The office sector has been defined by several key factors in recent years, including a flight to quality, increasing vacancies, and falling rents. According to a recently released report from CBRE, these trends have been influenced by record-high concessions.
Overview of Base Rents
Base rents refer to the starting rent for the first year of a lease term and are also known as asking rents. CBRE analysts note that base rents for top-tier buildings (Class A and above) have increased by 2.6% since 2022 while Class B and C buildings have seen an average decrease of 1%. While these numbers may not be cause for celebration or concern on their own, it is important to consider other factors beyond just asking rent.
Understanding Concessions
When discussing any type of rent, it is crucial to take into account incentives or concessions offered by landlords. These are designed to attract tenants in today’s market where occupiers hold more power than landlords. As such, effective rents – which include concessions – have actually decreased since 2022 according to CBRE analysts with top-tier building seeing a drop of 1.2% and Class B/C buildings experiencing an even larger decline at -3/9%. This can be attributed primarily due record-high landlord concessions.
Tenant Improvements (TIs) & Buildouts
Landlords across all types of office properties saw increases in tenant improvement allowances from Q3-2019 through Q3-2020:
• Top-tier building TI allowances rose nearly $100 per square foot during this period
• Lower tier assets saw TI allowance increase about $85 per square foot over same time frame
• Interestingly enough though TIs were up overall there was only about half as much growth among lower tier assets compared with higher end counterparts.
This could potentially be explained because lower-end properties often lack desired amenities found within high-quality spaces located within desirable submarkets; therefore owners must offer more concessions to attract and retain tenants.
2024 Forecast
CBRE analysts predict asking rents could decrease by 3-4% in the coming year, with a potential moderation of concessions as well. As financing costs increase and funding becomes less accessible for landlords, they may turn to other methods such as shared building services or flexible space options rather than offering large concession packages. Demand for top-tier properties is expected to remain strong as occupiers seek high-quality spaces in desirable submarkets.
