As the era of hybrid working sets in, companies are banking on the idea that better offices attract better employees, and that’s certainly reflected in the office leasing business. A recent CBRE report revealed that since 2021, the effective rents of prime office buildings have increased while those of lower quality assets have decreased.
Since 2019, CBRE has reviewed more than 2,700 leases in 12 major office markets and categorized buildings as either upper tier (Class A or Class A+) or lower tier (Class B or C). CBRE looked specifically at effective rents, which take into account concessions from building owners (such as reduced rent and increased tenant allowances), for its analysis. According to the report, average effective rents for prime properties rose 3.8% in 2021 and 6.7% so far this year. On the other hand, average effective rents for lower-tier properties fell 3.4% last year and fell another 1.1% this year. The increasing number of leases seems to have contributed to lower rental rates for lower level buildings.
The increase in demand for prime office space appears to be a direct result of office workers’ insistence on working remotely for at least part of the week. This has led office occupants to prioritize high-quality workplaces over the past couple of years to encourage employees to work from home and provide them with the tools they need to be effective there. But attracting top talent isn’t the only reason for this trend. Commercial real estate investors generally turn to acquiring higher quality real estate to better hedge against economic downturns, and offices are no exception.