Lease Size as a Hidden Lever for Office Outperformance

Uncertainty in the office market continues as the national vacancy rate approaches 21%, a figure that may understate the true underlying weakness in near-term office utilization and demand. But, despite the gloomy trends and investors’ fears about the sector, it’s clearly not dead. Occupancy didn’t collapse to 50%, or even 70%. In fact, for stronger office REITs, both operating income and average occupancy are on the rise, according to Moody’s.

Active and prospective office investors thinking about the right approach to the sector could benefit from a mindset shift related to a deceptively simple question: “How is office space priced?” New research has found the office market is segmented “based on leases’ space size (square footage),” and that spaces of a commonly found size within a market command a rent premium.¹ In fact, if a specific size is abundant—meaning it represents a higher share of all available spaces in a market—that size tends to earn significantly higher rents. The authors call this the “Abundance Premium.”