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Owners of Class-A and trophy office properties are likely to see rents keep creeping up over the next year, a new analysis from CBRE shows.
The office market’s bifurcation is far from over, CBRE’s examination of 3,900 lease transactions over the past year found.
The brokerage’s analysis looked at properties in 12 of the most prominent office markets in the U.S.: Atlanta, Boston, Chicago, Dallas-Fort Worth, Denver, Houston, Los Angeles, Manhattan, Philadelphia, San Francisco, Seattle and Washington, D.C.
It found that in the most desirable office buildings, typically in convenient locations and with a range of amenities, rents have continued to increase, jumping by 2.4% in that period. Meanwhile, rents in Class-B and C office buildings have dropped by 1.2%.
Those findings follow a pattern the brokerage has observed over the past few years. Class-A and trophy properties have increased rents by around 3% per year since 2021, whereas less attractive properties have seen an annual 1% decrease in rents.
Additionally, the effect of tenant improvement allowances on net rents has been mixed.
Class-B and C landlords have increased TI allowances by 51% since 2019, which has suppressed effective rents, CBRE found. Although Class-A and trophy landlords have also upped TI allowances by 37% during that period, base rents for those properties have kept climbing.
But landlords of Class-B and C properties have found a way to offset lower demand. Data shows they have been willing to offer more generous concessions to tenants than Class-A and trophy owners, CBRE found. Those packages may have created more base rent stability for those buildings, adding certainty for lenders.
Still, concessions were down in the first half of this year from 2023 as high interest rates and limited access to capital impede landlords’ ability to offer enticing packages to would-be tenants.
Lower-tier office properties offered 8% less concessions, and owners of top-tier product offered 9% less. The reductions work out to around $98 per SF for Class-A and trophy versus $86 per SF for Class-B and C.
The result will be an overall decrease in office asking rents of 1.8% by mid-2025, driven by further declines for Class-B and C properties, while Class-A and trophy rents hold steady or increase, CBRE predicted.
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