“Office Building Woes: A Look at the Growing Divide Between Prime and Non-Prime Buildings in the US Market”
The headlines are filled with stories of office buildings facing foreclosure or being sold at discounted prices. However, it’s important to note that not all office buildings are created equal. According to recent data from CBRE Research and CBRE Econometric Advisors, there is a significant gap between the performance of prime and non-prime office spaces.
Experts report that in Q1 2024, prime offices had a vacancy rate of 14.8%, while non-prime spaces had a vacancy rate of 19.3%. Additionally, from Q1 2020 to Q1 2024, prime buildings saw positive net absorption of over 49 million square feet while non-prime buildings experienced negative net absorption of over170 million square feet.
Despite challenges caused by the pandemic, demand for prime office space is expected to increase as companies look for high-quality workplaces that can attract top talent. This trend will also benefit nearby lower-tiered offices located in vibrant mixed-use districts.
In fact, according to CBRE’s Office Occupier Sentiment Survey results released earlier this year nearly sixty percent (60%)of participants expressed interest in relocating their businesses into higher quality workspaces near public transportation options and sustainability initiatives.
While newer offices may be slower to lease up due cyclical factors impacting demand for commercial real estate since early last decade; they still have an average vacancy rate lower than older properties -20% versus almost25%.
As markets like Austin,Texas; Nashville,Tennessee ;and San Jose ,California continue seeing more new construction deliveries,the availability rates among newly delivered premium grade facilities has been trending downward compared with those reported by other types such as Class B&C assets .
Landlords should take advantage opportunities presented by increased tenant overflow demands when looking beyond highly occupied primary locations .For instance,some tenants might prefer amenities like highly rated indoor air quality equipment,electric vehicle charging stations,parking and bike storage spaces,shared meeting rooms,and sustainable features.
Tenants interested in upgrading their office space should start looking sooner rather than later as prime space availability is expected to decline. By starting the search process early, tenants can secure more favorable lease terms and rates. In conclusion,the demand for prime office spaces will continue to lead the market with opportunities for both landlords and tenants alike.