Class-B May Be the Best Investment. Here's Why.
Depressed oil markets harm Class-A office buildings much more than Class-B, according to a new report by NAI Partners chief researcher Nat Holland.
Over the long term, the classes operate very similarly: Class-A averages 2.3M SF of leases per quarter and Class-B pulls in 2M SF a quarter. (The amount of inventory is very similar, so it's a fair comparison.) But when you delve down, Class-A is episodic, Nat says, with leasing volume fluctuating based on market conditions. Understandably, energy performance has the biggest impact—Texas rig count explains 38% of the variation in leasing activity in Class-A properties. However, Class-B seems to be barely impacted by rig count, or much of anything else—it’s pretty consistent quarter after quarter.
NAI Partners partner Dan Boyles says it makes sense that Class-A is impacted first and most—downturns often immediately lead to sublease space and new deliveries not leasing up. And Dan says he's still very active with Class-B leasing, including some expansions from non oil and gas companies. But a sustained downturn will trickle down to Class-B, he tells us. If Class-A rents weaken enough, some tenants will take the flight to quality. That may have already happened in Q2—Class-A absorbed 740k SF, while Class-B lost 310k SF.
