Intelligent Investment
Top-Tier Office Rents Continue to Rise, While Lower-Tier Rents Fall
March 5, 2025 3 Minute Read
Base and effective rents1 for Class A+/A office buildings have increased by 3.1% and 5.2%, respectively, since 2023, while those for Class B/C office buildings have fallen by 5.7% and 1.2%, according to a CBRE analysis of 4,350 new lease comparables2 across 12 office markets.3 This trend is supported by the high demand for limited new supply of top-quality, amenity-laden office buildings in prime locations.
Figure 1: Annual Office Base Rent Growth by Building Class
Top-tier effective rent outperformance is due in part to steady growth of base rent and fewer concessions in 2024. Many tenants are willing to pay a premium for top-tier buildings, especially when the landlord offers a generous tenant-improvement allowance that facilitates a high-quality fit-out. Higher top-tier rents are in part the result of landlords ensuring their return on investment when offering higher build-out costs and capital expenses.
Effective rents for lower-tier office buildings have steadily declined, while landlords have kept base rents relatively flat until the second half of 2024 to meet financing requirements and maintain property values. This has contributed to lower net operating incomes as operating costs and vacant space have escalated. However, landlords of lower-tier buildings are beginning to reduce base rents and capital improvements to attract tenants seeking cost-effective options.
Figure 2: Annual Office Effective Rent Growth by Building Class
Landlord concession packages appear to have been trending down since peaking in 2023, although they remain about 30% higher than in 2019. High concessions have placed downward pressure on effective rents of lower-tier assets, while top-tier assets continue to see positive growth due to base rent increases.
The average tenant-improvement allowance for top-tier assets fell by 10% in 2024 to $92 per sq. ft., while those for lower-tier assets fell by 16% to $73 per sq. ft. This reduction is partly due to the inability of some owners of lower-tier buildings to continue offering generous concession packages amid a high-interest-rate environment in which building values are depressed, debt structures are challenged and capital sources are limited.
Figure 3: Average Tenant Improvement Allowance & Free Rent
Landlords who need to manage financial pressure will likely continue to reduce spending on concession packages and lower asking rents to attract tenants. Additionally, there are cases where building sales at reduced prices have benefited tenants through lower rents, which we expect will continue over the next year.
Tenants will continue to have the upper hand in lease negotiations for space in lower-quality buildings with high availabilities, as landlords compete for a smaller pool of prospective tenants. However, tenants are advised to assess the landlord's financial health and include protective clauses in their lease agreements to mitigate risks like building ownership changes or maintenance issues. Meanwhile, landlords of quality buildings in the best locations will gain leverage over tenants amid the flight to quality and as new supply diminishes.
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.
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Contacts
Charlie Donley
Senior Research Analyst, U.S. Office Research
