Flight to Quality Fuels Growing Divide in Office Sector

While much of the office building sector struggles to adapt to high interest rates, inflation and reduced demand due to hybrid work, a top tier of office buildings is thriving. Rent premium for prime office space increased to 84% during the first quarter and vacancy rates were 14.8%, 4.5 percentage points lower than the rest of the market, a gap that has widened from 1.9 percentage points in mid-2018.

Continued demand for prime space and a shrinking construction pipeline mean prime rents will continue to rise and command a premium over non-prime space, according to an analysis of office markets in 57 U.S. cities conducted by CBRE. The trend underscores a preference for new, high-quality buildings that appeal to employees and increase office attendance.

The study identified 830 properties that fit this top echelon of office buildings, representing just 2% of U.S. office buildings. About 60% of these buildings were constructed in the past decade, while the rest have recently undergone extensive renovations. Prime buildings have quality design, wellness standards, a strong mix of amenities and are in walkable neighborhoods near retail and transit.

The next tier of buildings after highly occupied prime space will likely benefit from overflow demand, especially in vibrant mixed-use districts, said CBRE. The firm’s 2024 Occupier Sentiment Survey found that the most sought-after building amenities included top-rated indoor air-quality equipment, electric vehicle charging stations, ample parking and/or bicycle storage space, shared meeting space, tech-enabled building controls and sustainability features.

Notably, nearly 60% of respondents to that survey indicated they are considering relocating to higher-quality space. However, tenants searching for the best space will face limited options due to a sharp drop in new prime deliveries beginning in 2025, CBRE said. Approximately 22 million square feet of prime office space was under construction during the first quarter this year, with completion dates extended through 2027.

Prime buildings registered 48 million square feet of positive net absorption – meaning more space newly occupied than vacated – from 2020 to 2024. That compares with negative net absorption – or more space vacated than newly occupied – of 170 million square feet among the rest of the office market.

“The widening gap between prime office space and commodity office space reflects commercial and societal shifts of recent years. This new analysis is one of the clearest indicators yet of the size of that widening gap,” said Mike Watts, president of Americas Investor Leasing at CBRE. “Companies seeking to recruit and retain talent are targeting the best quality office space – prime space – to make in-person work as effective and enjoyable as possible for employees and clients.”