“Flight to Quality” Has Flown
Quarterly Report 2Q 2005 - Click Here to View Full PDF
Over the past 36 months, the term “Flight to Quality” has been used in excess by commercial real estate professionals. This term refers to the tendency of tenants, previously housed in Class B and C commercial buildings, making the move to more prestigious Class A buildings in an effort to take advantage of depressed rents.
Although this trend was very familiar in 2002 to 2004, now in 2005, that same Class A space is becoming increasingly scarce and rates continue to climb. Over the past 12 months, Downtown Oakland Class A buildings have seen vacancy shrink from double to single digit numbers on the heels of transactions by major tenants such as BART and Kaiser Permanente.
This rapid turn-around in vacancy has caused landlords to re-think their rates and begin asking significantly higher rents. Shorenstein at 555 12th Street has recently inked a deal on the top floor at $3.00 per square foot, per month to start. Prentiss Properties renewed an existing tenant at One Kaiser Plaza for more than $2.75 per square foot, per month to start. This is in stark contrast to the lease deals that Shorenstein was signing in 2002, 2003 and 2004 at rates of under $2.25 per square foot, per month to start.
In contrast, the lower end of the Class A market as well as Class B properties continue to offer incentives and drastically reduced rents to entice tenants to take a closer look at their buildings. Buildings like 1000 Broadway, 2201 Broadway and 1956 Webster have been luring potential tenants with generous offers of free rent, tenant improvement allowances and flexible term in order to fill empty space.
Although the market is moving away from tenants and toward landlords, it is doubtful that the market will see another spike as it did in 2000,. However, the market is definitely trending upward. Year 2005 looks like it will be an interesting year for both tenants and Landlords alike. It is clear that the disparity is growing between the best Class A buildings and the rest of the pack.
