One of the biggest themes we’ve been hearing in the office market over the past year is that there’s a flight-to-quality happening. Office tenants in the market for space are choosing newer, Class A properties with top-of-the-line amenities instead of Class B or Class C space. While it may not be the case in every market, there is a lot of truth to this in many markets, leading us to wonder which Class A fundamentals are that much different than Class B and Class C buildings. To find out, we looked at current figures on effective rents and average building age for Class A and Class B/C office properties in five major markets around the U.S.
|City||Class A average 2023 effective rents||Class B/C average 2023 effective rents||Class A 2023 average lease transaction size||Class B/C 2023 average lease transaction size||Average Class A building age||Average Class B/C building age|
|New York City||75.65||50.53||28,180||9,140||1968||1927|
Of the five areas measured: New York City, San Francisco, the Bay Area (which excludes San Francisco but includes Marin County, San Jose, Napa, San Mateo, etc.) Boston, and Chicago, Class A 2023 average effective rents were higher than Class B/C in all cases. But the gap between the rent prices varies between markets. The highest difference seen is in New York, where average Class A rents are $75.65 and Class B/C is $50.53. Similarly larger gaps can be seen in San Francisco and Boston. The Bay Area had a smaller difference, with an $11 difference between Class A and Class B/C. But Chicago’s numbers were nearly the same, with Class A rents less than $1 higher than Class B/C.
Looking at the average age of buildings between Class A and Class B/C, there are pretty significant differences. The largest gap is in San Francisco, where the average age of Class A office properties is 1980 while the average age of Class B/C is 1928, a more than 50-year difference. Interestingly, the city with the smallest gap in average age between classes is Chicago, where average rents are nearly the same between Class A and Class B/C office properties.
Comparing office metrics between Class A and Class B/C in these five markets makes a few things clear: tenants are paying more for space in Class A properties compared to Class B/C, and the Class A buildings are at least a couple decades younger. The outlier of the group, Chicago, where Class A and Class B/C rents are less than $1 apart and overall significantly lower than effective rents in other cities, is a market that also struggled with vacancy last year. Among all gateway markets, Chicago had the highest vacancy rate, at 19.4 percent, according to CommericalEdge. But the biggest factor in the average effective rents in Chicago is likely being driven by slower leasing activity. In a bid to sign more tenants in a challenging market, many landlords are offering large concession packages to tenants, which then brings down the effective rent. Larger concession packages are common these days in most markets, but they may be having a larger impact in markets like Chicago, where there is oversupply and slower leasing activity.