Office tenants clearly prefer higher floors

Since the COVID-19 pandemic began, upper-floor office leases have outperformed other lease types and in some cases yielded higher effective rents, according to a recent CompStak report.

An analysis of office leases signed from 2018 through the first quarter of 2024 in four major U.S. office markets—Manhattan, San Francisco, Los Angeles and Chicago—conducted by CompStak shows a preference for higher floors, underscoring the oft-mentioned flight to quality trend in the wake of the COVID-19 pandemic.

The commercial real estate data platform also found that the legal and financial sectors are the dominant players in the high-rise leasing market, paying the highest rents in all four markets.

Over the past year, the three most valuable leases for offices on the upper floors in each market were signed by law firms. The group was completed by an investment bank.

In Manhattan, the Paul Weiss law firm agreed to lease the 31st through 44th floors of a 50-story tower at 1345 Avenue of the Americas in a deal valued at $1.08 billion.

In Chicago, the law firm Winston & Strawn has signed a lease for the 43rd through 48th floors of a 60-story building at 300 North LaSalle Street for $81.5 million.

In San Francisco, investment bank Stifel agreed to lease the 33rd and 36th-38th floors of the 38-story One Montgomery Street building in a deal valued at $49.7 million.

In Los Angeles, law firm Cox, Castle & Nicholson has signed a lease for the 21st and 22nd floors of a 44-story building at 2029 Century Park East for $43.1 million.

In San Francisco, CompStak data provided mixed results on the overall health of the market. While the market led in effective rents for recently signed high-rise leases and current rents paid by tenants on the top floors, it was the only market to see rents decline from pre-COVID levels.

San Francisco’s weighted average effective rent over the past eight quarters fell 5.7% to $86.88 per square foot compared to pre-COVID.

The latest CompStak data underscored Manhattan’s dominance. From the second quarter of 2023 to the first quarter of 2024, Manhattan was home to the largest office leasing deals, with the five largest deals ranging from $187 million to more than $1 billion.

Manhattan’s weighted average effective rents rose 6.5% from pre-COVID-19 levels to $83.21 per square foot. Los Angeles and Chicago’s Central Business District saw the same increase, up 9.1% to $50.03 per square foot and up 7.1% to $39.01 per square foot.

CompStak found that tenant preferences for higher floors were not reflected in concession rates, as concessions for leases on higher floors were the same as or higher than concessions for leases in other offices.

The data platform added that concession rates post-COVID-19 have increased by 220-440 basis points.