An essential part of the commercial real estate sector, office buildings are divided into multiple categories based on their primary use type of office space or in different classes by features like age, location and amenities. As each category offers different market positions and profitability, understanding the specifics of all types of office buildings is key for CRE professionals to make informed, strategic decisions.
Office Properties by Use Type of Office Spaces
Office buildings are divided into categories based on their office space use types, each with unique layouts and functionalities to meet the needs of various industries. While some buildings are dedicated to a single use, most accommodate multiple uses. These multi-use office buildings have a primary use type, determined by the predominant type of office space, alongside secondary uses.
While the office sector faces challenges such as high vacancy rates and a dwindling supply of new developments, it’s important to note that some types of office buildings are navigating these challenges more successfully. Here’s a breakdown of the main types of office buildings by their primary use type of office space.
Traditional Office
The most common category, traditional office buildings provide a blend of private and collaborative work areas, with standard features including private offices, open areas for cubicles and common rooms. This setup appeals to companies looking for traditional space for lease in the long run, as they generally require leases ranging between 5 to 10+ years.
The evolving office market trends are making long-term leases less appealing to current tenants, as they’re seeking added flexibility. According to our study on offices under construction by use type, 2024 traditional office completions are projected to decrease by 37.5% compared to 2019, reflecting the shift in the demand for these assets.
Coworking Spaces
Office coworking spaces provide rentable offices or desks in an open layout, complete with shared amenities for all tenants. Their main advantages are the short-term leases and all-inclusive rental fees, making them a flexible, hassle-free option, ideal for current office market demands.
As the nature of work shifts and the preference toward shared, flexible work environments increases, coworking spaces continue to experience growth. Despite comprising just a small fraction (0.2%) of the national office space under construction as of April, the first quarter of 2024 saw an impressive 6% increase in the national supply, as highlighted in Coworking Cafe’s latest industry report. The report provides insights on the leading markets by number of coworking spaces as of April 2024, with Los Angeles and Manhattan leading the way, closely followed by Dallas-Fort Worth, Washington, D.C., and Chicago.
The office shift toward suburban spaces envelopes this sector as well, with suburban coworking spaces now accounting for nearly as much space as their urban counterparts, per our April office report. This shift is mainly driven by the desire to accommodate workers closer to their homes and make daily commutes easier.
Medical Offices
Medical office buildings (MOBs) are specialized facilities for health care services strategically located near hospitals or in easily accessible areas. MOBs feature advanced infrastructure to support medical equipment.
A recent study from Partner Valuation Advisors featured on Commercial Property Executive shows that medical offices remain attractive investment opportunities due to the increasing demand for health care facilities and their high occupancy rate compared to other office types. According to our market report on the U.S. office construction pipeline, at the end of Q1, MOBs represented 10% of the ongoing construction projects in the U.S., indicating their growing importance in the CRE marketplace.
Life Sciences
Life science offices are custom-built facilities for biotech and pharmaceutical companies, providing an ideal environment for conducting biological and chemical research. They’re currently experiencing a surge in popularity, with construction activity at an all-time high, according to CommercialEdge data.
To put this growth into perspective, the life science sector saw 29 million square feet completed between 2019 and 2023, while this year alone, another 22 million square feet are scheduled for completion. This reflects the growing investments in health care innovation and the development of new medical treatments.
Research & Development
Research and development (R&D) offices are spaces tailored to facilitate innovation in the science sectors, excluding life sciences. These offices feature specialized labs, technical facilities and advanced infrastructure to support R&D activities.
Although accounting for only 5.1% of office projects under construction at the end of Q1, as shown in our office pipeline market report, the R&D office sector has experienced a significant upswing in recent years. With completions between 2019 and 2023 showing a consistent increase, this year’s deliveries are expected to be 164% higher compared to pre-pandemic times.
Creative Office
Creative office space, defined by an open layout, reshapes the traditional office environment. These spaces embrace the concept of moving away from conventional private offices and cubicles in favor of open areas with low-walled workspaces or desks.
Office construction pipeline data from our market study shows that a total of 3.7 million square feet of creative offices are expected to come online in 2024, 65% below 2019 figures. This trend reflects a change in workplace design and tenant preferences, potentially pointing toward a temporary shift away from the open space concept, a trend impacted significantly by the COVID-19 pandemic.
Office Buildings Classes
Office buildings are also categorized into different classes primarily based on quality factors like year built, current condition and amenities.
Class A
Class A office buildings are high-quality assets with premium amenities that are either new developments or have undergone significant improvements in recent years. They’re situated in prime locations with great accessibility, such as Central Business Districts (CBDs). A subset of this category are the Class A+ office buildings, elite structures with amenities that exceed the high standards of typical Class A buildings.
Even though office utilization has overall declined in recent years, the flight-to-quality trend persists — favoring Class A office buildings — as companies seek to provide attractive workspaces that compete with remote working options.
Class A and A+ office properties are known for their superior amenities, commanding rental rates significantly above the market average. However, the shift in the office market from CBDs and urban spaces to suburban areas has led to many Class A and A+ buildings in downtown areas struggling to improve office utilization. As of April, average U.S. listing rates for Class A and A+ properties were $44.76 per square foot, marking a 4.5% decrease year-over-year, while the national office vacancy was 19.3%, according to CommercialEdge data.
The Evolution of Listing Rates by Office Building Class
Class B
Class B office properties typically feature older but well-maintained and functional buildings located in desirable areas. These buildings compensate through their reasonable pricing and potential for upgrades to Class A standards.
Despite concerns that the flight-to-quality trend might pose a risk to Class B office properties, these have seen a slight increase in rental rates over the past year. Average U.S. listing rates for Class B office properties rose by 0.8% year-over-year, reaching $30.49 per square foot in April, with an average vacancy rate of 18.9%, recent CommercialEdge data shows. The move toward suburban areas may contribute to the improved performance.
At the same time, Class B office buildings can represent valuable investment opportunities, as with the right enhancements, they can be elevated to Class A status, boosting their value and rental income. These types of assets could potentially be considered for office-to-residential conversions in order to repurpose their space to align with current market demands.
Class C
Class C office properties are the go-to for tenants seeking affordable, primary office space. Usually over 20 years old and offering minimal amenities, these buildings are located farther from prime areas and command rental rates below market average.
Based on our property and listing metrics, Class C office buildings have seen a 2.3% increase in average listing rates year-over-year, at $23.32 per square foot as of April 2024, with a vacancy rate of 11.5%. These properties present promising opportunities for redevelopment, potentially resulting in significant returns after refurbishment.
The CRE landscape is constantly evolving and adapting, with significant changes in demand across various types of office buildings. Understanding the differences between each and their unique opportunities is essential for making well-informed investment and leasing decisions.
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