Key takeaways
- Office demand has bifurcated sharply between top-quality and commodity space.
- Re-tenanting office is capital intensive — TI and leasing commissions are substantial.
- Lease rollover schedules matter more in office than in any other property type.
- Residential conversion works only on a narrow subset of buildings.
Class and the flight to quality
Class A buildings are newer or well-renovated, well-located, amenitized, and command top rents. Class B is functional but older or less amenitized. Class C is dated and typically competes only on price.
The post-2020 pattern has been a flight to quality: tenants consolidating into less space but better space, leaving commodity buildings with rising vacancy. Aggregate office vacancy statistics conceal this, because the market average blends a competitive top tier with a struggling remainder.
The capital cost of occupancy
Signing an office tenant costs money. Tenant improvement allowances can run tens of dollars per square foot, leasing commissions are paid to both brokers, and free rent periods reduce effective rent. On a five-year lease these costs can consume a large share of total lease revenue.
This is why net effective rent — face rent adjusted for concessions and capital costs, amortized over the term — is the only number worth comparing. Face rents held up better than net effective rents through the recent adjustment, which flattered headline statistics.
Rollover risk and conversion
Model the lease expiration schedule year by year. A building with 40% of its rent roll expiring within 24 months carries concentrated risk that a stabilized occupancy figure does not reveal. Weighted average lease term is the summary statistic lenders and buyers look at first.
Office-to-residential conversion attracts attention but works on a narrow subset of buildings: floor plates shallow enough for window access to every unit, workable window operability, plumbing risers that can be reconfigured, and a basis low enough to absorb construction cost. Most towers fail at least one test.
Frequently asked questions
Is office a bad investment now?
It is a repriced asset class with wide dispersion. Well-located quality buildings acquired at a reset basis can perform. Commodity buildings with heavy rollover and capital needs are genuinely difficult.
What is a medical office building?
Office space built for healthcare tenants, with specialized plumbing, power, and often proximity to hospitals. It has historically shown steadier occupancy than general office.
What does weighted average lease term mean?
The average remaining lease duration weighted by rent contribution. Longer WALT means more predictable income and generally better financing terms.
Sources & further reading
- CBRE and JLL office market statistics
- Urban Land Institute office conversion research
- Commercial Mortgage Alert office loan performance data
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