Tenant Flight to Quality Spurs Rise in Class A Office Rates

He attributes this to a flight to quality. "In high-rise space for floors 20 and above, rents are rising up to $46 per sf, and the vacancy is down to 5%," Sciolla tells GlobeSt.com. Tenants are upgrading from class B space and "shuffling within towers." He calls it a "class system" in which vacancy in mid-rise floors is 12% and 16% in lower floors. "Below the 20th floor," he says, "rents have remained steady or have dipped slightly."

Rates for class A space Downtown continue to average between $37 per sf and $42 per sf, according to Sciolla. He believes increased demand for prime tower space could take rates in those locations to between $47 per sf and $50 per sf. Meanwhile, class B rates hover in the $25-per-sf to $28-per-sf range.

Overall, class A vacancy in second quarter dropped from 20% to 18%, and class A vacancy is at 15%. "This marks the first quarter in three years that the overall availability rate dropped," he says, "and it is the second consecutive quarter that saw 200,000 sf of positive absorption. Whether this will be a continuing trend or just a blip remains to be seen," and he expects Gillette and Proctor & Gamble to dispose of some space by year-end.

Two trends loom, according to Sciolla. There is some movement of companies from the financial district to Back Bay as quality high-rise space in the financial district diminishes. In addition, as much as one million sf of class B and C office space is expected to be converted into residential property.