It’s no secret that offices were landlords sweetening deals for tenants the past year in a still difficult commercial real estate market. New data suggests the deals have gotten even sweeter.
Global real estate firm CBRE found that in 2023, top-tier building owners of the brightest offices—known as Class A and Class A+ buildings—tenants would average 10 free months over the life of their leases. That’s up from seven months free in 2019. Leases typically span about nine years, according to CBRE.
Landlords of these spaces also give tenants more money to build out their office spaces. Building owners are shelling out an average of $98 per square foot — nearly 40% more than they did before the pandemic.
But the view is still better at the top…for landlords, at least
The CBRE report analyzed 3,400 leases across 12 major US cities and found that—surprise, surprise—the market for nicer office buildings still looks much better than it does for lower-tier buildings, also known as Class B and Class C -buildings. Allowances given to tenants for alterations or renovations to these buildings have risen 52% since 2019 to $86 per square foot.
“The increase in concessions just underscores how office tenants today have an advantage in lease negotiations,” Mike Watts, president of CBRE’s investor leasing for the Americas, said in a Dec. 20 statement. “It also illustrates an ongoing ‘flight to quality’ ” in which companies prefer higher quality buildings that will help attract employees to work from the office.
Overall, net effective rents, which take into account landlord concessions, fell 1.2% for Class A and Class A+ buildings from 2022 to 2023, but fell more than three times as much—4%—for Class B and Class C buildings.
Office vacancy rates also remain much lower for top-tier buildings. Offices built in 2010 or later, which represent the top 5% to 10% of the market, had a 14.6% vacancy rate. Meanwhile, the office buildings in general had a vacancy rate of 18.4%.
A new kind of indulgence
Building owners want to give tenants better concessions, and a new kind of perk has made its way into the mainstream, says Julie Whelan, one of CBRE’s principal researchers. Along with your typical 10-month free or build-out allowances, landlords offer tenants shared spaces for meetings and social events, much like amenity floors in apartment buildings.
“This additional space is usually provided in the form of a shared service floor and/or shared office space that is open to the tenants of the building on a priority basis and sometimes the public to use,” Whelan said. “It can usually be booked, and tenants are usually charged to use the space.”