Prime Office Space Leads – and Will Continue to Do So

The headlines continue to herald office building woes, from buildings slipping into foreclosure to buyers snapping up near-empty facilities at ever-deeper discounts. However, as usual, such stories fail to note that “office” is a broad category. Within that category are prime and non-prime buildings. Recent information from CBRE Research and CBRE Econometric Advisors indicated that “there’s a growing divide in the U.S. office market between the performance of prime and non-prime buildings.”

According to the experts:

• Prime office vacancy rate stood at 14.8% versus 19.3% vacancy for non-prime space in Q1 2024.

• Prime buildings experienced positive net absorption of 49 million square feet from Q1 2020 to Q1 2024, while the non-prime buildings saw negative net absorption of 170 million square feet during the same period.

• Due to anticipated demand and preleasing of the construction pipeline, prime vacancy is forecast to return to its 8.2% pre-pandemic rate by 2027.

• The next building tier after highly occupied prime space will benefit from overflow demand. This could be the case “especially in vibrant, mixed-use districts.”

• Occupiers are willing to pay a premium for office space that offers better workplace experiences and assists in new talent recruitment.

Other features of the report include the following:

Quality is Important

The CBRE team, quoting data from the company’s latest Office Occupier Sentiment Survey, indicated that nearly 60% of participants said they’re considering relocating to higher-quality space. That space should be near public transportation (to ease commuting issues) and assist with corporate sustainability goals. Furthermore, workplace quality matters, especially as occupiers continue adjusting strategies to encompass more flexible working patterns.

New Buildings are Leasing More Slowly

Even amid the preference for prime buildings, the newer office space is slower to lease up “amid structural and cyclical challenges over the past four years that have reduced demand for office space,” the CBRE team said. Still, the average vacancy rate of 20.6% among newly delivered prime buildings was lower than the 24.4% reported by non-prime buildings. Markets with more deliveries and tech-specific markets like Austin, Nashville and San Jose tend to be the largest contributors to the prime vacancy rates. “We view this as a short-term issue reflecting cyclical weakness rather than a structural issue,” the CBRE experts said.

Opportunities for Landlords and Tenants

Prime space availability will tighten, meaning overflow to the next quality tier of buildings. The CBRE analysts note that this “next level” could benefit from added amenities like top-rated indoor air quality equipment, electric vehicle charging stations, additional parking and bike storage space, shared meeting space and sustainability features. Meanwhile, tenants nearing lease expiration dates and interested in “moving on up” should start their search sooner rather than later due to declining prime space availability. Said the CBRE experts: “An early search could also help tenants lock in more favorable lease terms and rates.