The financial gulf between trophy and Class A and A+ buildings and those in B and C classes continues to widen according to a new report from CBRE.
Base and effective rents for these types of properties grew by 5.2% and 3.1%, respectively, between 2023 and 2024. For Class B and C assets, rents fell by 5.7% and 1.2%, according to CBRE’s analysis of 4,350 comparable new leases over 12 metro markets.
“This trend is supported by the high demand for limited new supply of top-quality, amenity-laden office buildings in prime locations,” the report read. There has also been a decline in the construction pipeline, adding negotiation leverage to landlords
Combining the results into two groups of upper-tier and lower-tier properties, the higher quality type showed year-over-year growth of 5.0% in 2021, 2.4% in 2022, 2.7% in 2023, and 3.1% in 2024. For the lower-tier, the changes were -1.1% in 2021, 0.4% in 2022, -0.7% in 2023, and -5.7% in 2024.
It supports a continuous pattern that higher quality spaces continue to outperform. The office category has undergone overall financial problems concentrated among lower-tier buildings.
“There is an excess of dated, functionally obsolete office buildings and an undersupply of offices that satisfy tenants' changing needs,” a Brookfield analysis said in early 2024. Instead of companies not needing office space, “tenant preferences have shifted to buildings with modern amenities and functionality, and the recent rise in interest rates has exposed older office buildings as uneconomical.”
Estimates have varied as to the percentage of all office buildings that Class Aand A+ (often called trophy) properties represent. Brookfield estimated that 90% of all office vacancies were in the bottom 30% of buildings, "largely characterized by older offices with limited amenities and reduced functionality." The top 25% of buildings in comparison saw stable vacancy rates and record-high rents.
The growth in upper-tier rents is due to a pair of factors that are a direct result of demand, according to CBRE: steady base rent growth and fewer concessions, particularly in 2024.
Concessions declined in 2024 for the first time since CBRE started tracking the activity in 2019. Some examples of this included periods of free rent, and the amount of money landlords provide for tenants to build out and customize their offices.
The analysis found that the amount of free rent across all categories of buildings reached a peak of 9.6 months in 2023 and declined to 8.9 months last year. The average tenant improvement allowance, or TIA, fell from $97.55 per square foot in 2023 to $87.51 in 2022.
Those, however, are averages. Among lower-tier properties, many owners have lowered their base rents to attract tenants.