Prime Office Slump Eases in Gateway Markets in H1
Although effective rents for prime offices are up, rents for Class B and C offices continue their downward trajectory.
The bifurcation between prime and Class B and C office spaces in gateway markets continued its trajectory in the first half of the year, albeit at a slightly tempered pace.
According to a new report by CBRE, landlords of Class A and A+ office buildings in more than 12 markets saw their effective rents increase slightly in the first six months of the year, while Class B and C offices experienced a slight decline over the same period.
The aggregate performance of the office sector reflects several trends that began to take shape in 2021, CBRE said. High interest rates coupled with the shift to hybrid and remote work arrangements have decreased the overall demand for office space in gateway markets after the pandemic. This paradigm, along with the long-term trend in the office sector, has persuaded landlords across all types of office buildings to offer generous concessions such as tenant improvement allowances and months of free rent.
Tenants looking to sign new leases in the 12 markets studied have adjusted their demands as well, flocking to buildings offering many amenities and locations that are convenient for workers, such as transit centers.
“CBRE Econometric Advisors forecasts that overall asking rents will decrease 1.8% by mid-2025,” the report said. “Base rents in top-tier assets will likely hold steady or increase, while concessions continue to moderate, contributing to more effective rent growth as demand for this asset class remains strong. On the other hand, lower-tier assets will see a more pronounced drop in base rents, lowering effective rents even if concession packages are reduced.”
Base rents—the starting rent for the first year of a lease term—have grown by an average of 3% every year since 2021 for prime office buildings, according to CBRE. Meanwhile, base rents for lower-tier buildings have decreased by 1% annually for the last three years.
CBRE analyzed over 3,900 office leases signed in the first six months of the year across 12 markets, including Manhattan, Denver, Boston, Houston, L.A., Atlanta, and Washington, D.C. The firm said that despite the sector’s comparatively positive performance in the last six months, landlords under financial pressure will likely reduce concession packages and lower asking rents to continue signing tenants.