World's office markets see fall in rents after unprecedented fall in demand
23 Feb, 2010, Global
- Tokyo, Japan now the world’s most expensive office location
- London’s West End rises to 2nd
- Hong Kong falls to 3rd
The world’s leading centres have suffered an unprecedented fall in demand for office space which has contributed to the first aggregated global fall in prime office rents since 2003. Global real estate adviser Cushman & Wakefield, in its new Office Space Across the World report, says that 2009 recorded a steep and widespread fall in office demand with every region in the world recording falling prime rents for the first time.
The outlook for 2010 however is more positive. As some major economies return to growth, demand for office space from corporates is likely to once again increase and reduce the supply of space. Rental growth is already being recorded in some of the world’s leading office markets such as the City of London and Oslo CBD, and rents globally are expected to reach their low point by the middle of the year. The second half of 2010 will therefore be one of recovery and cautious optimism from both landlords and occupiers.
The largest prime office rental falls included all of the key cities of Asia Pacific with Singapore, Hong Kong and Tokyo recording falls of -45%, -35% and -21% respectively. Ho Chi Minh City, Vietnam saw the largest regional rental compression with a fall of -53% recorded.
Kyiv, Ukraine and Dublin, Ireland were the biggest fallers in Europe with more than -50% and -38% respectively wiped off the value of prime office rents by year end. Even previously resilient markets were affected including London’s West End which recorded a -25% decline, and Warsaw’s CBD which recorded a -24% decline.
In the Americas, rents overall declined by -7% during 2009. In the USA, Boston, San Francisco, Seattle and New York’s Downturn recorded the biggest falls respectively at -26%, -24%, -23% and -23%. South America was more resilient with rents in Santiago, Chile bucking the trend and actually increasing 28% although the market is small and characterised by a limited supply of Grade A office space. Buenos Aires, Argentina recorded the biggest fall in South America at -14% whilst the region’s largest economy, Brazil, recorded a fall of -8%.
Prime office rents are a key benchmark on which the strength of the world’s office and development sector is measured. The global economic crisis, collapse and contraction of financial institutions and subsequent uncertainty across the wider business world meant demand for new office space fell significantly. Although developers were generally quick to respond to the crisis and postponed the development of new buildings, the supply of office space available to lease still increased as corporates, seeking to reduce costs, vacated or sub-let excess office accommodation.
WORLD’S MOST EXPENSIVE OFFICE LOCATIONS
In the ranking of the world’s most expensive office locations, the three top locations remained constant with Tokyo moving into first place from second with full office occupancy costs (prime rents plus taxes and service charges), costing €1,441 sq m per year/$190 sq.ft per year. London’s West End moved from third to second place with full occupancy costs of €1,220 sq m per year/$161 sq.ft per year and Hong Kong fell from first to third position with full occupancy costs of €1,207 sq m per year/$160sq.ft per year.
The biggest risers in the ranking were Rio de Janeiro, Brazil moving from 23rd to 13th position with only a slight rental decline and appreciation of the Brazilian Real against the Euro, and Seoul, South Korea and Sydney, Australia rising respectively from 27th to 14th and 29th to 15th with prime rental rises.
Not all markets were affected to the same extent by the global downturn with Santiago, Chile recording a 28% increase in office rents as a shortage of prime space and robust demand pushed up prices. Smaller rises were also recorded in cities as diverse as Jakarta, Indonesia, Miami, USA and Cape Town, South Africa where the country’s hosting of the 2010 Football World Cup fuelled short term demand.
Guy Taylor, head of West End office agency, Cushman & Wakefield in London, said: “2009 was undoubtedly a challenging year for office markets in London. We turned the corner in the third quarter, however, as the take-up of space increased and, in the fourth quarter, we saw some major transactions that have boosted the annual take-up to a respectable level. With rents on prime space now showing signs of growth, 2010 will be a time for occupiers to secure good terms before the onset of a shortage of new space drives terms further in landlords' favour. Certainly for the best space in the key West End market, we are already seeing competitive bidding and it is likely that by the end of 2010, that there will be a marked shortage of grade A product in some locations and possibly a number of major pre-let agreements with landlords for buildings either planned or now coming out of the ground.”
John Siu, general manager for Cushman & Wakefield in Hong Kong commented: "Demand for office space in Hong Kong’s key business districts started to pick up towards the end of 2009 and we are beginning to see signs of rental increases. Banking and finance firms are gradually taking up additional office space and rent-conscious corporates are moving into the several newly completed Grade A office buildings in Kowloon East. We see 2010 as a year for tenants to take advantage of the rare current vacancies and significantly discounted rents before the market rebounds to the highs seen in early 2008."