Office rents across the globe, led by Asia, rose during 2011. After such a positive year, where will the markets go in 2012? Barrie David reports
Office market performance was positive in 2011 as robust leasing activity in the first half of the year resulted in rising rents in the majority of markets. This rental appreciation was fuelled by growth in Asia Pacific, where rents advanced by 8%. Elsewhere, rental growth was more muted: the Americas registered a 3% increase and Europe rose by 2%.
Hong Kong held its position as the most expensive location in the world in terms of total occupancy costs (which is defined as rent plus service charges and property taxes as payable by the tenant), with London (West End) remaining in second place and Tokyo in third. Additionally, all three cities retained the same positions as they held in the previous year.
Although increasing tenant activity yielded a promising beginning to 2011, in the second half of the year caution rose in the occupier sector, and performances across the globe slowed down. Apprehension derived from both the euro-zone sovereign debt crisis and the US deficit, resulting in demand levels easing and occupiers becoming more restrained when making location decisions. By the close of 2011, this hesitancy had spread further to the Asia Pacific region, with caution - particularly from financial services occupiers - becoming increasingly evident in such locations as Hong Kong by the end of the year.
In Asia Pacific, the principal Chinese cities of Beijing and Shanghai led the way in terms of rental growth. In Beijing rents accelerated by a staggering 75% over the year where strong occupier demand - combined with a scarcity of high-quality space and a lack of new supply arriving on the market - resulted in rents soaring over the year, subsequently overtaking Shanghai as the most expensive location in mainland China. However, rental performance in Shanghai was far from subdued, as rents rose by nearly 30% over the course of the year.
The office markets in Asia Pacific remain some of the most expensive across the globe, with Hong Kong in first place and Tokyo in third place. The Chinese economy continued to grow at a robust rate in 2011, and this helped to propel activity from expansionary occupiers seeking to capitalise on China's booming market. One of the most active sectors over the year within the Asia Pacific region was the banking sector. As a result many key financial hubs, such as Shanghai, witnessed prime rental figures moving up. Unlike its European and North American counterparts, the banking sector in Asia Pacific has largely been resilient to the turbulence hitting many of the global financial markets. However, in the second half of 2011 the worldwide trend of slowing occupier activity hit Asia, and consequently many financial services companies were more cautious in terms of location and occupation-based decisions.
Although the majority of locations in the region experienced robust rental performance, many markets lost momentum towards the end of the year on the back of wider economic concerns. The prevailing cost-cutting and space rationalisation strategies, seen most notably in Europe and North America, became increasingly apparent within the Asian markets during the second half of the year. Occupiers were hesitant when locating the optimum premises for their operations, and because of this, certain non-CBD locations offering lower occupancy costs with good-quality space became attractive options for tenants. Nevertheless, the relative strength of China within the region, along with the progression of both the Japanese and Thai markets over the year, should ensure that economic growth throughout the region remains steady amidst difficulties elsewhere.
Regional rental performances across Europe were similar, with both Western Europe and Central and Eastern Europe witnessing muted levels of growth. This was largely a result of the increasing prevalence of occupiers seeking lease renegotiations and adopting cost-reduction strategies as the year progressed. The most expensive location within Europe was London's West End, which secured the top position ahead of Moscow and London's City submarket. The availability of high-quality space within London's West End has become much tighter over the year, and with demand largely holding firm prime rents saw further upward movement in 2011.
The first half of the year was marked by a slow but steady economic recovery within Europe, and this stimulated encouraging market activity for most European locations. However, economic conditions towards the end of 2011 changed significantly, with the sovereign debt crisis affecting business confidence throughout the region. As a consequence, uncertainty heightened in the European market, leading to a steady decline in occupier demand during the second half of the year.
Nevertheless, the core locations in Western Europe (London and Paris in particular) remained attractive to occupiers, with rents appreciating in these locations. In the CEE region, by far the most expensive location was Moscow. There remains a shortage of high--quality space in the city, and with robust occupier demand being sustained for most of the year, prime rents rose significantly in 2011. However, the picture for the remainder of the CEE region was largely different: with weakening economic conditions, activity in most other CEE markets was characterised by space rationalisation and the desire to reduce operating costs.
Although the overall rental picture for the Americas was mixed over the year, the majority of cities realised rises in prime rents in 2011. The most expensive city in the region was New York - Midtown (Madison/5th Avenue), which remains one of the principal office locations in the US and consequently has witnessed increased occupier interest. Such high demand - coupled with an absence in the amount of new space delivered onto the market - has resulted in Midtown rents appreciating over the year. The US markets as a whole witnessed steady demand and solid leasing activity over the year. Despite most US markets having experienced minor rental increases in 2011, San Francisco witnessed the most robust growth as rents accelerated by almost 20%, fuelled by soaring demand from high-tech and IT firms. This ‘tech boom' in San Francisco and Silicon Valley continued unabated throughout 2011, with demand for high-quality space underpinning strong activity.
In South America, the most expensive location was Rio de Janeiro, where demand for office space remained strong. Although prime CBD rents in the city fell by 8% over the year, Rio remained the second-most expensive location in the region in 2011. A number of occupiers have begun looking at the non-CBD areas of the city in order to secure high-quality space, which is largely restricted in the more central areas of Rio. Consequently, while CBD rents edged down in 2011, non-CBD rents came under an increasing upwards pressure as the year progressed. Amidst global economic uncertainty, Brazil's domestic economy continued to advance, encouraging high occupier interest and sustaining market activity.
Looking ahead, in the Asian region sustained office demand is expected to stimulate further rental rises into the New Year. Although the height of Beijing's growth witnessed in 2011 might not be repeated, the region's market fundamentals remain solid. Moreover, with the global economic outlook still uncertain, Asia Pacific might experience further shocks in 2012, although it is well placed to withstand any additional turbulence.
The occupier market in Europe is expected to remain largely subdued into 2012, with core cities, such as London, Paris, Moscow and Frankfurt, outperforming most other locations. Furthermore, the shortage of prime space in a number of these markets will result in significant location decisions being put on hold until the second half of 2012.
With occupier demand expected to remain strong in 2012, the Brazilian cities of São Paulo and Rio de Janeiro are expected to continue to drive the wider Americas region in terms of rental growth and market activity. In the US a slow economic recovery is underway, but any further shocks might hamper future growth. Nevertheless, markets such as Houston and San Francisco are expected to see positive activity because of the growing presence of technology and energy industries.
Barrie David is senior research consultant in the Cushman & Wakefield EMEA research team