Is There Enough Class-A Office Stock to Meet the Flight to Quality?
Maybe for a short while. But as developers shy off from new construction, there’s not going to be enough in a few years.
“Flight to quality” has become the bird-watching theme for the difficult conditions of the office property market.
The theory is that as companies reconsider their office space needs in the face of hybrid work conditions, they are more likely to made changes, looking for office space that is modern, ready to suit their needs going forward, and hopefully attractive enough to entice employees to leave their slippers behind at home and come into work.
That’s fine, but Cushman & Wakefield recently asked an important question: Is there enough appropriate office space to meet flight-to-quality demand? The answer is yes, for the immediate time, but pretty soon, not a chance.
The most attractive and desirable office space is only between 10% and 15% of total inventory, the firm says. Demand for the buildings is high. Top-tier space in gateway markets enjoys vacancy rates that are 700 basis points lower than the remaining market. “Direct vacancy in the best buildings is sub-11%,” an impressive number in relative comparison.
“Overall gross asking rents at top-tier assets are 51.5% higher than the rest of the office space in gateway markets,” they said. “The national premium for top-tier office space is a very similar 51.4%.” That shows heavy demand that isn’t what the figures for stock show. Similar to water, the body of all office-leasing businesses can’t be readily compressed. The buildings in top shape fill up and the costs they can demand rise. “The premium for new urban office space doubled in 2023 and now sits 35 percentage points higher than prior to the pandemic.”
Then what happens to the 90% or so of companies and employees that have yet to secure a comfortable perch? Either find other less-desirable accommodations or reconsider the idea of everyone working from home all the time.
That is, unless there is enough new office built to expand availability and help take off the strain. Which isn’t happening. There used to be 40 to 50 million plus square feet of new office being delivered a year. That is estimated to be down this year to maybe 33 million square feet in 2024 and well below 10 percentage in 2026 and 2027.
According to C&W, the amount of buildings that are undergoing renovations and significant investment offer opportunities to investors.