as vacancy rose and leasing slumped. Average free rent for lower-tier assets increased to 7.9 months this year, up from 6.4 in 2019, and ticked up to 7.6 months for top-tier assets from 6.5. Tenant improvement allowances for top-tier assets were at an average of $89.93 per square foot in the first half of this year, up 11% since 2019.  TIs for lower tier assets are up 32% to $75.03 psf.

The firm does note that analyses of flight to quality trends are subjective, as the definitions of Class A, B, and C space vary and companies often do move to better space within the same quality tier.  But “as more occupiers prioritize office space quality to help attract and retain talent, top-tier office buildings should continue to outperform lower-quality ones over the near term,” the firm predicts.

These findings echo an earlier report this month from JLL, which noted that while office sector leasing was flat in the second quarter, the flight to quality trend continued to gain speed. “As with other core metrics, vacancy is trending in different directions based on building quality, holding firm at 16.5% for buildings delivered since 2015 and increasing to 19.0% for second- generation product,” it said.