The rebound of the United States office sector appears nowhere in sight. Overall vacancy rates are far from pre-pandemic levels and leasing activity remains weak. But, that’s just the big picture. There’s a segment of the office sector that is faring quite well and that’s the high-end property segment. Specifically, trophy and Class A properties are in high demand. As tenants hammer out their space utilization strategies in the hybrid work environment, many are capitalizing on the opportunity to secure premier office accommodations, but it’s costing them a pretty penny.
In order to better understand just how the market for trophy class office space differs from its Class A counterparts we took a look at how asking rents differ between the two as well as the overall vacancy rate for the country’s top 5 metros. Here is what we found:
| Office Market | Trophy Asking Rent | Class A Asking Rent | Vacancy Rate |
|---|---|---|---|
| Manhattan | $127.87 | $80.43 | 19.7% |
| San Francisco | $122.16 | $75.86 | 29.4% |
| Washington, D.C. | $95.14 | $71.58 | 18.2% |
| Los Angeles | $45.51 | $42.78 | 28.2% |
Manhattan
Manhattan has long been the most expensive office market in the United States, that hasn’t changed. Average asking rents for trophy properties in the first quarter of 2023 totaled a whopping $127.87 per square foot, and Class A asking rents averaged $80.43 per square foot. The amount that tenants are willing to pay for high-end accommodations has been on the rise, despite the climate of economic uncertainty. While landlords may not be getting asking rates, they’re still getting tenants to pay a notably higher amount than they did in 2022. Net effective rent for trophy space in Manhattan averaged approximately $100 per square foot in the first quarter of 2023 and jumped to $112 per square foot in the first quarter of 2023.
While there is a sizable gap between asking rents and effective rents, the price of trophy space is still substantial. Among those that are willing to pay for trophy-level digs is law firm Wilson Sonsini Goodrich & Rosati, which inked a 16.5-year lease in April 2023 for 119,000 square feet at Paramount Group Inc.’s 770,000-square-foot 31 West 52nd Street trophy office building. That’s a huge lease in a market where the average vacancy rate for all property types is 19.7 percent. In New York City, the office market is increasingly centering on premier assets, and the numbers tell the story. According to tech firm VTS’s Office Demand Index analysis, which tracks unique new tenant in-person and virtual tour requirements, 81.6 percent of tours in New York City involved Trophy and Class A office space in February 2023, compared to just 76 percent in February 2022.
San Francisco
You have to look to the West Coast for the second most expensive trophy and Class A rents in the country. In the San Francisco office market, the average asking rent for trophy and Class A office space in the first quarter of 2023 was $122.16 and $75.86, respectively, according to research from Avison Young. In San Francisco, however, tenants are looking for the best-of-the-best in office offerings, which means trophy properties, not Class A buildings, are most coveted. Net effective rents for trophy assets in the first quarter reached $107 per square foot, while Class A effective rents averaged just $69 per square foot.
The San Francisco office market is experiencing record-high vacancies, a soaring 29.4 percent in the first quarter of 2023, but the vacancy rate among trophy assets is roughly 10 percent lower than the overall average. So, while major tech companies like Salesforce and Meta continue to decrease their office footprints in the city, many other office users are looking to lease high-end space, although not necessarily hundreds of square feet like the downsizing tech-tenant population. Earlier this year, law firm Gibson Dunn & Crutcher LLP signed a deal for 50,000 square feet at One Embarcadero Center, one of four office high-rises within Boston Properties’ mixed-use Embarcadero Center complex. As Avison Young noted in its first quarter 2023 report, trophy buildings with superior attributes and amenities remain much more in demand, which has significantly expanded the premium on these assets. Even in a market with one of the highest vacancy rates in the country, the demand for trophy office assets persists.
Washington, D.C.
Similar to San Francisco, in Washington, D.C., the flight-to-quality trend means the flight to trophy properties. Unlike San Francisco, the price of top-of-the-line office space is under $100 per square foot. First quarter 2023 asking rent was $95.14 per square foot for trophy properties in the District and $71.58 per square foot for Class A buildings. Tenants are continuing to downsize to smaller spaces but upgrade to higher-quality accommodations, resulting in the trophy office segment outperforming all other segments by a wide margin.
Like office markets in other major metros, the Washington, D.C., office market has yet to regain its pre-pandemic footing. During the first three months of 2023, the District was saddled with 22.6 million square feet of vacant space ranging in size from 20,000 square feet to more than 200,000 square feet. Among the large blocks of vacant space, only 17 were in trophy properties, while 109 were in Class A properties and 210 were in Class C buildings. The competition for trophy space is likely to heat up, as the city’s construction pipeline remains constrained. The first quarter saw only one trophy office building under construction, Skanska’s 17xM project, and more than 50 percent of the building is already pre-leased to law firm Gibson Dunn & Crutcher LLP and UBS Financial Services Inc., the latter of which signed on for nearly 25,000 square feet in April. If construction activity doesn’t kickstart in Washington, D.C., in the foreseeable future, the opportunities for trophy office space are destined to dry up in the nation’s capital.
Los Angeles
Los Angeles is experiencing relatively low trophy office rents for a major metropolitan market. In the first quarter of the year, the average trophy asking rent was $45.51 and the price of Class A space wasn’t far behind at $42.78 per square foot. Los Angeles is a very large market with a bevy of submarkets so the average can be deceiving. Additionally, Los Angeles is unique in that it has two central business districts, one in downtown and the other in Century City, with both areas serving as home base for financial, legal, and professional services companies. Both CBDs have yet to rebound fully from the impact of the COVID-19 health crisis, but Downtown is in a far worse position than Century City. Plagued by safety issues, Downtown is seeing a flight to other submarkets. However, not everyone is abandoning the downtown area, and those who choose to stick it out are downsizing their footprints by 30 to 60 percent in their moves to trophy destinations, according to research by Newmark. While the number of downtown tenants is dwindling, the office users who remain have many options for trophy office space, so owners of the most elite properties have to compete for leases, offering tenant-improvement allowances and the like.
Farther west in Century City, the submarket is experiencing bustling activity in its trophy segment. Nestled in West Los Angeles, Century City is miles away from the safety troubles of Downtown and the difference is evident in the statistics. The trophy-grade vacancy rate in Century City in the first quarter of 2023 was an enviable 8.2 percent. Beyond Downtown and Century City, Los Angeles has been recording notable activity in the trophy segment. In February, Sony Pictures decided to consolidate several offices under one roof with the lease of 225,000 square feet in the tower at 5750 Wilshire Blvd within Wilshire Courtyard, Omni Group’s two-building, creative trophy office complex. In LaLa Land, it’s all about the best of the best when it comes to leasing activity in the office sector. And tenants seeking high-end space are paying substantially less than their counterparts in other major metros.
The flight-to-quality is an ongoing trend in the national office sector and there are no signs of abatement in the foreseeable future. As tenants make plans for the future of their workspace, they grapple with issues ranging from economic uncertainty to return-to-work numbers. And amid those challenges, whether they ultimately decide to downsize or simply relocate, office tenants in the top metropolitan cities are setting their sights on trophy properties. Owners of these premier buildings aren’t getting asking rates, as it remains a tenants’ market, but they’re still pocketing the big bucks.
