Intelligent Investment

Growth of Office Effective Rents Limited by Record-High Concessions

December 20, 2023 2 Minute Read

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Effective rents1 have fallen for both top-tier and lower-tier office buildings since 2022, as conditions remain favorable for occupiers amid record-high vacancy and subdued demand. CBRE’s analysis of more than 3,400 lease comparables2 across 12 U.S. office markets3 from 2019 to Q3 2023 shows that effective rents for top-tier office buildings (Class A+/A) decreased by 1.2% since 2022, while those for lower-tier (Class B/C) buildings fell by 3.9%. The flight-to-quality trend persists, as effective rents for top-tier buildings have outperformed lower-tier buildings since 2020.

Figure 1: Annual Office Effective Rent Growth by Building Class

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*Data through Q3 2023.
Source: CBRE Research Q3 2023.

Base rents4—the starting rent for the first year of the lease term—have increased by 2.6% for top-tier buildings since 2022. Base rents for top-tier buildings have increased for three consecutive years, while those for lower-tier properties have slipped by 1.0% on average. In a challenging market, landlords typically keep the base or asking rent firm for as long as they can in exchange for more concessions to tenants.

Figure 2: Annual Office Base Rent Growth by Building Class

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*Data through Q3 2023.
Source: CBRE Research Q3 2023.

The decrease in effective rents is largely driven by record-high landlord concessions in the form of tenant improvement (TI) allowances and free rent. Higher build-out and construction costs have also contributed to the rise in concessions. Average free rent for top-tier assets increased to 10.1 months this year from 6.8 in 2019, while the average for lower-tier assets increased to 8.4 months from 6.4.

TI allowances for top-tier assets averaged $98.05 per sq. ft. through Q3 2023, up 13% since 2022. Those for lower-tier assets were up 10% to $85.99 per sq. ft. However, TI allowances for top-tier assets have risen 37% since 2019, compared with 52% for lower-tier assets. Lower-tier assets are typically in less desirable submarkets and don’t offer the amenities most occupiers are looking for in today’s market. Therefore, landlords of Class B/C assets have increased their concession packages by a greater degree to secure long-term deals. The sharper increase in concessions is a main factor of weaker effective rent growth in lower-tier assets.

Figure 3: Average Tenant Improvement Allowance & Free Rent

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*Data through Q3 2023.
Source: CBRE Research Q3 2023.

While asking rents have remained steady for the past few quarters, CBRE forecasts that they will decrease by 3% to 4% in 2024. As a result, concessions are expected to moderate. With higher financing costs and less access to funding, landlords will explore ways to appeal to tenants without offering concessions, such as shared building services, flexible space and more expansion and contraction options. Stronger demand for top-tier properties is expected to continue, as occupiers seek high-quality space in the most desirable submarkets.

1 Effective rent incorporates escalations, free rent and tenant improvement allowances over the entire lease term.
2 New direct deals with a term of at least five years. Average lease term in the analysis is 9.2 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 the starting rent for the first year of the lease term.

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