The ABC of Office
Whilst researching for the CoreNet Global government forum last week, it became increasingly obvious that we are in a three-tier market.
The top tier starts with A. These are the best buildings, with generally the highest ESG ratings. They are typically the buildings we hear and read about the most. It is the segment dominated by REITS, Super Funds and the top tier of tenants. It is also where valuations may be more important than accommodations.
Next comes B, or the best of the rest. B is the biggest segment of the market. These buildings have good ESG ratings but often don’t rate as high as their A-grade counterparts. As noted earlier this year, it is where the battle of the B’s continues due to the amount and competitiveness of space. The B’s include:
- B Grade buildings – PCA grading
- Wanna B’s – would like to be B’s
- Should B’s – not really A
- Shouldn’t B’s – good quality buildings hampered by “something”
- RefurB’s – refreshed buildings not as shiny as the best
- Backfill – space left behind as musical chairs continues. This can be direct and sublease space
Finally, C. These buildings have minimal or no ESG ratings and present the best redevelopment opportunity, not the best office accommodation opportunity.
C incorporates all of those buildings that are slowly losing tenants to the A and B segments and are not being refurbished to meet the future market. The best example is the East Perth sector, which was taken out of PCA’s Perth CBD office market statistics.
This C group is anywhere between 5-10% of the total market by stock (dependent on the city), generally older and smaller buildings, and has the highest vacancy. However, this group has the best potential to be repurposed, retrofitted, or refurbished to meet the needs of smaller office tenants who cannot afford the A’s or the B’s.
In essence, the reported shortage of supply is only in the A segment. There is still plenty of choice in the B and C segments. We’re still waiting for the smartest developers, owners or Lessors to seize the opportunity: refurbish a smaller, well-located building with good natural light, and offer high-quality space at competitive rents for the smaller tenants being priced out of the A-and B-grade market.
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