Is Flight to Quality for U.S. Office Space Fading or Enduring? by Transwestern
Since the beginning of the recession in 2007, office tenants have used a variety of ways to cut their occupancy costs. These methods have included densification (reduction in the amount of space leased per worker), hoteling programs, telecommuting and elimination of private offices. Another approach that tenants took was to seek newer, more functional and efficient space, which led to a “flight to quality” by many tenants.
This trend continued until the end of 2012, but seems to have plateaued in the first half of 2013. Writing in Transwestern’s third quarter 2013 edition of Insights + Trends+ Opportunities, Alexander (Sandy) Paul, executive vice president, Delta Associates (Transwestern’s research affiliate), asked: “Is the plateauing of the Class A share of absorption the new normal, or might the flight to quality that we saw during the recession continue? And if the flight to quality is tapering, why might that be?”
Paul noted that if “the flight to quality is tapering, it may be because the discounted Class A rents that tenants took advantage of from 2009 through 2011 are not as cheap anymore. In 2012, Class A asking rents were rising at an average rate of 1.8 percent, while Class B rents were edging downward 0.1 percent nationally, reflecting the flight to quality over the prior few years, driven by tenants’ goal of greater efficiency in their use of space.
“Tenants took Class A space off the market while rents were low,” Paul continued, “and this increase in demand caused owners to eventually push rents higher. Indeed, in 2013, Class A and Class B rents have increased at the same rate, 0.3 percent during the first half of the year.” Thus higher-end space is no longer the bargain it was from 2009 to 2011.
Still, Paul added, “Class A space, particularly newer product, continues to offer the advantages of layout, energy efficiency and technological amenities that most Class B and Class C properties cannot. For that reason, we expect the flight to quality to continue, though the gap between Class A and Class B demand may narrow some. Because economic growth has been modest, Class A rents remain affordable in most markets – by historical standards – with growth rates below the long-term average. This will encourage tenants to seek out better accommodations that in turn will allow them to stand out to potential employees as the competition for talent heats up along with the economy. At the same time, seeking out more efficient space today will allow long-term cost savings.”
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