"Flight to Quality" ~ a two way street

There are some real estate phrases you just have to know if you want to sound cool. For instance, if you don't say "bifurcation of the market" at least once per real estate event, you will undoubtedly lose cool points.

One such phrase that gets thrown around quite often these days is "Flight to Quality". More often than not, you will hear this associated with tenants who upgrade from Class B spaces to Class A spaces. In soft markets tenants are able to leverage lower net effective rents into premium office space for the same amount of rent they were previously paying. Generally speaking, this leaves the class B and C landlords scrounging for tenants by slashing their asking rents and boosting their concession packages. Yet, this isn’t always the case as evidenced by what is going on currently in the Houston office market. Flight to quality can go the other way as well. This scenario is where office tenants will select quality landlords over another landlord with an equal or better building based on the strength of ownership.

At PRS, we have seen a pretty substantial flight to quality landlords. First, let's define who are "quality landlords":

+ Healthy financially: Quality landlords can afford to both maintain the building properly, as well as fund their obligations from a lease (i.e. fully funding Leasing Commissions and Tenant Improvements quickly and without issue.)

+ Usually own a portfolio of buildings. Quality landlords usually have multiple buildings in a portfolio. If one or more of those others buildings are not cash flowing well, those assets stand to benefit from the strength of the other buildings in the portfolio.

+ High level of service and property management: Quality landlords either provide "best in show" service and property management in house, or they hire top of the line third party mangers to provide the best service to the customers (the tenants) of their building.

We saw this on a first hand basis with some of the recent lease transactions PRS completed for Parkway Property's 1401 Enclave building. Parkway benefited from its reputation of a strong landlord who pays leasing commissions right away, has incredible property management, and the ability to build out suites at a high level. Competing buildings that were functionally similar but were in receivership or without the similar reputation were at a disadvantage to Parkway's building. The recent result was three leases resulting in 52K SF of absorption for the building in a very difficult and competitive environment.

So, as we continue to climb out of this soft market look for this two way street of Flight to Quality. Tenants will look to upgrade space, but they will also be looking to upgrade their building's ownership. Class A or B buildings with outstanding ownership stand to benefit.