Shrinking gap between Class B and Class A rents has driven cost-conscious tenants to higher quality product
Nonprofits, a cost-conscious industry, favor DC’s more cost-effective Class B/C product
August 07, 2019
- Nonprofits, a cost-conscious industry, favor DC’s more cost-effective Class B/C product, but as the composition of the DC office market migrates away from older product, so too do nonprofits. Over the past 10 years, 6.3 million s.f. of B/C product has been repositioned to Class A/Trophy, but with the recent flood of Class A office product onto the market, there is increased competition amongst Class A assets, applying a downward pressure on Class A rents. The combination of a shifting office supply and a relatively small rent gap between B+ and A- assets is making the jump to Class A assets more feasible for nonprofits.
- The period from 2010 – 2014 saw 63% of all nonprofit leases sign in Class B assets, while only 20% of leases were signed at Class A buildings. In the period from 2015-2019, 56% of nonprofit leases were signed in Class B assets, while 26% of nonprofit leases were signed in Class A assets. That’s a 7% decrease in nonprofit leasing activity for Class B assets and 6% increase in leasing in Class A assets.
- Pricing of the assets has driven nonprofits into the A office market. In 2010, the average price paid by nonprofits for Class B space was $43.51 p.s.f. FS, and $49.69 p.s.f. FS for Class A. In 2019, the average price paid by nonprofits for Class B product was $52.39 p.s.f. FS, and $54.79 p.s.f. FS for Class A. In 2010, nonprofits in Class A product paid a 14.1% premium over Class B nonprofit tenants. In 2019, nonprofits in Class A paid only a 4.6% premium over Class B nonprofit tenants. The changes in direct asking rents can be attributed to a change in supply: between 2010 and 2019, the Class B office supply shrank from 61 million s.f. to 55.7 million s.f., an 8.5% decrease. In the same period between 2010 and 2019, the Class A office supply grew from 40.6 million s.f. to 50 million s.f., an increase of 23%.
- With more than 1 million s.f. of Class B/C office product slated for redevelopment through 2022, and a shrinking gap in pricing between Class B and Class A office space, nonprofits and other cost-conscious tenants are expected to make the jump between classes with increasing frequency in the coming years.
Source: JLL Research