Beware the False Flight To Quality Narrative for Office

Narratives around the so-called “flight to quality” are failing to move the needle on capital market performance, as the majority of Class B and C properties are slightly outperforming Class A counterparts.

“This doesn’t mean that trading up is not occurring, but it’s more likely that the true level of this activity is out of touch with the rhetoric,” Moody’s Analytics’ Thomas LaSalvia writes in a new report in the Scotsman’s Guide. 

That includes the fact that many office-using companies “have done quite well” throughout the pandemic,” LaSalvia says in the analysis.

“Greater profits, higher stock prices and an expectation of further growth are not uncommon, especially among many large office-using firms,” he writes. “Combining this business performance with the potential for rent concessions or discounts within certain markets, and decision makers may think that now is the right time to trade up.”

In addition, the tight labor market has emboldened many workers to work less in the physical office—and many are also saying they’re willing to leave if they don’t get what they want. 

“Even if this threat isn’t credible, companies will have to compete for workers and entice them to the office if that is what business leaders deem necessary. Class A space may be required to gain access to the best and brightest talent,” LaSalvia writes.

But that’s not the whole argument, he says, opining that some leaders may have “more of a suburban mindset,” and are thus endeavoring to be closer to their workers. Instead, parsing the data for both capital- and space-market activity shows that the flight to quality argument is actually quite minor.

Just 24 of the 82 markets Moody’s analyzed posted situations where Class A assets outperformed Class B and C properties, leading LaSalvia to write that “the flight-to-quality trend has its merits in the post-pandemic world, and some businesses will find it worthwhile to trade up.”

But “the data does not support a widespread proliferation of this phenomenon, at least as it amounts to the performance of Class B/C versus Class A properties,” he writes. “If trading up is occurring in substantial numbers, it is likely occurring within the same asset class and not between classes, which is something beyond the scope of this analysis. Changing buildings for better natural light, a slightly better view or space that is more environmentally friendly is likely. It is on the margins where this phenomenon may truly lie.”