Smart Office Buildings See a Variety of Premiums

Noting that office properties are facing challenges with work-from-home and hybrid models of business is beyond speculation at this point. What’s new in an analysis from Moody’s Analytics is that office buildings can rework themselves for the shifting patterns and gain significant competitive advantages.

A caveat is that the Moody’s white paper, while written by their staff, also involved data from WiredScore, which “assesses, certifies and improves digital connectivity and smart technology in homes and offices,” according to the company’s own description, and so has a vested interest.

To start, the Moody’s researchers noted a difference in performance of Class A office space over Class B or C. “Trophy office space with best[1]in-class amenities and technology to support growth are more sought after by companies to attract and retain top talent,” they wrote. “Developers keep this in mind when planning their next projects – with digital connectivity top of mind. The highest-quality office spaces on the market, ones that are usually newly-constructed and have been outfitted with premium fixtures, amenities, HVAC, and digital systems are considered Class A, while Class B/C buildings are usually older and not as well maintained. Since 2010, Class A new construction has averaged 31.5 million square feet per year, while Class B/C construction only averaged 2.6 million square feet.”

That much has been talk of the CRE industry for some time. But the researchers also looked at WiredScore ratings of buildings as a proxy for the degree of a building’s digital connectivity, which should support more complex office use models, and found that it seemed to have statistically rigorous implications.

“[O]ffice buildings who hold WiredScore certification experience a noticeable boost to their performance,” they wrote. “On a per-square-foot basis, rents in WiredScore certified properties are $6.50 higher. This result is statistically significant. As for occupancy, WiredScore-certified buildings also outperform their non-certified counterparts. Holding all else constant, vacancy is on average 3.8% lower in buildings that are certified than those that are not. Again, the result is very promisingly statistically significant.”

They also found that “tenants are statistically significantly signing longer lease terms for square footage in office buildings that are WiredScore-certified, lengthening the lease by approximately nine months.”

The advantage of the rating as a signifier of more effective and useful connectivity is particularly marked in larger metro areas, they wrote. As an example, in Q3 of 2022, Class A office space in Atlanta had average asking rents of  $31.33 per square foot and $21.26 per square foot for B and C. But for buildings with the certification, the asking rents were $40.07 per square foot for A and $27.36 per square foot for B and C, premiums of 27.9% and 28.7% respectively.

Nationally, the Class A differential was 16.3%. The biggest boost was with B and C, where the certification brought 40.9%.

It is important to consider information that wasn’t available in the white paper, like the realized and not asking rents, what other amenities the certified buildings also had or differences in marketing efforts that also might have influenced the differences.