Companies Choosing High Quality Offices In Response To Hybrid Work

Companies are choosing high quality offices to encourage employees to work from the office and be their most productive when there, according to CBRE analysis.

A “flight to quality” is playing out across 12 major U.S. markets as office-using companies adapt their workplaces for hybrid work, according to a CBRE analysis of trends in office rents.

A flight to quality traditionally entails users and investors shifting to the highest quality properties in a given commercial real estate sector due to an economic or industry upheaval. In the office sector, that change has come in the past two years through widespread adoption of hybrid work in response to the Covid-19 pandemic.

That, in turn, has spurred companies to favor high quality offices as a strategy for encouraging employees to work from the office and equipping them to be their most productive when there.

The 12 cities included in CBRE’s analysis are Atlanta, Boston, Chicago, Dallas/Fort Worth, Denver, Houston, Los Angeles, Manhattan, Philadelphia, San Francisco, Seattle and Washington, DC.

hybrid work trend
(Image: Adobe Stock by murattellioglu)

 

CBRE reviewed more than 2,700 lease transactions across these office markets since 2019, classifying buildings as either Class-A or A+ for top tier or Class B or C for lower tier. The analysis found that average effective rents for top-tier properties increased by 3.8 percent in 2021 and by 6.7 percent so far this year.

Conversely, average effective rents for lower-tier properties declined by 3.4 percent last year and by 1.1 percent so far this year.

“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. “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.”

“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.”

– Mike Watts, President,
Americas Investor Leasing

CBRE’s analysis focused on effective rents, which take into account concessions provided by building owners like months of free rent and higher allowances for tenants to fit out their offices. An increase in such concessions was a key factor in the declining lease rates for lower-tier properties.

Annual Effective Rent Growth By Type

hybrid work offices
Effective rents have risen for top-tier office buildings and fallen for lower-quality properties since 2021, illustrating a flight-to-quality trend. Effective rent accounts for escalations, free rent and tenant improvement allowance over the entire lease term. (Source: CBRE)

Most analyses of flight-to-quality trends are subjective: There are not strict, universal definitions of Class A, B and C space. Companies can and do move to better space within the same quality category, especially in the A tier. And lease rates don’t always tell the full story; Location, tenant mix, access to transportation corridors and other factors can play a role.

CBRE’s Tech Insights Center also conducted an analysis of the flight-to-quality trend among Class A office buildings in downtown San Francisco in this year’s second quarter. The study found markedly better vacancy rates and lease rates in buildings that CBRE defines as “prime Class A” versus those defined as “non-prime Class A.”

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