Intelligent Investment

Flight-to-Quality Trend Apparent as Top-Tier Office Assets Outperform

19 Jul 2022 2 Minute Read

Effective rents1 have risen for top-tier office buildings and fallen for lower-quality properties since 2021, illustrating a flight-to-quality trend.

Figure 1: Annual Effective Rent Growth by Type

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*Through Q2
Source: CBRE Research, Q2 2022.

CBRE’s analysis of more than 2,700 lease comps2 across 12 U.S. office markets3 from 2019 to Q2 2022 shows that effective rents for top-tier office buildings (primarily Class A+/A assets) increased by 3.8% in 2021 and by 6.7% through Q2 of this year. Conversely, effective rents for lower-tier (primarily Class B/C) buildings fell by 3.4% in 2021 and by 1.1% so far this year.

Figure 2: Annual Base Rent Growth by Type

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*Through Q2
Source: CBRE Research, Q2 2022.

Despite a recent rise in base rents4, free rent has steadily increased over the past three years amid rising vacancies and weaker leasing activity. Average free rent for lower-tier assets increased to 7.9 months this year from 6.4 in 2019, while the average for top-tier assets increased to 7.6 months from 6.5.

Figure 3: Average Tenant Improvement Allowance and Free Rent

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*Through Q2
Source: CBRE Research, Q2 2022.

Tenant improvement (TI) allowances for top-tier assets averaged $89.93 per sq. ft. in the first half of 2022, up 11% since 2019, while those for lower-tier assets are up 32% to $75.03 per sq. ft. The sharper increase for lower-tier assets is a main driver of lower effective rents.

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.

1 Effective rent accounts for escalations, free rent and tenant improvement allowance over the entire lease term.

2 New direct deals with a term of at least five years.

3 Atlanta, Boston, Chicago, Dallas/Fort Worth, Denver, Houston, Los Angeles, Manhattan, Philadelphia, San Francisco, Seattle and Washington, D.C.

4 Base rent is considered the starting rent for the first year of the lease term.