The term “flight to quality” has been commonly used to explain the surge in demand witnessed in the office occupancy market. While this concept seems plausible on the surface, a more in-depth analysis of office leasing patterns reveals that it falls short of accurately portraying the complete reality.
As a category, buildings with a five-star rating – signifying the highest quality and constituting around 7% of the entire U.S. office inventory – are the only ones experiencing consistent demand since the onset of 2020. These buildings have shown positive net absorption, indicating an increase in occupied space, in contrast to negative trends observed in all other rating classifications.
However, this apparent strength still translates to a notable weakness. The positive absorption at five-star buildings since 2020 has accounted for only 8.5% of the total inventory, significantly lower than the over 15% recorded in the four years preceding 2020.
Several indicators challenge the narrative of a flight to quality:
- The Share of Leasing Volume at Higher-Quality Buildings Decreases:
Contrary to the expected trend of a rise in leasing activity at top-tier spaces if there were a genuine flight to quality, the share of leasing activity at five-star buildings has diminished. In 2019, over 10% of new office leasing occurred at five-star buildings, but in 2023, this figure dropped to less than 8%. The combined share for five-star and four-star buildings fell to 43.5%.
- Lease Sizes Decrease Most Rapidly at Five-Star Buildings:
Total office leasing volume in 2023 fell below its pre-pandemic average, primarily due to leases being, on average, 20% smaller than in the second half of the 2010s. Notably, leases at five-star properties in 2023 were 43% smaller on average than those in 2019. While this might suggest a flight to quality, the overall effect has been a decrease in demand for top-rated buildings compared to pre-2020 levels.
- Older Buildings, Regardless of Rating, Experience Occupancy Decline:
Contrary to expectations, even top-rated buildings constructed before 2020 have witnessed a decrease in occupancy over the past 12 months. In contrast, newer buildings across all quality ratings have maintained consistent demand. Buildings completed since 2020 have seen positive absorption of 16% to 18% of inventory, while older buildings, regardless of their quality rating, have faced negative absorption.
In conclusion, rather than witnessing a flight to quality, the data suggests that office tenants are concentrating on new buildings, irrespective of their quality. Even in this scenario, demand has slowed compared to pre-pandemic norms, with newer office properties performing better than traditionally perceived “high-quality” ones.