It’s no secret that office landlords have been sweetening deals for renters over the past year in a still-difficult commercial real estate market. New data suggests the deals have been getting even sweeter.
Global real estate firm CBRE found that in 2023, top-tier building landlords of the glitziest offices—known as Class A and Class A+ buildings—offered renters an average of 10 free months over the life of their leases. That’s up from seven months free in 2019. Lease agreements typically span about nine years, according to CBRE.
Landlords of these spaces are also giving tenants more money to build out their office spaces. Building owners are shelling out an average of $98 per square foot—nearly 40% more than they did before the pandemic.
But the view is still better at the top…for landlords, at least
The CBRE report analyzed 3,400 lease agreements across 12 large US cities and found that—surprise, surprise—the market for nicer office buildings still looks a lot better than it does for lower-tier ones, also known as Class B and Class C buildings. Allowances given to tenants for modifications or renovations to these buildings have risen 52% since 2019 to $86 per square foot.
“The increase in concessions underscores just how office tenants have an advantage in lease negotiations today,” Mike Watts, president of CBRE’s investor leasing for the Americas, said in a statement on Dec. 20. “It also illustrates an ongoing ‘flight to quality’ in which companies favor higher quality buildings that will help to entice employees to work from the office.”
Overall, net effective rents, which take into account landlord concessions, fell 1.2% for Class A and Class A+ buildings from 2022 to 2023 but dropped more than three times as much—4%—for Class B and Class C ones.
Office vacancy rates also remain much lower for top-tier buildings. Offices built in 2010 or later, representing the top 5% to 10% of the market, had a 14.6% vacancy rate. Meanwhile, the office buildings overall saw a vacancy rate of 18.4%.
A new kind of concession
Building owners are looking to give renters better concessions, and a new kind of perk has made its way into the mainstream, says Julie Whelan, one of CBRE’s head researchers. Along with your typical 10-months-free or allowances for build-outs, landlords are offering tenants shared spaces for meetings and social events, much like amenities floors in apartment buildings.
“This ancillary space is usually provided in the form of a shared services floor and/or shared office space that is open to the tenants of the building on a priority basis and sometimes the public to use,” said Whelan. “It can usually be booked, and tenants are usually charged to use the space.”